UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
000-54389
Commission file number
GENIUS BRANDS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
20-4118216
(I.R.S. Employer
Identification No.)
9401 Wilshire Boulevard #608
Beverly Hills, CA
310-273-4222
(Address and telephone number of principal executive offices)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: common stock, par value $0.001 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that
the registrant was required to submit and post such files). x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in the definitive proxy or information statement incorporated by reference in Part III of
this Form 10-K or amendment to Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
¨
¨
Accelerated filer
Smaller reporting company
¨
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates based upon the last sale price of the issuer
common stock reported on the OTC Bulletin Board on June 28, 2013 was $19,066,488.
As of April 8, 2014, there were 6,029,828 shares of common stock outstanding.
Genius Brand International, Inc.
Index
PART I.
FINANCIAL INFORMATION
Item 1.
Description of Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III.
Item 10.
Directors, Executive Officers, and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV.
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis and Results of Operation)
contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended
to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as
denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such
statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to
risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the
forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation,
those specifically addressed under the heading "Risks Factors" below, as well as those discussed elsewhere in this Annual Report on Form
10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. We file reports with the Securities and Exchange Commission ("SEC"). Our electronic filings with the United States
Securities and Exchange Commission (including our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K, and any amendments to these reports) are available free of charge on the Securities and Exchange Commission’s website at
http://www.sec.gov. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE,
Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-
800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise
after the date of this Annual Report on Form 10-K, except as required by law. Readers are urged to carefully review and consider the various
disclosures made throughout the entirety of this Annual Report, which are designed to advise interested parties of the risks and factors that
may affect our business, financial condition, results of operations and prospects.
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Item 1.
Description of Business.
General
PART I
Genius Brands International, Inc. (“we”, “us”, “our”, “GBI” or the “Company”), creates, produces and distributes original “content
with a purpose” for kids, meaning multi-media, multi-format content for kids that we believe is as entertaining as it is enriching. In most cases,
the Company wholly owns the original content it produces, and works with a variety of partners who are experts in their respective categories,
to develop and distribute it in multiple formats around the world. The Company owns and is developing a portfolio of original children’s
entertainment to appeal to toddlers to teens.
The Company commenced operations in January 2006, assuming all of the rights and obligations of its then Chief Executive Officer,
Klaus Moeller, under an Asset Purchase Agreement between the Company and Genius Products, Inc., in which we obtained all rights,
copyrights, and trademarks to the brands “Baby Genius,” “Little Genius,” “Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all
then existing productions under those titles. On October 17, 2011 and October 18, 2011, Genius Brands International, Inc., filed Articles of
Merger with the Secretary of State of the State of Nevada and with the Secretary of State of the State of California, respectively. As previously
described on the Company’s Schedule 14C Information Statement, filed with the Securities and Exchange Commission on September 21,
2011, by filing the Articles of Merger, 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, on October
12, 2011, the Company filed an Issuer Company-Related Action Notification Form with the Financial Industry Regulatory Authority
(“FINRA”) and on November 29, 2011 our trading symbol 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 company and
sole member of A Squared (the “Parent Member”) and A2E Acquisition LLC, our newly formed, wholly-owned Delaware subsidiary
(“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurred
concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving
entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of
A Squared. A Squared created, produced and distributed original “content with a purpose” for kids 6-11, whereas Genius Brands previously
focused on toddlers. Today the merged company is focused on providing “content with a purpose” for toddlers to tweens, in all media
formats, relevant consumer products categories, in territories around the world.
On April 2, 2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and
outstanding common stock on a one-for-one-hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory
Authority) on April 7, 2014. All common stock share and per share information in this Annual Report, including the accompanying
consolidated financial statements and notes thereto, has been adjusted to reflect retrospective application of the reverse split, unless otherwise
indicated.
Distribution
Children today spend upwards 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 reliance on and impact of media on kids’ lives, GBI is focused on
producing “content with a purpose” to serve all the various ways kids consume and interact with media today. Whereas the Company’s
distribution was limited to traditional means in the past, the Company today is focused on expanding its content distribution across multi-
media platforms, across borders to extend its international presence, and broaden its base of consumer products with expanded product
categories.
Products
GBI produced and manages: Baby Genius, a musical collection of songs and videos that are entertaining and stimulating for toddlers;
Secret Millionaires Club with Warren Buffett, teaching kids the “business of life” through fun adventures in business; a new collection of
superheroes, created with Stan Lee through a new label, Stan Lee Comics, including its first direct to TV movie trilogy, Stan Lee’s Mighty 7;
Martha & Friends with Martha Stewart, inspiring creativity and self-expression in kids; Gisele & the Green Team with Gisele Bündchen, a
superhero series for girls that encourages “girl power” and provides environmental lessons; Pascualina, the popular teen brand from Chile that
inspires and encourages teen girls; and, Thomas Edison’s Secret Lab,” a new series that shows how much fun science and math can be.
Collectively, GBI’s portfolio of “content with a purpose” serves kids from toddler to teens.
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Marketing
The commercial success of every new GBI property is reliant on its ability to attract an engaged audience that drives consumer
interest. Critical to this is the Company’s ability to secure broad distribution for its content across media platforms, as well as licensees and
retailers who develop and distribute the Company’s IP in various consumer products. To this end, in addition to critical distribution
agreements, the Company works closely with certain parties such as broadcasters, licensees, and retailers to collaboratively and efficiently
market the brands across channels that appeal to parents and kids.
Competition
GBI competes against creators of children’s content, including Disney, Nickelodeon, Cartoon Network Sesame Street, and many
others, small and large. The competitive advantage that GBI has is its niche focus on delivering “content with a purpose,” promising content
that is as entertaining as it is enriching. In the crowded children’s entertainment space, we are competing with other content creators for
distribution and retail shelf space that is largely now dedicated to the large studios. This is why GBI’s unique focus on dedicating itself to
“content with a purpose” is an important differentiator and distinct advantage in an endless sea of kids’ entertainment properties.
Customers and Licensees
GBI works with a network of customers and partners from around the world including broadcasters, consumer products licensees
and retailers. This broad cross section of rightsholders, creators, broadcasters, licensees, vendors, and retailers includes companies including
but not limited to Comcast, The Hub, Sony, Walmart, Cinedigm, Target, Hot Topics, Groupon, Sony, Netflix, American Public Television,
Stan Lee, Warren Buffet, and The Edison Innovation Foundation. The Company handles its own distribution and consumer products sales
internally for the US market, and partners with local agencies around the world who manage the Company’s distribution sales and consumer
products programs internationally. This helps to manage overhead costs while ensuring local market expertise for each of its properties.
Inventory
We try to maintain a reasonable DVD and CD inventory. The Company has discontinued distribution of third party DVD properties
and concentrates solely on its own DVD and CD titles.
Government Regulation
The FCC requires broadcast networks to air a required number of hours of Educational and Informational content (E/I). The
Company is also subject to online distribution regulations, namely the FTC’s Children’s Online Privacy Protection Act (COPPA) which
regulates the collection of information of kids younger than 13 years old.
We are currently subject to regulations applicable to businesses generally, including numerous federal and state laws that impose
disclosure and other requirements upon the origination, servicing, enforcement and advertising of credit accounts, and limitations on the
maximum amount of finance charges that may be charged by a credit provider. Although credit to our customers is provided by third parties
without recourse to us based upon a customer’s failure to pay, any restrictive change in the regulation of credit, including the imposition of, or
changes in, interest rate ceilings, could adversely affect the cost or availability of credit to our customers and, consequently, our results of
operations or financial condition.
Licensed toy products are subject to regulation under the Consumer Product Safety Act and regulations issued thereunder. These
laws authorize the Consumer Product 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 fines
or penalties on manufacturers or retailers. Similar laws exist in some cities and other countries in which we plan to market our
products. Although we do not manufacture and may not directly distribute the toy products, a recall of any of the products may adversely
affect our business, financial condition, results of operations and prospects.
We also maintain websites, including our website located at www.babygenius.com, the Company’s streaming subscription site;
www.smckids.com; www.slam7.com; www.geniusbrands.com, and www.edisonsecretlab.com are subject to laws and regulations directly
applicable to Internet communications and commerce, which is a currently developing area of the law. The United States has enacted Internet
laws on children’s privacy, copyrights and taxation. However, laws governing the Internet remain largely unsettled. The growth of the market
for Internet commerce may result in more stringent consumer protection laws, both in the United States and abroad, that place additional
burdens on companies conducting business over the Internet. We cannot predict with certainty what impact such laws will have on our
business in the future. In order to comply with new or existing laws regulating Internet commerce, we may need to modify the manner in
which we conduct our website business, which may result in additional expense.
Because our products are manufactured by third parties and licensees, the Company is not significantly impacted by federal, state and
local environmental laws and does not have significant costs associated with compliance with such laws and regulations.
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Employees
We currently have seven full-time employees. Certain functions, such as consumer product licensing, foreign sales, accounting, home
video sales, and production, are outsourced on an as needed basis. Not including production, the Company utilizes between ten and fifteen
people on an ongoing, outsourced basis.
Intellectual Property
GBI owns the following properties and related trademarks: Secret Millionaires Club, Thomas Edison’s Secret Lab
The Company has a one-third ownership 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 is the owner of the Stan Lee and the Mighty 7 property.
The Company has 50/50 ownership agreements with the following partners and their related brands: Martha Stewart’s Martha &
Friends; and Gisele Bundchen’s Gisele & the Green Team. It also has an exclusive Master License for exploitation of rights in the property
Pascualina throughout the world outside of Chile.
Additionally, the Company owns the trademarks “Baby Genius”, “Little Genius”, “Kid Genius”, and “Wee Worship”, as well as
several other names and trademarks on characters that had been developed for our video releases and associated with our different brands. We
currently hold fourteen registered trademarks in multiple classes in the United States as well as additional trademarks in the United States that
are associated with our other brands. We also have a number of registered and pending trademarks in Europe and other countries in which our
products are sold.
We also currently hold ninety-six motion picture, thirteen sound recording and one literary work copyrights related to our video,
music and written work products. Under prior management, the Company did not generally file for copyright protection for all of its
productions, but relied on common law principles and agreements with its vendors and content providers to secure its rights in the intellectual
property aspects of our products. Under current management, with the implementation of its new post-Merger operating model, the Company
intends to file copyright registrations for all of its productions and literary works.
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Item 1A.
Risk Factors.
RISKS RELATING TO OUR BUSINESS
We have incurred net losses since inception.
The Company has recently adopted significant changes to its business model and experienced a broad change in its management and
operations. Under prior management and in connection with its prior business model and activities, the Company had a history of operating
losses and incurred significant net losses in each fiscal quarter since its inception. For the years ended December 31, 2013 and 2012, the
Company had net revenues of $2,556,538 and $6,570,199 and incurred net losses of $7,216,031 and $2,067,609, respectively. These losses,
among other things, have had an adverse effect on our results of operations, financial condition, stockholders’ equity, net current assets and
working capital.
We will need to generate significant additional revenue to achieve profitability. The Company has already achieved significant cost
savings. Our ability to generate and sustain significant additional revenues or achieve profitability will depend upon numerous factors some of
which are outside of our control, including sales of our products.
Business interruptions could adversely affect our operations.
Our operations are vulnerable to outages and interruptions due to fire, floods, power loss, telecommunications failures and similar
events beyond our control, particularly in locations where our manufacturers and vendors are located. An increase in prices due to any of these
occurrences would increase our operating costs, which could in turn adversely affect our profitability. We carry business interruption
insurance for potential losses (excluding earthquake-related losses), but there can be no assurance that such insurance would be sufficient to
compensate us for losses that may occur or that such insurance may continue to be available on affordable terms if available at all. Any losses
or damages incurred by us could have a material adverse effect on our business and results of operations.
Our business depends in large part on the success of our vendors and outsourcers, and our brands and reputation may be harmed
by the actions of third-parties that are outside our control.
We have long and established partnerships with partners around the world, ranging from broadcasters, licensees, retailers, agencies,
etc. While we cannot fully control the actions of our partners, we are careful to be in business with partners who we believe to be trustworthy,
reliable and accountable.
In connection with our direct to retail business, we rely significantly on vendor and outsourcing relationships with third parties for
manufacturing and other services. Any shortcoming of a vendor or outsourcer, particularly an issue affecting the quality of the end product,
may be attributed by customers to us, thus damaging our reputation, brand value and potentially affecting our results of operations. Problems
with transitioning these services and systems or operating failures with these vendors and outsourcers could also delay product sales, reduce
efficiency of operations, and significant capital investments could be required to remediate the problem. However, this risk is diminished with
respect to properties that we license to third parties for exploitation pursuant to which we generally receive an advance against future royalties
and/or a minimum guarantee which we believe shifts the foregoing risks to the licensee. Any material failure, inadequacy or interruption
resulting from such vendors or outsourcings could harm our ability to effectively operate our business.
Significant increases in the price of commodities, transportation or labor, if not offset by declines in other input costs, or a reduction
or interruption in the delivery of raw materials, components and finished products from our vendors could negatively impact our
financial results.
Cost increases, whether resulting from rising costs of materials, compliance with existing or future regulatory requirements,
transportation, services and labor could impact the profit margins realized by us on the sale of our products. Because of market conditions,
timing of pricing decisions, and other factors, there can be no assurance that we will be able to offset any of these increased costs by adjusting
the prices of our products. Increases in prices of our products could result in lower sales. Our ability to meet customer demand depends, in
part, on our ability to obtain timely and adequate delivery of products from our suppliers and internal manufacturing capacity. Although we
work closely with our vendors to avoid these types of shortages, there can be no assurance that we will not encounter these problems in the
future. A reduction or interruption in the delivery of finished products, whether resulting from more stringent regulatory requirements,
suppliers, disruptions in transportation, port delays, labor strikes, lockouts, or otherwise, or a significant increase in the price of one or more
supplies, such as fuel or resin (which is an oil-based product), could negatively impact our financial results.
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Because we expect to need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and
may be forced to limit the scope of our operations.
We expect that as our business continues to grow we will need additional working capital. If adequate additional debt and/or equity
financing is not available on reasonable terms or at all, we may not be able to continue to expand our business, and we will have to modify our
business plans accordingly. These factors would have a material and adverse effect on our future operating results and our financial condition.
If we reach a point where we are unable to raise needed additional funds to continue as a going concern, we will be forced to cease
our activities and dissolve the Company. In such an event, we will need to satisfy various creditors and other claimants, severance, lease
termination and other dissolution-related obligations.
Our ability to raise financing through sales of equity securities depends on general market conditions and the demand for our
common stock. We may be unable to raise adequate capital through sales of equity securities, and if our stock has a low market price at the
time of such sales, our existing stockholders could experience substantial dilution. If adequate financing is not available or unavailable on
acceptable terms, we may find we are unable to fund expansion, continue offering products and services, take advantage of acquisition
opportunities, develop or enhance services or products, or to respond to competitive pressures in the industry which may jeopardize our ability
to continue operations.
Changes in the United States, global or regional economic conditions could adversely affect the profitability of our business.
A decrease in economic activity in the United States or in other regions of the world in which we do business could adversely affect
demand for our products, thus reducing our revenue and earnings. A decline in economic conditions could reduce demand for and sales of
products. In addition, an increase in price levels generally, or in price levels in a particular sector such as the energy sector, could result in a
shift in consumer demand away from the entertainment and consumer products we offer, which could also adversely affect our revenues and,
at the same time, increase our costs.
Production cost amortization for our CD and DVD products are calculated on a straight-line basis. Unamortized production costs are
evaluated for impairment each reporting period on an aggregate basis. If estimated remaining revenue is not sufficient to recover the
unamortized production costs, the unamortized production costs will be written down to fair value. In any given quarter, if we lower our
previous forecast with respect to total anticipated revenue from a category of products, we would be required to accelerate amortization of
related production costs. Such accelerated amortization would adversely impact our business, operating results and financial condition.
If we fail to honor our obligations under the terms of our third party licensing and supply agreements, our business may be
adversely affected.
We try to maintain a reasonable DVD and CD inventory, however if we overestimate the demand for a particular title, we may
warehouse significant quantities of that title. The Company has in the past distributed third party DVD properties for which it incurred
production and warehousing costs. The Company has terminated those third party arrangements and is concentrating on inventory of its own
DVD and CD titles for which it can more closely control its costs. In February 2014, the Company entered into an exclusive 3-year
arrangement with Sony DADC US Inc. which gives Sony the right to fulfill the Company’s DVD and CD duplication requirements. In
consideration for these exclusive rights the Company received a marketing support payment of $750,000 with an additional $750,000 to be
paid within 12 months. Sony will recoup the marketing support payment through a premium on the physical media unit costs. The Company is
obligated to repay a pro-rata portion of the marketing support payment if the Company does not order a minimum number of DVD/CD units
during the term. The Company believes the minimum order threshold is achievable over the term based on its productions as well as given that
the minimum number will include duplication orders placed with Sony under the arrangement made by the Company’s licensees as described
below. Although we may sell such inventory at a deeply discounted price toward the end of the distribution term in order to recoup our
manufacturing, storage and other costs, there is no guarantee that a market will exist for a given title, even at the deeply discounted price.
Additionally, our royalty and/or distribution fee agreements sometimes contain terms, such as minimum royalties per unit and music
publishing fees, which effectively prevent us from steeply discounting the price on some titles.
Conversely, if we or our distributors fail to stock sufficient inventory for any particular product or product line, we may be unable to
meet customer demand in a timely manner, which may result in loss of accounts, requests for discounts or refusal by the customer to pay.
For the Company’s non-direct-to-retail business, the Company seeks to license the DVD and CD rights to third parties for which it
will receive a royalty per unit without the obligation to manufacture the units itself. The Company will seek to increase this model of physical
goods distribution while seeking to have such third parties licensees fulfill their duplication needs through the Company’s arrangement with
Sony described above although there is no assurance that it will be successful in doing so.
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If we are not able to adequately protect our proprietary intellectual property and information, our results of operations could be
adversely affected.
The value of our business depends on our ability to protect our intellectual property and information, including our trademarks, trade
names, copyrights, patents and trade secrets, in the United States and around the world, as well as our customer, employee, and consumer
data. If we fail to protect our proprietary intellectual property and information, including any successful challenge to our ownership of
intellectual property or material infringements of intellectual property, it could have a significant adverse effect on our business, financial
condition, and results of operations.
Loss of key personnel may adversely affect our business.
Our success greatly depends on the performance of our executive management team, including Andrew Heyward, our Chief
Executive Officer and Amy Moynihan Heyward, our President. The loss of the services of any member of our core executive management
team or other key persons could have a material adverse effect on our business, results of operations and financial condition.
Our management team currently owns an aggregate controlling interest in our voting stock and investors will not have any voice in
our management.
Our management team and Board of Directors owns or controls a combined 3,306,044, or 54.7%, of the 6,029,828 shares currently
outstanding. It should be assumed that our management team and Board of Directors will maintain a controlling interest in the Company and,
as a result, will have the ability to control substantially all matters submitted to our stockholders for approval, including:
·
·
·
·
election of our board of directors;
removal of any of our directors;
amendment of our articles of incorporation or bylaws; and
adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination
involving us.
The approval of our directors and executive officers will be required to affect all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors
and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could
reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
We cannot assure you that the interests of our management team will coincide with the interests of the investors. Our articles of
incorporation do not provide for the allocation of corporate opportunities between us, on the one hand, and certain of our founding
stockholders, on the other hand, which could prevent us from taking advantage of certain corporate opportunities. So long as our management
team collectively controls a significant portion of our common stock, these individuals, or entities controlled by them, will continue to
collectively be able to strongly influence or effectively control our decisions.
Litigation may harm our business or otherwise distract management.
Substantial, complex or extended litigation could cause us to incur large expenditures and could distract management. For example,
lawsuits by licensors, consumers, employees or stockholders could be very costly and disrupt business. While disputes from time to time are
not uncommon, we may not be able to resolve such disputes on terms favorable to us.
Our revenues and results of operations may fluctuate significantly.
Cash flow and projections for any entertainment company producing original content can be expected to fluctuate until consumer
products are in the market. Unanticipated delays in entertainment production can push back an entire program. Structured retail windows that
dictate when new products can be introduced at retail are also out of the Company’s control. And the unknown as to the popularity and appeal
of a new entertainment product also directly impacts cash flow.
Our revenues and results of operations depend significantly upon the appeal of our content to end customers, which cannot be
predicted with certainty, the timing of releases of our products and the commercial success of our products, none of which can be predicted
with certainty. Accordingly, our revenues and results of operations may fluctuate significantly from period to period. The results of one period
may not be indicative of the results of any future period. Our revenues and results are also significantly influenced by seasonality and in
particular the fourth quarter gift-giving season where demand for our products peaks. Any quarterly fluctuations that we report in the future
may not match the expectations of market analysts and investors. This could cause the price of our common stock to fluctuate significantly.
6
If we fail to adequately manage our growth, we may not be successful in growing our business and becoming profitable.
Our focus is on maximizing the revenue potential of our existing brand portfolio while strategically working to round-out the
portfolio with complementary brands and build our business infrastructure to ensure our brands success in the marketplace.
We expect our business to grow over the next two years. We expect that our growth will place significant stress on our operation,
management, employee base and ability to meet capital requirements sufficient to support our growth over that period. Any failure to address
the needs of our growing business successfully could have a negative impact on our chance of success.
Failure to successfully market or advertise our products could have an adverse effect on our business, financial condition and
results of operations.
Our products are marketed worldwide through a diverse spectrum of advertising and promotional programs. Our ability to sell
products is dependent in part upon the success of these programs. If we or our distributors do not successfully market our products or if
media or other advertising or promotional costs increase, these factors could have an adverse effect on our business, financial condition, and
results of operations.
We may experience indirect increases in the cost of our products as a result of new laws and governmental regulations passed in
response to changing climate conditions.
Although we are not directly responsible for compliance with such laws in the manufacturing of our products, and rely on our
manufacturers and vendors to ensure that they are in compliance with federal, state and local environmental laws and regulations, as well as
similar laws in other jurisdictions where they do business, the cost of compliance with new or existing laws and regulations may increase and
our vendors may pass those costs on to the Company. If that happens, it will have the effect of decreasing our profit margins and we may be
forced to either raise our prices or, in response to competitive pressure, experience a decrease in profits which would have a material adverse
effect on our business, financial condition and results of operations.
We are subject to various laws and government regulations, violation of which could subject the Company to sanctions. In
addition, changes in such laws or regulations may lead to increased costs, changes in our effective tax rate, or the interruption of
normal business operations that would negatively impact our financial condition and results of operations.
We operate in a highly regulated environment in the US and international markets. Federal, state and local governmental entities, and
foreign governments regulate many aspects of our business, including our products and the importation and exportation of those products.
These regulations may include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws
and revised tax law interpretations), product safety and other safety standards, trade restrictions, regulations regarding financial matters,
environmental regulations, advertising directed toward children, product content, and other administrative and regulatory restrictions. While we
take all the steps we believe are necessary to comply with these laws and regulations, there can be no assurance that we will be in compliance
in the future. Failure to comply could result in monetary liabilities and other sanctions which could have a negative impact on our business,
financial condition and results of operations. In addition, changes in laws or regulations may lead to increased costs (including costs of
compliance passed on to us by manufacturers), changes in our effective tax rate, or the interruption of normal business operations that would
negatively impact our financial condition and results of operations.
Inaccurately anticipating changes and trends in popular culture, media and movies, fashion, or technology can negatively affect our
sales.
Successful movies and characters in children’s literature affect play preferences. Trends in media, movies, and children’s characters
change swiftly and contribute to the transience and uncertainty of play preferences. Almost all of our products and product lines are based on
the Baby Genius brand and related brands. We respond to trends and developments by modifying, refreshing, extending, and expanding our
product offerings on an annual basis. However, we operate in extremely competitive industries where demand for children’s attention is
dynamic. If the interest of children trend away from our current brand or products toward other offerings based on current media, movies and
characters, and if we fail to accurately anticipate trends in popular culture, movies, media, fashion, or technology, our products may not be
accepted by children, parents, or families and our revenues, profitability, and results of operations may be adversely affected.
We rely on a limited number of suppliers.
There are many factors beyond our control which may impact the sale of our products and orders for production of our
programming, including but not limited to economic downturns such as the current recession. If we are forced to change the music or content
on existing products, which may be costly and time consuming and which may have the result of making our then current inventory
undesirable.
7
We may not be able to keep pace with technological advances.
The entertainment industry in general, and the music and motion picture industries in particular, are continuing to undergo significant
changes, primarily due to technological developments. Because of the rapid growth of technology, shifting consumer tastes and the popularity
and availability of 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. It is also impossible to predict the overall effect these factors could have on our
ability to compete effectively in a changing market.
Others failure to promote our products may adversely affect our business.
The availability of retailer programs relating to product placement, co-op advertising and market development funds, and our ability
and willingness to pay for such programs, are important with respect to promoting our exclusive titles. In addition, although we may have
agreements for the advertising and promotion of our products through distributors, we will not be in direct control of those marketing efforts.
Such efforts may not be done in a manner that will maximize sales of our products and the cost of increasing marketing efforts through our
retail customers and distributors may be cost-prohibitive.
We face intense competition from a large variety of retailers that sell similar merchandise and have better resources than we do.
The industries in which we operate are highly and increasingly competitive and our results of operations are sensitive to, and may be
adversely affected by, competitive pricing, promotional pressures, additional competitor offerings and other factors, many of which are beyond
our control. We compete for retailers as well as other outlets for the sale and promotion of our merchandise. Our primary competition comes
from competitors, such as The Walt Disney Company and Fisher Price, which have greater financial resources and more developed marketing
channels than we do. If we fail to compete successfully, we could face lower sales and may decide or be compelled to offer greater discounts
to our customers, which could result in decreased profitability or a failure to attain profitability.
We may not possess satisfactory rights in certain of our properties.
We do not require chain of title information to some of our exclusively licensed content and the risk exists that some content may
have a defective chain of title, although we have no reason to believe otherwise and these have never been contested. The validity and
ownership of rights to some titles can be uncertain and may be contested by third parties, which may result in litigation which could result in
substantial costs and the diversion of resources, and could have a material adverse effect on our business, results of operations and financial
condition. The Company believes, however, that in the event of such occurrence, it can replace those defective materials with content that is
wholly owned by the Company. The Company is already in the process of re-designing certain of the Company’s titles to eliminate these risks
and to replace the elements owned by third parties with content wholly owned by the Company which can also generate revenue for the
Company. Notwithstanding the foregoing, the majority of the Company’s intellectual property is wholly owned by the Company.
Protecting and defending against intellectual property claims may have a material adverse effect on our business.
Our ability to compete in the home entertainment industry depends, in part, upon successful protection of our proprietary and
intellectual property. We protect our property rights to our productions through available copyright and trademark laws and licensing and
distribution arrangements with reputable companies in specific territories and media for limited durations. Despite these precautions, existing
copyright and trademark laws afford only limited practical protection in some jurisdictions. In some jurisdictions of our distribution, there are
no copyright and/or trademark protections available. In addition, although we own most of the music included in our products, and license
other content through licensors such as HFA, NAXOS, and the San Diego Zoological Society, there are numerous titles which are available in
the public domain and for which it is difficult or even impossible to determine whether anyone has obtained ownership or royalty rights. It is
an inherent risk in our industry that people may make such claims with respect to any title already included in our products, whether or not
such claims can be substantiated. With respect to the music and other licensed content from third parties the Company is already in the process
of re-designing certain of the Company’s titles to eliminate these risks and to replace the elements owned by third parties with content wholly
owned by the Company which can also generate revenue for the Company. Notwithstanding the foregoing, the majority of the Company’s
intellectual property is wholly owned by the Company.
It may be possible for unauthorized third parties to copy and distribute our productions or portions of our productions. In addition,
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 claims of infringement or invalidity. Any such litigation could result in substantial
costs and the resulting diversion of resources could have an adverse effect on our business, operating results or financial condition. From time
to time, we may also receive claims of infringement of other parties’ proprietary rights. Regardless of the validity or the success of the claims,
we could incur significant costs and diversion of resources in defending against such claims, which could have an adverse effect on our
business, financial condition or results of operations.
8
The adoption or modification of laws or regulations relating to the internet could adversely affect the manner in which the
Company conducts its business.
The growth and development of the market for online commerce may lead to more stringent consumer protection laws, both in the
United States and abroad, that may impose additional burdens on the Company. Laws and regulations directly applicable to communications or
commerce over the internet are becoming more prevalent. The United States Congress has enacted internet laws regarding children's privacy,
copyrights, taxation, and the transmission of sexually explicit material. The European Union recently enacted its own privacy regulations. The
law of the internet, however, remains largely unsettled, even in areas in which there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual property, privacy, libel, and taxation apply to the internet. In
order to comply with new or existing laws regulating online commerce, the Company (i) may need to spend time and money revising its
websites, (ii) may need to hire additional personnel to monitor compliance with applicable laws or (iii) may need to modify its software to
protect customers' personal information.
In addition to the foregoing, as a publisher of online content, the Company faces potential liability for defamation, negligence,
copyright, patent or trademark infringement or other claims based on the nature and content of materials published or distributed, as do other
publishers of such content. If the Company faces such liability, then its reputation and business may suffer. In the past, plaintiffs have brought
these types of claims and sometimes successfully litigated them against online services. Although the Company carries general liability
insurance, such insurance does not cover claims of these types. There can be no assurance that the Company will be able to obtain insurance to
protect against such liability in the future or that same will be adequate to indemnify the Company for all liability that may be imposed thereon.
RISKS RELATING TO OUR COMMON STOCK
Our common stock may be affected by limited trading volume and price fluctuations which could adversely impact the value of our
common stock.
Trading in our common stock 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 adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could
cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market
in the belief that our stock price will decline in the future. We cannot predict the actions of market participants or the stock market as a whole.
We can offer no assurances that the market for our common stock will be stable or that our stock price will fluctuate in a manner that is
consistent with our operating results.
If our common stock remains subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing
customer transactions and trading activity in our securities may be adversely affected.
Unless our common stock is listed on a national securities exchange, including the Nasdaq Capital Market or we have stockholders’
equity of $5,000,000 or more and our common stock has a market price per share of more than $4.00, transactions in our common stock will
be subject to the SEC’s “penny stock” rules. If our common stock remains subject to the “penny stock” rules promulgated under the Securities
Exchange Act of 1934, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be
adversely affected.
In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure
document that describes the risks associated with such stocks, the broker-dealer's duties in selling the stock, the customer's rights and remedies
and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for
low-priced stock transactions based on the customer's financial situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account
statements to the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our
common stock, decrease liquidity of our common stock and increase transaction costs for sales and purchases of our common stock as
compared to other securities. Our management is aware of the abuses that have occurred historically in the penny stock market.
As a result, if our common stock continues to be subject to the penny stock rules, the market price of our securities may be
depressed, and you may find it more difficult to sell our securities.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the
disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate
internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely
affect our public disclosures regarding our business, prospects, financial condition or results of operations.
9
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal
controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public
accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are
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 difficult for us to predict how long it
will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to
remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and
remediation process on a timely basis. In addition, management’s assessment of internal controls over financial reporting may identify
weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns
for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or
disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our
common stock.
We are authorized to issue "blank check" preferred stock without stockholder approval, which could adversely impact the rights of
holders of our common stock.
Our Articles of Incorporation authorize our Company to issue up to 10,000,000 shares of blank check preferred stock. Currently no
preferred shares are issued; however, we can issue shares of our preferred stock in one or more series and can set the terms of the preferred
stock without seeking any further approval from our common stockholders. Any preferred stock that we issue may rank ahead of our
common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock. In addition,
such preferred stock may contain provisions allowing those shares to be converted into shares of 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 shares of authorized preferred stock, there can be no assurance that we will not
do so in the future.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of
ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In
general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public
information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current
public information and notice requirements. Of the approximately 5,918,704 shares of our common stock outstanding as of December 31,
2013, approximately 1,358,707 shares are freely tradable without restriction, as of December 31, 2013. Any substantial sales of our common
stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
We do not expect to pay dividends in the future and any return on investment may be limited to the value of our common stock.
We do not currently anticipate 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 development
and marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our
common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of the our Board of Directors. If we do not
pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
The Company owns no real property. The Company leases approximately 2,807 square feet of general office space at 9401 Wilshire
Boulevard Suite 608 Beverly Hills, CA 90212 pursuant to a 36 month lease that commenced May 1, 2012. The Company pays approximately
$135,444 annually in respect of such leased premises with annual increases for expenses.
Item 3.
Legal Proceedings.
There are presently no material pending legal proceedings to which the Company is a party or as to which any of its property is
subject, and no such proceedings are known to the Company to be threatened or contemplated against it.
Item 4.
Mine Safety Disclosures.
N/A
10
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Commencing in November 2011, our common stock is quoted on the OTC Bulletin Board under the symbol “GNUS”. Previously
transactions in our common stock were reported in the United States under the symbol “PENT” on the OTC Market Groups, Inc. On April 2,
2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and outstanding common stock
on a one-for-one hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory Authority) on April 7,
2014. All common stock share and per share information in this Form 10K, including the accompanying consolidated financial statements and
notes thereto, has been adjusted to reflect retrospective application of the reverse split, unless otherwise indicated.
Quarter Ending
Quarter High
Quarter Low
3/31/2012
6/30/2012
9/30/2012
12/31/2012
3/31/2013
6/30/2013
9/30/2013
12/31/2013
$29.00
$26.00
$26.00
$17.00
$11.00
$13.00
$8.00
$7.50
$15.00
$15.00
$14.00
$6.00
$5.60
$4.50
$1.00
$2.30
Outstanding Shares and Number of Stockholders
As of April 8, 2014, the number of shares of common stock outstanding was 6,029,828. As of April 8, 2014, there were
approximately 198 record holders of our shares of issued and outstanding common stock. This number does not include holders of shares
held in securities position listings.
Transfer Agent
The Company's registrar and transfer agent is Globex Transfer LLC, 780 Deltona Blvd, Suite 202, Deltona, FL 32725.
Dividends
We have never declared or paid dividends on our common stock. Moreover, we currently intend to retain any future earnings for use
in our business and, therefore, do not anticipate paying any dividends on our common stock in the foreseeable future.
11
Equity Compensation Plan Information
The following table reflects, as of December 31, 2013, compensation plans pursuant to which the Company is authorized to issue
options, warrants or other rights to purchase shares of its common stock, including the number of shares issuable under outstanding options,
warrants and rights issued 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)
Equity compensation plans not
approved by shareholders
Total
37,150
–
37,150
$32.00
–
$32.00
462,850
–
462,850
(1) On September 2, 2011, the majority shareholders of the Company adopted an amendment to the Company’s 2008 Stock Option Plan to
increase the number of shares of common stock issuable under the plan from 160,000 to 500,000.
Unregistered Sales of Equity Securities
None
Item 6.
Selected Financial Data
Not required for smaller reporting companies.
12
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in
conjunction with our audited financial statements and related notes for the fiscal years ended December 31, 2013 and 2012. In addition to
historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.
Overview
The MD&A is based on our financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates and judgments
that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases
its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions and conditions.
Our Business
We create and distribute products which we believe are entertaining, educational and beneficial to the well-being of infants and young
children under our brands. We create, market and sell children’s videos, music, books and other. We license the use of our intellectual
property, both domestically and internationally, to others to manufacture, market and sell products based on our characters and brand. We
own, control, distribute and seek to build animated content and brands aimed at kids, and then license the brands and characters onto various
products, including toys, publishing video games, music, apparel and soft goods. In most cases, we create our own original content. In other
cases, we partner with existing rights holders to develop an idea or an existing brand.
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 company and
sole member of A Squared (the “Parent Member”) and A2E Acquisition LLC, our newly formed, wholly-owned Delaware subsidiary
(“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurred
concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving
entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of
A Squared. A Squared is a children’s entertainment production company that produces original content for children and families that provide
entertaining and educational media experiences. A Squared also creates comprehensive consumer product programs in the forms of toys,
books and electronics. A Squared works with broadcasters, digital and online distributors and retailers worldwide as well as major toy
companies, video game companies and top licensees in the kids and family arena.
On April 2, 2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and
outstanding common stock on a one-for-one hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory
Authority) on April 7, 2014. All common stock share and per share information in this Annual Report, including the accompanying
consolidated financial statements and notes thereto, has been adjusted to reflect retrospective application of the reverse split, unless otherwise
indicated.
In November 2009, A Squared Entertainment LLC (“A Squared”) formed a joint venture, Stan Lee Comics, LLC, with POW
Entertainment Inc. (“POW”), a California corporation, and Archie Comic Publications, Inc. (“Archie”), a New York corporation, to create,
distribute, and exploit comic books and other intellectual property based on exclusive properties created by Stan Lee and owned by POW
Entertainment, Inc. Each of A Squared, POW, and Archie own one-third of Stan Lee Comics, LLC.
Upon formation, the parties agreed that POW would contribute certain properties to Stan Lee Comics, LLC as consideration for its
ownership interest. Similarly, A Squared would contribute certain creative development functions and be entitled to the exercise of all audio-
visual development, production and distribution rights in all media, as well as all merchandising rights, in and to the contributed properties as
consideration for its ownership interest. Finally, Archie would be entitled to all comic book publication and distribution rights in and to the
contributed properties as consideration for its ownership interest. Each party would be entitled to one-third of any net proceeds derived from
the contributed properties or their derivative works after recoupment of production cost and fees. Stan Lee Comics, LLC is the owner of the
Stan Lee and the Mighty 7 property.
Upon closing of the Merger, the Company assumed the rights to Stan Lee Comics, LLC held by A Squared Entertainment, LLC.
13
Results of Operations
Fiscal Year Ended December 31, 2013 Compared to December 31, 2012
Our summary results are presented below:
2013
2012
Change
% Change
Revenues
Costs and Operating Expenses
Depreciation and Amortization
Loss from Operations
$
Other Income
Interest Expense
Interest Expense - Related Parties
Gain (loss) on distribution contracts
Gain (loss) on extinguishment of debt
Gain (loss) on disposition of assets
Gain (loss) on exchange of warrants
Gain (loss) on derivative valuation
Net Other Income (Expense)
2,556,538
4,757,728
160,654
(2,361,844)
208
(1,663,632)
(30,189)
4,997
(614,073)
(251,192)
(312,144)
(1,886,943)
(4,752,968)
6,570,199 $
8,382,661
149,823
(1,962,285)
388
(332,055)
(50,259)
–
76,280
–
–
200,322
(105,324)
(4,013,661)
(3,624,933)
10,831
(399,559)
(180)
(1,331,577)
20,070
4,997
(690,353)
(251,192)
(312,144)
(2,087,265)
(4,647,644)
Income tax provision
–
–
–
Net Loss from Continuing Operations
Net Loss from Discontinued Operations
(7,114,812)
(101,219)
(2,067,609)
–
(5,047,203)
(101,219)
Net Loss
Net Loss per common share
$
$
(7,216,031) $
(2,067,609) $
(5,148,422)
(5.10) $
(3.00)
Weighted average shares outstanding
1,413,631
689,286
-61%
-43%
7%
20%
-46%
401%
-40%
N/A
-905%
N/A
N/A
-1042%
4413%
N/A
244%
N/A
249%
14
Revenues. Revenues by product segment and for the Company as a whole were as follows:
Product Sales
TV & Home Entertainment
Licensing & Royalties
Total Revenue
2013
2012
Change
% Change
$
$
1,682,780 $
505,552
368,206
2,556,538 $
6,277,663 $
–
292,536
6,570,199 $
(4,594,883)
505,552
75,670
(4,013,661)
-73%
N/A
26%
-61%
Product sales represent physical products in which the Company holds intellectual property rights such as trademarks and copyrights,
whether registered or unregistered, to the characters and which are manufactured and sold by the Company either directly at wholesale to retail
stores or direct to consumers through daily deal sites and our website. Product sales decreased by $4,594,883 due in part to a general decline
in market demand for CDs and DVDs.
TV & Home Entertainment revenue totaled $505,552 during the twelve months ended 2013, with no comparable amounts in 2012
due to the Merger. TV & Home Entertainment revenue is generated from distribution of our properties for broadcast on TV in domestic and
foreign markets and the sale of DVDs for home entertainment.
Licensing and royalty revenue includes items for which we license the rights from other companies to copyrights and trademarks of
select brands we feel will do well within our distribution channels as well as for our brands licensed to others to manufacture and/or market,
both internationally and domestically. During the twelve month period ended December 31, 2013 compared to December 31, 2012, this
category had increased from $292,536 to $368,206, or $75,670 (26%). This increase is due to a general increase in the demand for our
merchandising products and the revenue generated from the licensing income realized by those sales.
The 2014 economic outlook is uncertain and although we cannot guarantee, we anticipate continued growth in all areas of revenue.
The Company has retained new foreign sales agents to expand the foreign markets for TV distribution and licensing. New projects and
continued series productions will expand the US domestic distribution channels. There is also an increasing shift from CD and DVD sales to
digital downloading through various digital platforms which we anticipate will increase revenue.
Costs. Costs and expenses, excluding depreciation and amortization, consisting primarily of cost of sales, marketing and sales
expenses, and general and administrative costs, decreased $3,624,933 (43%) for the twelve month period ended December 31, 2013 compared
to the twelve month period ended December 31, 2012.
2013
2012
Change
% Change
Cost of Sales
General and Administrative
Marketing and Sales
Product Development
Total Costs and Operating Expenses
$
$
1,504,138 $
2,806,153
308,355
139,082
4,757,728 $
4,836,321 $
2,785,853
727,695
32,792
8,382,661 $
(3,332,183)
20,300
(419,340)
106,290
(3,624,933)
-69%
1%
-58%
324%
-43%
Cost of Sales decreased $3,332,183 (69%), during the twelve months of 2013 compared to the same period of 2012. The decrease
was a result of the decrease in product sales discussed above.
General and Administrative expenses consist primarily of salaries, employee benefits and stock based compensation as well as other
expenses associated with costs related to the Merger, executive management, finance, legal, facilities, marketing, rent, and other professional
services. General and administrative costs for 2013 increased $20,300 (1%) as compared to the prior year period. The aggregate increase for
the category includes increases of professional fees of $270,365 in professional fees, including $103,096 attributed to Merger-related
activities, and $275,063 in stock compensation expense offset by decreases of $359,349 in salaries and wages and $263,523 in investor
relations expense.
Marketing and sales expenses decreased $419,340 (58%) for the twelve months ended December 31, 2013 compared to the twelve
months ended December 31, 2012 primarily due to a decreases sales commission expenses, attendance at tradeshows and public relations
expenses.
Product development expenses are for routine and periodic alterations to existing products. For the twelve months ended December
31, 2013 compared to the twelve months ended December 31, 2012, these expenses increased by $106,290 (324%), primarily due to increased
demand for alterations to our existing products.
15
Interest Expense. Interest expense resulted from the debentures and bridge notes issued and other operating interest expense.
Interest expense on Debenture & Reissued
Debenture
Interest expense on Bridge Notes
Amortization of debenture issuance costs
Accretion of debt discount
Other operating interest expense
Interest Expense
$
$
2013
2012
Change
% Change
144,808 $
7,999
257,236
1,245,126
8,463
1,663,632 $
81,333 $
–
65,349
163,826
21,547
332,055 $
63,475
7,999
191,887
1,081,300
(13,084)
1,331,577
78%
N/A
294%
660%
-61%
401%
On June 27, 2012, the Company entered into a Securities Purchase Agreement whereby the Company issued and sold (i) a $1,000,000
16% senior secured convertible debenture due June 27, 2014 (the “Debenture”), and (ii) a common stock purchase warrant (the “Debenture
Warrant”) to purchase up to 50,000 shares of the Company’s common stock. The initial closing of the Debenture and Warrant Transaction
occurred on June 27, 2012 (“Original Issue Date”). The Company issued the Debenture and the Debenture Warrant for the purchase price of
$1,000,000. The Debenture is convertible, in whole or in part, into shares of Common Stock upon notice by the holder to the Company,
subject to certain conversion limitations set forth in the Debenture. The conversion price for the Debenture is $21.00 per share, subject to
adjustments. Interest on the Debenture accrues at the rate of 16% annually and is payable quarterly on February 1, May 1, August 1 and
November 1, beginning on November 1, 2012, on any redemption, conversion and at maturity. Interest is payable in cash or at the Company’s
option in shares of the Company’s common stock; provided certain conditions are met.
On August 29, 2013, pursuant to an agreement between the Company and certain holders, the original Debenture was assigned and
exchanged for an aggregate of $1,163,333 in new notes with the same provisions (the “Reissued Debenture”). The Reissued Debenture was
recorded as a modification of debt in accordance with ASC 470-50-40-6 wherein $150,000 in prepayment fees and $13,333 in accrued but
unpaid interest at the time of the exchange was added to the principal. The interest rate and maturity date were not changed. Commencing on
December 27, 2013, the Company was to be obligated to redeem a certain amount under the Reissued Debentures on a quarterly basis, in an
amount equal to $300,000 on each of December 27, 2013 and March 27, 2014 and $488,033 on June 27, 2014. At the assignment to the new
note holders, the conversion rate of the Reissued Debenture was changed to $1.212 per share.
On September 6, 2013, a holder of the Reissued Debenture issued notice of voluntary conversion for $75,000 of the issuance price
reducing the aggregate amount of the outstanding debentures to $1,088,333. The Company issued 61,882 shares of common stock. In
conjunction with this issuance there was a reduction in the derivative liability of $200,495, a reduction in the debt discount of $67,500, and a
loss on the conversion was recorded in the amount of $67,376.
On November 15, 2013, the Company issued 929,444 shares of common stock to holders of its Reissued Debentures, in the
aggregate principal amount of $1,088,333, plus accrued but unpaid interest in the aggregate amount of $38,141, in connection with the
automatic conversion of the Debentures upon consummation of the Merger. In association with the conversion, the Company recognized a
loss on the settlement of debt in the amount of $807,532, a reduction of the debt discount of $805,000, and a reduction of the derivative
liability of $2,867,602.
For year ended December 31, 2013 compared to the same period of 2012, interest expense for the Debenture and Reissued
Debenture was recorded in amounts of $144,808 and $81,333, 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 (“Bridge Notes”). The Bridge Notes have a stated conversion rate of $1.212 and can be voluntarily converted at any
time by the holder and mandatorily by the Company upon certain conditions. Cash was received in the aggregate of $309,000 from certain
non-related parties. Four officers and directors of the Company converted outstanding salaries payable to the new notes in the aggregate of
$221,000. At issuance, a debt discount of $530,000 was recorded. Costs related to the issuance of the Bridge Notes were recognized in 2013
totaling $30,715.
On November 15, 2013, the Company issued an aggregate of 448,613 shares of common stock to both non-related and related party
holders of the Company’s 12% convertible promissory notes in aggregate principal amount of $530,000 and accrued, but unpaid, interest of
$13,719 in connection with the automatic conversion of the Bridge Notes upon consummation of the Merger. During 2013, total accretion of
the debt discount was $530,000 resulting in a debt discount balance of $0. During 2013, interest expense associated with the non-related party
holders of these notes totaled $7,999.
Other interest expense is due to financing arrangements for insurance policies and other vendors who extend terms for materials
purchased.
16
Interest Expense - Related Party. Interest expense resulted from related party loans and notes issued.
Interest Expense - Related Parties
Interest Expense on Bridge Notes - Related
Parties
Interest Expense - Related Parties
$
$
24,469 $
50,259 $
(25,790)
5,720
30,189 $
–
50,259 $
5,720
(20,070)
-51%
N/A
-40%
2013
2012
Change
% Change
Throughout 2009, 2008 and 2007, the Company borrowed funds from Messrs. Moeller, Meader, Larry Balaban and Howard
Balaban. On December 31, 2009, the Officers agreed to issue new note agreements for the outstanding balances, including accrued but unpaid
interest, with a maturity date of December 31, 2010 (the “Officer Loans”). Subsequent agreements amended the stated interest rate to 6% per
annum and extended the maturity to January 15, 2015.
On November 15, 2013, in connection with the Merger, the Company issued an aggregate of 73,238 shares of common stock to
members of the pre-merger management team as consideration for the cancellation of an aggregate of $194,163 in principal and $62,167 in
accrued but unpaid interest thereon made to the Company by such individuals in connection with the Merger. The Company recognized a gain
on the settlement of debt in the amount of $7,324.
For the year ended December 31, 2013 compared to the same period of 2012, interest expense for these Officer Loans were recorded
in amounts of $13,080 and $14,132, respectively.
On March 31, 2011, four of the Company’s officers agreed to convert accrued but unpaid salaries through December 31, 2010 to
subordinated long term notes payable (the “Subordinated Officer Loans”). In February 2011, as a result of an agreement by each of the four
officers to retroactively decrease the amount of the annual salary for 2010 from $125,000 per annum per officer to $80,000, the amount of the
Subordinated Officer Loans was reduced to an aggregate of $1,620,137. In March 2012, the officers agreed to convert the aggregate sum of
$1,572,161 to shares of common stock of the Company. The remaining note, with a principal balance of $159,753, has a maturity of January
15, 2015 and a stated interest rate of six percent (6%) per annum.
On October 31, 2013, 43,207 shares of restricted common stock were issued in full payment of the remaining Subordinated Officer
Loan with a principal amount of $159,753 and accrued but unpaid interest in the amount of $56,278. The Company recognized a gain on the
settlement of debt of $90,733.
For the years ended December 31, 2013 and 2012, the interest recorded for these Subordinated Officer Loans was $11,390 and
$33,565, 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 (“Bridge Notes”). The Bridge Notes have a stated conversion rate of $1.212 and can be voluntarily converted at any
time by the holder and mandatorily by the Company upon certain conditions. Cash was received in the aggregate of $309,000 from certain
non-related parties. Four officers and directors of the Company, related parties, converted outstanding salaries payable to the new notes in the
aggregate of $221,000. At issuance, a debt discount of $530,000 was recorded. Costs related to the issuance of the Bridge Notes were
recognized in 2013 totaling $30,715.
On November 15, 2013, the Company issued an aggregate of 448,613 shares of common stock to both non-related and related party
holders of the Company’s 12% convertible promissory notes in aggregate principal amount of $530,000 and accrued, but unpaid, interest of
$13,719 in connection with the automatic conversion of the Bridge Notes upon consummation of the Merger. Additional expense related to the
issuance costs associated with the Bridge Notes was recognized in 2013 totaling $30,715. During 2013, total accretion of the debt discount
was $530,000 resulting in a debt discount balance of $0. During 2013, interest expense associated with the related-party holders of these notes
totaled $5,720.
On February 1, 2008, Isabel Moeller, sister of our former Chief Executive Officer, Klaus Moeller, loaned $310,000 to the Company
at an interest rate equal to 8% per annum. The funds were borrowed from Ms. Moeller in order to reduce outstanding obligations due to
Genius Products, Inc. at that time. Subsequent agreements extended the maturity date to January 15, 2015 and reduced the stated interest rate
to six (6%) percent per annum. Repayments on the principle balance were made in the aggregate of $24,000 during February and April 2011.
On April 1, 2011, Ms. Moeller agreed to convert $200,000 of the outstanding balance to shares of common stock of the Company. On March
31 2012, Ms. Moeller agreed to convert the remaining balance of outstanding principal and interest, in the amount of $173,385, to shares of
common stock of the Company. Interest expense for the twelve months ended December 31, 2013 and 2012 was $0 and $2,562, respectively,
as the note was paid in full in 2012.
17
Liquidity
Fiscal Year Ended December 31, 2013 Compared to December 31, 2012
Cash totaled $527,110 and $447,548 at December 31, 2013 and 2012, respectively. The change in cash is as follows:
Cash used in operating activities
Cash provided (used) in investing activities
Cash provided by financing activities
Increase (decrease) in cash
2013
2012
Change
$
$
(1,120,317) $
212,913
986,966
79,562 $
(935,323) $
(59,637)
1,037,167
42,207 $
(184,994)
272,550
(50,201)
37,355
During our fiscal years ended December 31, 2013 and 2012, our primary sources of cash were from investing and financing
activities. During 2013, our investing activities related primarily to cash provided by and assumed in the Merger. During the comparable
period in 2012, our investing activities related to investment in intangible assets and purchases of other fixed assets. During 2013, our
financing activities related primarily to the sale of common stock as well as the issuance of short term debt. During the comparable period in
2012, our financing activities related to the sale of common stock as well as the issuance of a certain Debenture. During both periods, these
funds were primarily used to fund operations.
Operating Activities
Cash used by operations in the twelve months ended December 31, 2013 was $1,120,317 as compared to a use of $935,323 during
the same period of 2012, representing an increase in cash used in operations of $184,994 based on the operating results discussed above.
Investing Activities
Cash provided by investing activities for the twelve months ended December 31, 2013 of $212,913 as compared to a use of funds of
$59,637 for the comparable period in 2012 is the result of the assumption of $283,199 in cash from the Merger. This source of cash was
offset by additional uses of cash from investments in intangible assets of $67,461 and $2,825 from the acquisitions of certain fixed assets.
Financing Activities
Cash generated from financing activities during the twelve months ended December 31, 2013 was $986,966 as compared to
$1,037,167 generated in the prior period. This relates to the sale of common stock as well as the issuance of short term debt.
Throughout the fourth quarter of 2013, the Company sold 296,429 shares of its common stock in a private placement to certain
investors at $3.50 per share. Through December 31, 2013, the Company received gross proceeds of $1,037,500, offset by offering costs of
$68,962. During 2012, the Company issued 10,000 shares of common stock for cash in the amount of $200,000, or $20.00 per share, to an
accredited investor.
During 2013, the Company issued 12% convertible notes to several parties with a maturity date of October 21, 2013 for an aggregate
of $530,000. Cash was received in the aggregate of $309,000. Four officers and directors of the Company converted outstanding salaries
payable to the new notes in the aggregate of $221,000. During 2013, the Company also paid an additional $275,000 in debenture issuance
costs. During 2012, the Company issued debentures for total gross proceeds of $1,000,000 less issuance costs of $162,833.
Capital Resources
As of December 31, 2013, the Company does not have any material commitments for capital expenditures.
18
Critical Accounting Policies
The Company’s accounting policies are described in the notes to the financial statements. Below is a summary of the critical
accounting policies, among others, that management believes involve significant judgments and estimates used in the preparation of its
financial statements.
Principles of Consolidation - The Company’s consolidated financial statements include the accounts of Genius Brands International,
Inc. and its wholly owned subsidiary A Squared Entertainment, LLC. All significant inter-company balances and transactions have been
eliminated in consolidation.
Intangible Assets - Intangible Assets acquired, either individually or with a group of other assets, are initially recognized and
measured based on fair value. In the 2005 acquisition of the assets from Genius Products, fair value was calculated using a discounted cash
flow analysis of the revenue streams for the estimated life of the assets. In the 2013 acquisition of the identifiable artistic-related assets from A
Squared, fair value was determined through an independent appraisal. The Company determined that these assets are indefinite-lived.
Additional, the Merger transaction with A Squared gave rise to goodwill representing the future economic benefits arising from the assets of
A Squared that could not be individually identified and recognized.
The Company develops new video, music, books and digital applications, in addition to adding content, improved animation and
songs/features to their existing productions. The costs of new product development and significant improvement to existing products are
capitalized while routine and periodic alterations to existing products are expensed as incurred. The Company begins amortization of new
products when it is available for general release. Annual amortization cost of intangible assets are computed based on the straight-line method
over the remaining economic life of the product, generally such deferred costs are amortized over five years.
The Company reviews all intangible assets periodically to determine if the value has been impaired following the guidance of ASC
350-20 – Goodwill and ASC 350-30 – General Intangibles Other Than Goodwill.
Capitalized Production Cost - The Company capitalizes production costs for episodic series produced in accordance with ASC 926-
20, Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against
revenue based on the initial market revenue evidenced by a firm commitment over the period of commitment. The Company expenses all
capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes.
The Company capitalizes production costs for films produced in accordance with ASC 926-20, Entertainment-Films - Other Assets -
Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production
based on the relative fair value of the film(s) delivered and recognized as revenue. The Company evaluates their capitalized production costs
annually and limits recorded amounts by their ability to recover such costs through expected future sales.
The Company also develops new videos, music, books and digital applications in addition to adding content, improved animation and
bonus songs/features to its existing product catalog. In accordance with ASC 350 - Intangible Assets and ASC 730 - Research and
Development, the costs of new product development and significant improvement to existing products are capitalized while routine and
periodic alterations to existing products are expensed as incurred.
Revenue Recognition - The Company recognized revenue related to product sales when (i) the seller’s price is substantially fixed, (ii)
shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and
(iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer as required by ASC
605 - Revenue Recognition.
Revenues associated with the sale of products, are recorded when shipped to customers pursuant to approved customer purchase
orders resulting in the transfer of title and risk of loss. Cost of sales, rebates and discounts are recorded at the time of revenue recognition or
at each financial reporting date.
The Company recognizes revenue in accordance with ASC Topic 926-605, Entertainment-Films - Revenue Recognition.
Accordingly, the Company recognizes revenue when (i) persuasive evidence of a sale with customer exists, (ii) the film is complete and has
been delivered or is available for delivery, (iii) the license period of the arrangement has begun and the customer can begin its exploitation,
exhibition, or sale, (iv) the arrangement fee is fixed or determinable, and (v) collection of the arrangement fee is reasonably assured.
For its distribution, TV, and home entertainment income the Company generally enters in to flat fee arrangements to deliver multiple
films or episodes. The Company allocates revenue to each film or episode based on their relative fair market values and recognizes revenue as
each film or episode is complete and available for delivery.
19
The Company’s licensing and royalty revenue represents both (a) variable payments based on net sales from brand licensees for
content distribution rights. These license agreements are held in conjunction with third parties that are responsible for collecting fees due and
remitting to the Company its share after expenses. Revenue from licensed products is recognized when realized or realizable based on royalty
reporting received from licensees and (b) licensing income the Company recognizes revenue as an agent in accordance with ASC 605-45,
Revenue Recognition - Principal Agent. Accordingly, the Company’s revenue is its gross billings to its customers less the amounts it pays to
suppliers for their products and services.
Other Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Off Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk
Not applicable.
Item 8.
Financial Statements and Supplementary Data
The financial statements are included herein commencing on page F-1.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
20
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Interim Chief
Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-
15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and
Interim Chief Financial Officer have concluded that, as of December 31, 2013, these disclosure controls and procedures were ineffective to
ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded,
processed, summarized and reported, within the time periods specified in the Commission’s rule and forms; and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Interim Chief Financial Officer
and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the
evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and
control objectives related to the evaluation of our control environment.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on our
evaluation, management concluded that our internal control over financial reporting was ineffective as of December 31, 2013 due to three
material weaknesses. A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight
Board’s Audit Standard No. 5 as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on
a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less
severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.
Management’s assessment identified the following material weaknesses in internal control over financial reporting:
1. The Company did not have the necessary process in place to ensure that year end cutoff procedures were observed. This included
recording the accruals necessary to capture costs in the proper periods and appropriately analyzing intangible asset values.
2. The Company’s controls did not operate effectively to ensure the proper valuation of beneficial conversion features immediately
prior to conversion of the underlying debt into share of common stock.
3. The Company did not have the necessary processes in place to ensure that Board of Directors and Management actions impacting
the financial statements were properly recorded and that they would be properly disclosed and presented on Form 10-K as
required by the Securities Exchange Commission (SEC) and Financial Accounting Standards Board (FASB).
In light of the material weaknesses described above, we performed additional analysis and other post-closing procedures to ensure
our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial
statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the
periods presented.
The Company has taken the following steps to correct the material weaknesses identified in this report:
1. The Company has closed its San Diego office and consolidated all accounting activities into one location at our Beverly Hills
location.
2. A new Controller has been hired with the proper accounting and auditing background and experience to establish procedures for
the proper recognition of revenue and expenses and to properly document the delivery of products to customer.
3. With the consolidation of the accounting activities into one office, the segregation of duties has been expanded so that several
people perform the various accounting duties necessary to insure proper internal control.
4. While there are no debt instruments on the balance sheet as of December 31, 2013, in the future, should the Company issue certain
complex debt or equity instruments, Management intends to mitigate any risks by utilizing external financial consulting services
prior to the review by our principal independent accounting firm to ensure that all information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the
time periods specified in the Commission’s rule and forms.
5. Management intends to ensure that all actions of Management and the Board of Directors are communicated to the internal
accounting staff for proper disclosure and, if necessary, will utilize the services of external financial consultants with technical
accounting expertise to assess the impact.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this
pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this
annual report.
21
Inherent Limitations Over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its
inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an
effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
22
Item 10.
Directors, Executive Officers and Corporate Governance.
Directors, Executive Officers, Promoters and Control Persons
PART III
The following table sets forth information about our Directors and Executive Officers:
Name
Age
Position
Chief Executive Officer and Chairman of the Board/Director
President and Director
Corporate Secretary
Interim Chief Financial Officer
Andrew Heyward
Amy Moynihan Heyward
Gregory Payne
Richard Staves
Klaus Moeller
Lynne Segal*
Jeffrey Weiss*
Joseph “Gray” Davis*
Bernard Cahill
Anthony Thomopoulos *
_______
* Denotes directors who meet our criteria for “independence”.
Director
Director
Director
Director
Director
Director
65
47
59
64
52
61
50
70
48
75
Our directors hold office until the earlier of their death, resignation or removal or until their successors have been qualified.
Background Information
Andrew Heyward, 65, co-founded DIC Animation City in 1983 and served as its Chief Executive Officer until its sale in 1993 to
Capital Cities/ ABC, Inc. which was eventually bought by The Walt Disney Company in 1995. Mr. Heyward ran the company while it was
owned by The Walt Disney Company until 2000 when Mr. Heyward purchased DIC Entertainment L.P. and DIC Productions L.P, corporate
successors to the DIC Animation City business, with the assistance of Bain Capital and served as the Chairman and Chief Executive Officer
of their acquiring company DIC Entertainment Corporation, until he took the company public on the AIM. He sold the company in 2008. Mr.
Heyward co-founded A Squared Entertainment LLC in 2009 and has served as its Co-President since inception. Mr. Heyward earned a
Bachelor of Arts degree in Philosophy from UCLA and is a member of the Producers Guild of America, the National Academy of Television
Arts and the Paley Center (formerly the Museum of Television and Radio). Mr. Heyward gave the Commencement address in 2011 for the
UCLA College of Humanities, and was awarded the 2002 UCLA Alumni Association's Professional Achievement Award. He has received
multiple Emmys and other awards for Children’s Entertainment. He serves on the Board of Directors of the Cedars Sinai Medical Center. Mr.
Heyward was chosen as a director because of his extensive experience in children’s entertainment and as co-founder of A Squared
Entertainment. Mr. Heyward has produced over 5,000 half hour episodes of award winning entertainment, among them Inspector
Gadget; The Real Ghostbusters; Strawberry Shortcake; Care Bears; Alvin and the Chipmunks; Hello Kitty’s Furry Tale 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.
Amy Moynihan Heyward, 47, is the founder and has been the President of A Squared since 2009. Prior the formation of A Squared,
Ms. Heyward served as the Vice President of Marketing at the Los Angeles Times from 2006 to 2008 and from 2003 to 2006, Ms. Heyward
served as the director of global marketing for McDonald’s Corporation. From 2002 to 2003, Ms. Moynihan handled promotions and
sponsorships for Hasbro, Inc. and from 1994 to 2000, Ms. Heyward worked in various marketing posts for Disney. Ms. Heyward received
degrees in Marketing Communications and Journalism from Northeastern University and sits on the Boards of Directors of LA’s Best and
After School All-Stars. Ms. Heyward was chosen as a director because of her experience in brand creation and as co-founder of A Squared
Entertainment.
Gregory Payne, 59, has been the Chief Operating Officer and General Counsel to A Squared Entertainment LLC since October 2011
and A Squared Holdings LLC since March 2009. He was an attorney in private practice and the Chairman of Foothill Entertainment, Inc. from
2000 to present. Mr. Payne served as Senior Vice President Legal and Business Affairs to DIC Animation City, DIC Entertainment L.P. and
DIC Productions L.P. variously during the period from 1986 to 1998 and was an attorney in private practice from 1978 until 1986. Mr. Payne
is a director and 50% shareholder of Foothill Entertainment Inc. Mr. Payne received his Juris Doctorate from Stanford Law School.
23
Richard Staves, 64, has served as the President of Cherry Creek Wealth Management since November 2013 and from January 2010
to October 2013 was the owner of Cambridge Financial Services, an accounting, tax preparation and wealth management services firm. Prior
to this position, Mr. Staves was a Senior Wealth Advisor for Wells Fargo Wealth Management Group from April 2008 to December 2009.
Mr. Staves has held various positions with Arthur Anderson from 1971 to 1976, including Tax Manager. Subsequently, Mr. Staves founded
a Certified Public Accounting firm and provided accounting services to companies on a consulting basis. Mr. Staves served as the Chief
Financial Officer of Armstrong, Hirsch & Levine, an entertainment law firm, for three years and also previously served as the Controller and
Chief Financial Officer of DIC Entertainment. Mr. Staves received his Bachelor of Arts from California State University and is a Certified
Public Accountant. Mr. Staves is a Personal Financial Specialist (PFS), as designated by the American Institute of Certified Public Accounts
(AICPA) and holds Series 7, 63 and 65 securities licenses.
Klaus Moeller, 52, was elected to serve on the board of directors of the Company at inception and has acted as its Chief Executive
Officer and Chairman of the Board up until November 2013. In May 2008, he was also appointed interim Chief Financial Officer of the
Company, a position he held until April 26, 2011. Mr. Moeller currently sits on the Board of Directors of Capital Art, Inc., which operates an
art business. Mr. Moeller was a Founder and the Chief Executive Officer, Chairman of the Board and a Director of Genius Products, Inc.
from 1998 to 2005. Mr. Moeller served as Interim Chief Financial Officer of Genius from May 2001 until August of 2004. Mr. Moeller grew
up and was educated in Germany, England, and Portugal. He worked as an auditor for Eluma S.A. in Sao Paulo Brazil, for the Ted Bates
Advertising Agency and BHF Bank in Frankfurt. Mr. Moeller is nominated because he has extensive experience in governance and leadership
roles on the boards of public companies on which he has served, as well as extensive background in finance, both as an auditor and as chief
executive officer and chief financial officer at Genius Products Inc.
Lynne Segall, 61, has served as the Senior Vice President and Publisher of The Hollywood Reporter since June 2011. From 2010 to
2011, Ms. Segall was the Senior Vice President of Deadline Hollywood. From June 2006 to May 2010, Ms. Segall served as the Vice
President of Entertainment, Fashion & Luxury advertising at the Los Angeles Times. In 2005, Ms. Segall received the Women of
Achievement Award from The Hollywood Chamber of Commerce and the Women in Excellence Award from the Century City Chamber of
Commerce. In 2006, Ms. Segall was recognized by the National Association of Women with its Excellence in Media Award. Ms. Segall was
chosen to be a director based on her expertise in the entertainment industry.
Jeffrey Weiss, 50, is the Co-Chief Executive Officer of American Greetings Corporations and has been an employee of such
company since 1988. Mr. Weiss is also a member of American Greetings Corporation’s Board of Directors. Mr. Weiss received his Bachelor
of Arts Degree in Finance from Yeshiva University and his Master’s degree from the University of Pennsylvania’s Wharton School of
Business. Mr. Weiss was chosen to be a director of the Company based on his experience in retail, product development, merchandizing,
marketing and entertainment development.
Joseph “Gray” Davis, 70, served as the 37th governor 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 member of the bi-partisan Think Long Committee, a Senior Fellow at the UCLA School of Public Affairs and Co-Chair of the
Southern California Leadership Counsel. Mr. Davis received his undergraduate degree from Stanford University and received his Juris
Doctorate from Columbia Law School. Mr. Davis served as lieutenant governor of California from 1995-1998, California State Controller
from 1987-1995 and California State Assemblyman from 1982-1986. Mr. Davis was chosen as a director of the Company based on his
knowledge of corporate governance.
Bernard Cahill, 48, is the founding partner of ROAR, LLC, an entertainment consulting firm, which he founded in 2004 and is the
founding partner of Cahill Law Offices, an entertainment law firm, which he founded in 1995. Mr. Cahill is the founder of Unicorn Games
LLC, which was sold to Hasbro, Inc. in 2000. Mr. Cahill holds a Bachelor’s of Science degree in Biology from Illinois State University and a
Juris Doctorate from the John Marshall Law School. Mr. Cahill is a member of the Tennessee State and Illinois State Bar. Mr. Cahill was
chosen to be a director based on his expertise in the entertainment field.
Anthony Thomopoulos, 75, was appointed as a director of the Company on February 27, 2014.. Mr. Thomopoulos served as the
Chairman of United Artist Pictures from 1986 to 1989 and formed Thomopoulos Pictures, an independent production company of both
motion pictures and television programs in 1989 and has served as its Chief Executive Officer since 1989. From 1991 to 1995, Mr.
Thomopoulos was the President of Amblin Television, 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 Media Arts Group, a NYSE listed company. Mr. Thomopoulos served as a state commissioner of the California
Service Corps. under Governor Schwarzenegger from 2005 to 2008. Mr. Thomopoulos is also a founding partner of Morning Light
Productions. Since he founded it in 2008, Mr. Thomopoulos has operated Thomopoulos Productions and has served as a consultant to
BKSems, USA, a digital signage company. Mr. Thomopoulos is an advisor and a member of the National Hellenic Society and holds a degree
in Foreign Service from Georgetown University and sat on its Board of Directors from 1978 to 1988. Mr. Thomopoulos was chosen as a
director of the Company based on his entertainment industry experience.
Family Relationships
There are no family relationships between any of our directors and our executive officers with the exception of Andrew Heyward and
Amy Moynihan Heyward, whom are married.
24
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.
2.
3.
4.
5.
6.
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;
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other
minor offenses);
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;
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;
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
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 good corporate governance is important to ensure that the Company is managed for the long-term benefit of our
stockholders. This section describes key corporate governance practices that we have adopted.
Board Leadership Structure and Role in Risk Oversight
The Board of Directors has 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 best interests of the company and our stockholders. The Board of Directors selects, evaluates and provides for the succession of
executive officers and, subject to stockholder election, directors. It reviews and approves corporate objectives and strategies, and evaluates
significant policies and proposed major commitments of corporate resources. Our Board of Directors also participates in decisions that have a
potential major economic impact on our company. Management keeps the directors informed of company activity through regular
communication, including written reports and presentations at Board of Directors and committee meetings.
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or
combined, we have traditionally determined that it is in the best interest of the Company and its shareholders to partially combine these roles.
Due to the small size of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officers positions
combined.
The Company currently has eight directors, including Mr. Heyward, its Chairman, who also serves as the Company’s Chief
Executive Officer. The Chairman and the Board are actively involved in the oversight of the Company’s day to day activities.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors, executive officers and persons who own more than 10% of the
Company's stock (collectively, "Reporting Persons") to file with the SEC initial reports of ownership and changes in ownership of the
Company's common stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a)
reports they file. To the Company's knowledge, based solely on its review of the copies of such reports received or written representations
from certain Reporting Persons that no other reports were required, the Company believes that during its fiscal year ended December 31, 2013
all Reporting Persons timely complied with all applicable filing requirements, except for Form 4s filed by Messrs. Klaus Moeller, Howard
Balaban, Larry Balaban, Michael Meader and Jeanene Morgan on June 21, 2013 which were not timely filed.
25
Code of Ethics
We have adopted a Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all of our officers,
directors and employees. A copy of the Code of Ethics may be obtained, free of charge, by submitting written request to the Company or on
our website at http://ir.stockpr.com/babygenius/governance-documents.
Board Committees
We currently do not maintain any committees of the Board of Directors. Given our size and the development of our business to date,
we believe that the board, through its meetings, can perform all of the duties and responsibilities which might be contemplated by a committee.
None of our directors meet the definition of an “audit committee financial expert” as defined in Item 407 of Regulation S-K.
Item 11.
Executive Compensation.
Executive Compensation
The following table sets forth the long-term compensation earned for services in all capacities for the fiscal years ended December 31,
2013 and 2012 paid to our Chief Executive Officer and Chief Financial Officer, and each other officer earning in excess of $100,000 per year.
Summary Compensation Table
Name and Principal Position
Andrew Heyward
Chief Executive Officer (2)
Year
2013
2012
Amy Moynihan Heyward
President (3)
Gregory Payne
Corporate Secretary (4)
Klaus Moeller
Former Chief Executive Officer (5)
Michael Meader
President (6)
Larry Balaban
Former Chief Creative Officer and
Corporate Secretary (7)
Howard Balaban
Former VP of Business Development (8)
Jeanene Morgan
Former Chief Financial Officer (9)
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
Salary
($)
Stock
Awards
($) (1)
Option
Awards
($) (1)
All Other
Compensation
($)
Total
($)
23,077
–
20,769
–
17,308
–
173,950
195,000
56,250
195,000
171,550
195,000
171,550
195,000
190,000
165,000
–
–
–
–
–
–
34,000
–
–
–
34,000
-
34,000
-
34,000
–
–
–
–
–
–
–
67,473
48,819
67,473
48,819
67,473
48,819
67,473
48,819
32,145
19,515
–
–
–
–
–
–
8,550
11,400
3,508
11,400
8,550
11,400
8,550
11,400
–
–
23,077
–
20,769
–
17,308
–
283,973
255,219
127,231
255,219
281,573
255,219
281,573
255,219
256,415
184,515
(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)
(3)
(4)
In association with the Merger, 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.
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.
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.
26
(5) 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:
o
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.
o
o
Annual car allowance of $11,400
In association with the Merger, Mr. Moeller resigned from his position as Chief Executive Officer effective November 15, 2013.
(6) Michael Meader’s compensation includes:
·
·
·
·
Salaried compensation pursuant to his April 26, 2011 Employment Agreement and the April 26, 2011 Employment Agreement as
amended on January 10, 2013.
Stock options including:
o
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.
o
Annual car allowance of $11,400
On March 28, 2013, Mr. Meader resigned from his position as President effective April 5, 2013.
(7) Larry Balaban’s compensation includes:
·
·
·
·
·
Salaried compensation pursuant to his April 26, 2011 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:
o
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.
o
o
Annual car allowance of $11,400
In association with the Merger, Mr. Larry Balaban resigned from his positions as Chief Creative Officer and Corporate Secretary
effective November 15, 2013.
(8) Howard Balaban’s compensation includes:
·
·
·
·
·
Salaried compensation pursuant to his April 26, 2011 Employment Agreement and the April 26, 2011 Employment Agreement as
amended on January 10, 2013.
10,000 shares of the Company’s common stock, granted in association with the Merger, for services to the Company.
Stock options including:
o
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.
o
o
Annual car allowance of $11,400
In association with the Merger, Mr. Howard Balaban resigned from his position as EVP of Corporate Development effective
November 15, 2013.
(9)
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:
o
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.
o
o
o
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 $20.00 per share.
Pursuant to the October 29, 2013 Employment Agreement, all options granted to Ms. Morgan were vested immediately.
o
Effective March 7, 2014, Ms. Morgan resigned from the Company.
·
27
Outstanding Equity Awards at Fiscal Year
The following table sets forth outstanding equity awards as of December 31, 2013.
Option awards
Stock awards
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
Number
of shares
or units
of stock
that have
not vested
(#)
Market
value of
shares of
units of
stock
that have
not
vested ($)
Option
exercise
price ($)
Option
expiration
date
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexersisable
Equity
incentive
plan
awards:
Market or
payout
value of
unearned
shares
units or
other
rights that
have not
vested ($)
Equity
incentive
plan
awards:
Number of
unearned
shares,
unit or
other
rights that
have not
vested (#)
–
–
–
–
–
–
–
500
1,500(2)
1,000(2)
1,000(2)
1,000(2)
2,000(2)
1,000
1,000
7,500
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– $
– $
– $
– $
– $
– $
– $
– $
– $
–
55.00 12/31/2014
34.00 12/31/2015
34.00 12/31/2016
34.00 12/31/2017
34.00 12/31/2018
44.00 12/31/2019
22.00 12/31/2016
20.00 12/31/2017
20.00 5/14/2018
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Name
Andrew
Heyward
Amy Moynihan
Heyward
Gregory Payne
Klaus Moeller
(1)
Michael Meader
(1)
Larry Balaban
(1)
Howard Balaban
(1)
Jeanene Morgan
(1)
In association with the Merger, Messrs. Moeller, Meader, L. Balaban, and H. Balaban each agreed to the cancellation of options to
purchase up to 19,500 shares of the Company’s common stock.
(2) Options were granted as part of offer of employment. Options to purchase up to 4,500 shares of common stock were granted on
December 31, 2010, with 1,500 vesting on issuance and 1,000 vesting per annum on December 31, 2011, 2012, and 2013. On May 2,
2012, an additional option to purchase up to 2,000 shares was granted pursuant to an employment agreement vesting on December 31,
2014. On October 1, 2013, pursuant to an employment agreement, all options granted were immediately vested.
28
Employment Agreements
On April 26, 2011, the Company and each of Messrs. Moeller, Meader, Larry Balaban and Howard Balaban (the “Executives”)
agreed to terminate all then existing employment agreements for the Executives and enter into new five-year employment agreements unless
written termination is provided by either party. Each employment agreement provides for a graduated base salary beginning at $165,000 per
annum retroactive to March 20, 2011, continuing to December 31, 2011, increasing to $195,000 for 2012 and $225,000 for 2013. After 2013,
the agreement provides for base salary increases at the discretion of the Board of Directors, with a minimum 5% increase. In addition to base
salary, each Executive will receive an annual car allowance of $11,400, and four weeks paid vacation per annum.
Each agreement also provides for a cash incentive bonus determined at the sole discretion of our Board of Directors which shall not
be less than 4.5% of the Company’s EBITDA (Earnings Before Interest, Depreciation, Taxes and Amortization) if the Company is EBITDA
positive nor be more than 100% of the Executive’s base salary, although the Board has retained discretion to waive the 100% cap. In addition,
pursuant to the agreements each Executive has been granted a non-qualified stock option to purchase up to 10,000 shares of the Company’s
common stock, vesting as to 2,500 shares on the grant date and 2,500 shares per year on the anniversary date of the agreements. The exercise
price of options is $44.00 per share and the options will expire on the tenth anniversary of the date of grant except in the event of a termination
for cause under the respective employment agreement, in which case the option will expire in its entirety ninety days after termination of
employment. Each Executive has granted the Company a right of first refusal to repurchase any shares of common stock acquired by the
Executive pursuant to the option in the event of a termination for cause. The purchase price on the right of first refusal would be the bid price
on the date of termination.
The employment agreement provides for payment of severance compensation equal to eighteen months of the Executive’s base salary
on the date of termination of the Executive’s employment by the Company other than for cause. Subject to the provisions of Section 409A of
the Internal Revenue Code of 1986, as amended, severance will be paid over the course of eighteen months following the termination date and
will be made on the Company’s normal payroll dates during the severance period. Severance compensation is in addition to his base salary
through the date of termination, accrued vacation and bonus compensation earned but not yet paid on the date of termination.
In addition, the agreements each provide that, upon termination without cause or as a result of a change of control, the unvested
portion of any options then held by the Executive will immediately vest. For purposes of these agreements, a “change of control” includes the
sale of all or substantially all of the Company’s assets, a merger or consolidation resulting in securities representing 50% of the combined
voting power of the outstanding common stock being transferred to persons who are different from the holders immediately preceding the
transaction, the acquisition (directly or indirectly) of 50% of the total combined voting power of the common stock pursuant to a tender or
exchange offer, or a majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election
is not endorsed by a majority of the members of the Board before the date of the appointment or election.
Each of the employment agreements includes standard confidentiality, non-competition (including during any severance period), non-
solicitation and non-disparagement provisions, provides for twenty days of vacation time per annum, and provides for indemnification of the
Executive to the fullest extent allowed by the California Corporations Code and the Company’s Articles of Incorporation and Bylaws.
On January 10, 2013, Messrs. Moeller, Meader and Howard Balaban agreed to reduce the amount of payments for salary effective
January 1, 2013 through January 19, 2013 to $165,000 and a further reduction to $140,000 commencing January 20, 2013, continuing until
further notice by each one to the Board of Directors. The agreements with each of Messrs. Moeller, Meader and Howard Balaban include the
accrual of unpaid salary, the right to convert any or all of the accrued but unpaid salary to common stock of the Company at a conversion price
of $21.00 per share and an amendment to all outstanding stock option grant notices to allow each to retain all rights until the expiration date
upon termination unless for cause, as defined in the employment agreement.
On March 28, 2013, Mr. Meader voluntarily resigned his position as President effective April 5, 2013. The Company agreed that
Mr. Meader will retain all stock options granted to him as of the date of termination, with no changes in the vesting and expiration dates in
accordance with the original grant notices, in exchange for a general release of all claims against the Company. The Company has entered into
a consulting agreement with Mr. Meader to provide continued services for an initial period of twelve months.
On October 29, 2013, the Company entered into a new employment agreement with Mr. Moeller effective as of October 1, 2013.
Pursuant to Mr. Moeller’s employment agreement (the “October Moeller Employment Agreement”), Mr. Moeller shall serve as the
Company’s Chief Executive Officer for a period of two years in consideration for (i) an annual salary of $20,800 (except that if the Company
generates cash flow from operations of at least $300,000 on an annual basis, Mr. Moeller’s annual salary shall be $100,000 plus an additional
payment of $75,000 per annum, payable in cash or shares of the Company’s common stock, in quarterly installments of $18,750 each, and (ii)
the acceleration of vesting of all previously issued option grants to Mr. Moeller under the Company’s 2008 Stock Option Plan as well as
participation in other Company benefit plans and the ability to receive a year-end performance bonus, at the discretion of the Company’s Board
of Directors. In the event Mr. Moeller’s employment is terminated by the Company without “Cause” (as defined in the October Moeller
Employment Agreement), Mr. Moeller shall be entitled to severance payments for twelve months, based on the annual salary rate of $100,000.
29
In connection with the Merger, the Company and Mr. Moeller entered into a termination agreement to terminate Mr. Moeller’s
employment agreement dated as of October 29, 2013 (the “Moeller Employment Termination Agreement”).
On May 2, 2012, the Company entered into a five-year “at will” employment agreement with Jeanene Morgan to serve as the
Company’s Chief Financial Officer. The agreement provides a base salary of $165,000 per annum from January 1, 2012 to December 31,
2012, increasing to $190,000 on January 1, 2013 and $215,000 on January 1, 2014. After 2014, the agreement provides for base salary
increases at the discretion of the Board of Directors with a minimum 5% increase. Ms. Morgan shall be permitted to participate in all benefit
plans of the Company and receive 4 weeks paid vacation.
The agreement also provides for a cash incentive bonus determined at the sole discretion of our Board of Directors which shall not be
less than 2.0% of the Company’s EBITDA (Earnings Before Interest, Depreciation, Taxes and Amortization) if the Company is EBITDA
positive nor be more than 100% of the base salary, although the Board has retained discretion to waive the 100% cap. In addition, pursuant to
the agreement Ms. Morgan has been granted a qualified stock option to purchase up to 2,000 shares of the Company’s common stock, vesting
on December 31, 2014. The exercise price of option is $44.00 per share and the option will expire on the fifth anniversary of the date of
vesting except in the event of a termination for cause under the employment agreement, in which case the option will expire in its entirety
ninety days after termination of employment.
The employment agreement provides for payment of severance compensation equal to twelve months of the base salary on the date of
termination of employment by the Company other than for cause. Subject to the provisions of Section 409A of the Internal Revenue Code of
1986, as amended, severance will be paid over the course of twelve months following the termination date and will be made on the Company’s
normal payroll dates during the severance period. Severance compensation is in addition to her base salary through the date of termination,
accrued vacation and bonus compensation earned but not yet paid on the date of termination.
In addition, the agreement provides that, upon termination without cause or as a result of a change of control, the unvested portion of
any options then held by Ms. Morgan will immediately vest. For purposes of this agreement, a “change of control” includes the sale of all or
substantially all of the Company’s assets, a merger or consolidation resulting in securities representing 50% of the combined voting power of
the outstanding common stock being transferred to persons who are different from the holders immediately preceding the transaction, the
acquisition (directly or indirectly) of 50% of the total combined voting power of the common stock pursuant to a tender or exchange offer, or a
majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a
majority of the members of the Board before the date of the appointment or election.
The employment agreement includes standard confidentiality, non-competition (including during any severance period), non-
solicitation and non-disparagement provisions, provides for twenty days of vacation time per annum, and provides for indemnification of the
Executive to the fullest extent allowed by the California Corporations Code and the Company’s Articles of Incorporation and Bylaws.
On January 10, 2013, Ms. Morgan agreed to defer the payment of the salary increase which would have become effective January 1,
2013. The deferral will continue until further notice by Ms. Morgan to the Board of Directors. The agreement includes the accrual of unpaid
salary, the right to convert any or all of the accrued but unpaid salary to common stock of the Company at a conversion price of $21.00 per
share and an amendment to all outstanding stock option grant notices to allow Ms. Morgan to retain all rights until the expiration date upon
termination unless for cause, as defined in the employment agreement.
On October 29, 2013, the Company entered into a new employment agreement with Ms. Morgan effective as of October 1, 2013.
Pursuant to Ms. Morgan’s employment agreement (the “October Morgan Employment Agreement”), Ms. Morgan shall serve as the
Company’s Chief Financial Officer for a period of two years in consideration for (i) an annual salary of $175,000 and (ii) the acceleration of
vesting of all previously issued option grants to Ms. Morgan under the Company’s 2008 Stock Option Plan as well as participation in other
Company benefit plans and the ability to receive a year-end performance bonus, at the discretion of the Company’s Board of Directors. In the
event Ms. Morgan’s employment is terminated by the Company without “Cause” (as defined in the October Morgan Employment
Agreement), Ms. Morgan shall be entitled to severance payments for twelve months. Effective March 7, 2014, Ms. Morgan resigned from her
position as Chief Financial Officer of the Company.
On November 15, 2013, the Company entered into an employment agreement with Andrew Heyward (the “Andrew Heyward
Employment Agreement”), whereby Mr. Heyward agreed to serve as the Company’s Chief Executive Officer for a period of five years,
subject to renewal, in consideration for an annual salary of $200,000. Additionally, under the terms of the Andrew Heyward Employment
Agreement, Mr. Heyward shall be eligible for an annual bonus if the Company meets certain criteria, as established by the Board of
Directors. Mr. Heyward shall be entitled to reimbursement of reasonable expenses incurred in connection with his employment and the
Company may take out and maintain during the term of his tenure, a life insurance policy in the amount of $1,000,000. During the term of his
employment and under the terms of the Andrew Heyward Employment Agreement, Mr. Heyward shall be entitled to be designated as
composer on all music contained in the programming produced by the Company and to receive composer’s royalties from applicable
performing rights societies.
30
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 consideration for an annual salary of $180,000. Additionally, under the terms of the Amy Heyward Employment Agreement, Ms.
Heyward shall be eligible for an annual bonus if the Company meets certain criteria, as established by the Board of Directors. Ms. Heyward
shall be entitled to reimbursement of reasonable expenses incurred in connection with her employment and the Company may take out and
maintain during the term of her tenure, a life insurance policy in the amount of $1,000,000. During the term of her employment and under the
terms of the Amy Heyward Employment Agreement, Ms. Heyward shall be entitled to be designated as composer on all music contained in
the programming produced by the Company and to receive composer’s royalties from applicable performing rights societies.
On November 15, 2013, as a closing condition to the Merger, each of Messrs. Moeller, Larry Balaban and Howard Balaban resigned
their executive positions with Company. Accrued but unpaid salaries and benefits payable to these individuals were converted into the
Company’s common stock. Under the terms of their termination agreements, Messrs. Moeller, L. Balaban, and H. Balaban each agreed to
cancel options to purchase an aggregate of up to 19,500 shares of the Common Stock. Also in connection with the Merger, Mr. Meader
agreed to cancel options to purchase an aggregate of up to 19,500 shares of the Company’s common stock.
In connection with the Merger, the Company entered into Salary Conversion Agreements with each of Klaus Moeller, Jeanene
Morgan, Larry Balaban, Howard Balaban and Michael Meader pursuant to which such individuals agreed to convert an aggregate of
approximately $612,443 in accrued but unpaid salaries into an aggregate of 124,146 shares of Common Stock.
Director Compensation
The following table sets forth with respect to the named directors, compensation information inclusive of equity awards and
payments made for the fiscal years ended December 31, 2013 and 2012 in the director's capacity as director. The Company intends to
implement a Directors Stock Option plan and provide certain directorship fees in the future.
Name
Andrew Heyward (1)
Amy Moynihan Heyward (1)
Klaus Moeller
Lynne Segal (2)
Jeffrey Weiss (2)
Joseph “Gray” Davis (2)
William McDonough (2)(5)
Bernard Cahill (2)
Michael Meader (2)(3)
Saul Hyatt (2)(4)
Larry Balaban (2)
Howard Balaban (2)
Fees Earned or
Paid in Cash ($)
Stock
Awards ($)
Option
Awards ($)
All Other
Compensation ($)
Total ($)
2013 $
2012 $
2013
$
2012 $
2013 $
2012 $
2013 $
2012 $
2013 $
2012 $
2013 $
2012 $
2013 $
2012 $
2013 $
2012 $
2013 $
2012 $
2013 $
2012 $
2013 $
2012 $
2013 $
2012 $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
35,000 $
– $
17,500 $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
388 $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
35,000
–
17,500
388
–
–
–
–
(1) Upon closing of the Merger, on November 15, 2013, Andrew Heyward and Amy Moynihan Heyward were appointed to the Board of
Directors.
(2) On December 9, 2013, in association with the Merger, Messrs. Meader, Hyatt, L. Balaban, and H. Balaban resigned from the Board of
(3)
Directors. Concurrently, Ms. Segal as well as Messrs. Weiss, Davis, McDonough, and Cahill were appointed to the Board of Directors.
In association with the Merger, Mr. Meader received 10,000 shares of the Company’s common stock for services to the Board of
Directors. Additionally, on May 15, 2013, the Board of Directors authorized the grant of a stock option to purchase up to 7,500 shares of
Directors. Additionally, 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.
In association with the Merger, Mr. Hyatt received 5,000 shares of the Company’s common stock for service to the Board of Directors.
(4)
(5) On February 27, 2014, Mr. McDonough resigned from the Board of Directors of the Company.
31
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table shows the beneficial ownership of shares of our $0.001 par value common stock as of April 8, 2014 known by
us through transfer agent and other records held by: (i) each person who beneficially owns 5% or more of the shares of common stock then
outstanding; (ii) each of our directors; (iii) each of our named executive officers; and (iv) all of our directors and executive officers as a group.
The information in this table reflects “beneficial ownership” as defined in Rule 13d-3 of the Exchange Act. To our knowledge and
unless otherwise indicated, each stockholder has sole voting power and investment power over the shares listed as beneficially owned by such
stockholder, subject to community property laws where applicable. Percentage ownership is based on 6,029,828 shares of common stock
outstanding as April 8, 2014. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting
and investment power and that person’s address is c/o 9401 Wilshire Boulevard Suite 608, Beverly Hills, California 90212.
Name and Address of Beneficial Owner
A Squared Holdings, LLC
Andrew Heyward (2)
Amy Moynihan Heyward (2)
Gregory Payne
Richard Staves
Klaus Moeller
Bernie Cahill
Lynne Segal
Jeffrey Weiss
Joseph “Gray” Davis
Anthony Thomopoulos
Melechdavid, Inc. (4)
Erick Richardson (5)
All Officers and Directors (Consisting of 10 persons)
* Indicates ownership less than 1%
Amount and
Nature of Beneficial
Ownership (1)
Percent of Class(1)
2,972,183
2,972,183
2,972,183
–
–
163,380
170,136 (3)
–
–
–
345
312,100
306,990
3,306,044
49.3%
49.3%
49.3%
*
*
2.7%
2.8%
*
*
*
*
5.2%
5.1%
54.7%
(1) Applicable percentage ownership is based on 6,029,828 shares of common stock outstanding as of April 8, 2014, together with securities
exercisable or convertible into shares of common stock within 60 days of April 8, 2014. 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 March 31, 2014 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) Represents shares held by A Squared Holdings LLC over which Andrew Heyward and Amy Moynihan Heyward hold voting and
dispositive power.
(3) Consists of (a) 160,136 shares of common stock beneficially owned by ROAR LLC and (b) 10,000 shares of common stock beneficially
owned by Girlilla Marketing LLC. Bernie Cahill is the founder of ROAR LLC, and ROAR LLC owns 65% of Girlilla Marketing LLC.
(4) The address of this beneficial owner is 100 S. Pointe Drive #1405, Miami Beach, FL 33139
(5) The address of this beneficial owner is 11290 Chalon Road, Los Angeles, California 90049
32
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Related Parties
Our Chief Executive Officer, Andrew Heyward, is the spouse of our President, Amy Moynihan Heyward. Our former Creative
Director, Larry Balaban, and our former EVP of Business Development, Howard Balaban, are brothers.
Bernard Cahill, a director of the Company appointed on December 9, 2013, is the founder of ROAR and ROAR owns 65% of
Girlilla. In connection with the Merger, the Company entered into a marketing consultation agreement with Girlilla Marketing LLC (“Girlilla”
and the agreement the “Girlilla Consulting Agreement”) pursuant to which Girlilla agreed to provide certain strategic digital marketing services
in consideration for 10,000 shares of Common Stock (the “Girlilla Shares”), which shall vest as follows: 2,000 shares upon execution of the
Girlilla Consulting Agreement, 2,000 shares on January 15, 2014, 2,000 shares on March 15, 2014, 2,000 shares on June 15, 2014 and 2,000
shares on September 14, 2014. Additionally, the Company entered into an engagement letter with ROAR LLC (“ROAR” and the engagement
letter, the “ROAR Engagement Letter”) pursuant to which ROAR agreed to provide the Company will services, including the development of
a business development strategy, for a period of 18 months. In consideration for its services, the Company agreed to pay ROAR 67,492
shares of Common Stock (the “ROAR Shares”) which shall vest as follows: 20,000 shares upon execution of the ROAR Engagement Letter,
20,000 shares on January 15, 2014, 13,746 shares on September 15, 2014 and 13,746 shares on March 15, 2015.
Throughout 2009, 2008 and 2007, the Company borrowed funds from Messrs. Moeller, Meader, Larry Balaban and Howard
Balaban. On December 31, 2009, the Officers agreed to issue new note agreements for the outstanding balances, including accrued but unpaid
interest, with a maturity date of December 31, 2010. Subsequent agreements amended the stated interest rate to 6% per annum and extended
the maturity to January 15, 2015. On November 15, 2013, in connection with the Merger, the Company issued an aggregate of 73,238 shares
of Common Stock to Klaus Moeller, Michael Meader, Larry Balaban and Howard Balaban in consideration for the cancellation of these notes
for an aggregate of $194,163 in principal and $62,167 in accrued but unpaid interest.
On March 31, 2011, four of the Company’s officers agreed to convert accrued but unpaid salaries through December 31, 2010 to
subordinated long term notes payable. In February 2011, as a result of an agreement by each of the four officers to retroactively decrease the
amount of the annual salary for 2010 from $125,000 per annum per officer to $80,000, the amount of the notes were reduced to an aggregate
of $1,620,137. In March 2012, the officers agreed to convert the aggregate sum of $1,572,161 to shares of common stock of the Company.
The remaining note, with a principal balance of $159,753, has a maturity of January 15, 2015 and a stated interest rate of six percent (6%) per
annum. On October 31, 2013, 43,207 shares of restricted common stock were issued in full payment of the note payable.
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 (“Bridge Notes”). The Bridge Notes have a stated conversion rate of $0.01212 and can be voluntarily converted at any
time by the holder and mandatorily by the Company upon certain conditions. Cash was received in the aggregate of $309,000. Four former
officers and directors of the Company converted outstanding salaries payable to the new notes in the aggregate of $221,000. On November
15, 2013, in connection with the automatic conversion of the Bridge Notes upon consummation of the Merger, the Company issued an
aggregate of 448,613 shares of common stock to all holders of the Bridge Notes, in the aggregate principal amount of $530,000, plus accrued
but unpaid interest of $13,719. Of this amount, 187,063 shares of the Company’s common stock were issued to the four officers and
directors.
On November 15, 2013, in association with the Merger, the Company issued 124,146 shares of common stock for the conversion of
$612,443 in accrued salaries and benefits to Messrs. Moeller, Balaban, Balaban, and Meader as well as Ms. Morgan.
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 current Chief Executive Officer, Andrew Heyward. As of December 31, 2013, these advances totaled $516,659. No interest is
due on these advances.
Except as otherwise indicated herein, there have been no other related party transactions, or any other transactions or relationships
required to be disclosed pursuant to Item 404 and Item 407(a) of Regulation S-K.
Director Independence
Our Common Stock is not quoted or listed on any national exchange or interdealer quotation system with a requirement that a
majority of our board of directors be independent and, therefore, the Company is not subject to any director independence requirements. Under
NASDAQ Rule 5605(a)(2)(A), a director is not considered to be independent if he or she also is an executive officer or employee of the
corporation. Under such definition, each of Messrs. Weiss, Davis, and Thomopoulos as well as Ms. Segall would be considered an
independent director, because none serve as an executive officer or employee of the Company, none have been an employee of the Company
during the past three years, and none has received compensation from the Company at any time during the past three years.
33
Item 14.
Principal Accounting Fees and Services
The following table sets forth fees billed to us by our independent auditors for the years ended December 31, 2013 and 2012 for (i)
services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services rendered that
are reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees, and (iii)
services rendered in connection with tax preparation, compliance, advice and assistance.
Audit Fees
Tax Fees
Other Fees
Total Fees
2013
2012
$
$
139,300 $
4,300
–
143,600 $
79,000
2,375
–
81,375
Our policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services
may include audit services, audit-related services, tax services and other services. Under our policy, pre-approval is generally provided for
particular services or categories of services, including planned services, project based services and routine consultations. In addition, the Board
of Directors may also pre-approve particular services on a case-by-case basis. Our Board of Directors approved all services that our
independent accountants provided to us in the past two fiscal years.
34
Item 15.
Exhibits, Financial Statement Schedules
Exhibit No. Description
PART IV
EXHIBIT INDEX
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Articles of Incorporation (Incorporated by reference from Registration Statement on Form 10 filed with the Securities &
Exchange Commission on May 4, 2011)
Bylaws (Incorporated by reference from Registration Statement on Form 10 filed with the Securities & Exchange Commission on
May 4, 2011)
Articles of Incorporation of Genius Brands International, Inc., a Nevada corporation (Incorporated by reference to the
Company’s Schedule 14C Information Statement, filed with the SEC on September 21, 2011)
Certificate of Correction to the Articles of Incorporation of Genius Brands International, Inc. (Incorporated by reference to the
Company’s Current Report on Form 8-K, filed with the SEC on December 12, 2011)
Articles of Merger, filed with the Secretary of State of the State of Nevada (Incorporated by reference to the Company’s Current
Report on Form 8-K, filed with the SEC on October 21, 2011)
Articles of Merger, filed with the Secretary of State of the State of California (Incorporated by reference to the Company’s
Current Report on Form 8-K, filed with the SEC on October 21, 2011)
Amendment to Bylaws dated November 15, 2013 (Incorporated by reference to the Company’s current report on Form 8-K filed
with the SEC on November 20, 2013)
Certificate of Amendment to Articles of Incorporation (Incorporated by reference to the Company’s current report on Form 8-K
filed with the SEC on October 17, 2013)
Certificate of Amendment to Articles of Incorporation (Incorporated by reference to the Company’s current report on Form 8-K
filed with the SEC on April 7, 2014)
Form of Stock Certificate (Incorporated by reference from Registration Statement on Form 10 filed with the Securities &
Exchange Commission on May 4, 2011)
2008 Stock Option Plan (Incorporated by reference from Registration Statement on Form 10 filed with the Securities & Exchange
Commission on May 4, 2011)
First Amendment to 2008 Stock Option Plan (Incorporated by reference from Registration Statement on Form 10 filed with the
Securities & Exchange Commission on May 4, 2011)
Second Amendment to 2008 Stock Option Plan (Incorporated by reference from Registration Statement on Form 10 filed with
the Securities & Exchange Commission on May 4, 2011)
Form of Stock Option Grant Notice (Incorporated by reference from Registration Statement on Form 10 filed with the Securities
& Exchange Commission on May 4, 2011)
Form of Warrant (Incorporated by reference from Registration Statement on Form 10 filed with the Securities & Exchange
Commission on May 4, 2011)
Employment Agreement between Genius Brands International, Inc. and Klaus Moeller dated October 29, 2013 (Incorporated by
reference from Registration Statement on Form 10 filed with the Securities & Exchange Commission on October 31, 2013)
Employment Agreement of Michael G. Meader (Incorporated by reference from Registration Statement on Form 10 filed with the
Securities & Exchange Commission on May 4, 2011)
Employment Agreement of Larry Balaban (Incorporated by reference from Registration Statement on Form 10 filed with the
Securities & Exchange Commission on May 4, 2011)
Employment Agreement of Howard Balaban (Incorporated by reference from Registration Statement on Form 10 filed with the
Securities & Exchange Commission on May 4, 2011)
Amended and Restated Subordinated Promissory Note to Klaus Moeller
Amended and Restated Subordinated Promissory Note to Michael G. Meader (Incorporated by reference from Registration
Statement on Form 10 filed with the Securities & Exchange Commission on May 4, 2011)
Amended and Restated Subordinated Promissory Note to Larry Balaban (Incorporated by reference from Registration Statement
on Form 10 filed with the Securities & Exchange Commission on May 4, 2011)
Amended and Restated Subordinated Promissory Note to Howard Balaban (Incorporated by reference from Registration
Statement on Form 10 filed with the Securities & Exchange Commission on May 4, 2011)
Promissory Note to Klaus Moeller (Incorporated by reference from Registration Statement on Form 10 filed with the Securities
& Exchange Commission on May 4, 2011)
35
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Promissory Note to Michael G. Meader (Incorporated by reference from Registration Statement on Form 10 filed with the
Securities & Exchange Commission on May 4, 2011)
Promissory Note to Larry Balaban (Incorporated by reference from Registration Statement on Form 10 filed with the Securities &
Exchange Commission on May 4, 2011)
Promissory Note to Howard Balaban (Incorporated by reference from Registration Statement on Form 10 filed with the
Securities & Exchange Commission on May 4, 2011)
Merchandise License Agreement with Jakks Pacific*( Incorporated by reference from Amendment No. 3 to Registration
Statement on Form 10 filed with the Securities & Exchange Commission on July 26, 2011)
Joint Venture Agreement between Pacific Entertainment Corporation and Dr. Shulamit Ritblatt dated September 20, 2011
(Incorporated by reference from Registration Statement on Form 10 filed with the Securities & Exchange Commission on May 4,
2011)
Operating Agreement of Circle of Education, LLC (Incorporated by reference from Registration Statement on Form 10 filed with
the Securities & Exchange Commission on May 4, 2011)
Promissory Note to Isabel Moeller dated September 30, 2010(Incorporated by reference from Registration Statement on Form 10
filed with the Securities & Exchange Commission on May 4, 2011)
Agreement to Convert Debt Into Equity between Pacific Entertainment Corporation and Isabel Moeller dated April 1,
2011(Incorporated by reference from Registration Statement on Form 10 filed with the Securities & Exchange Commission on
May 4, 2011)
Distribution Agreement between Pacific Entertainment Corporation and Global Access Entertainment, Inc. dated November 17,
2009* ( Incorporated by reference from Amendment No. 3 to Registration Statement on Form 10 filed with the Securities &
Exchange Commission on July 26, 2011)
Employment Agreement dated as of May 2, 2012 between Jeanene Morgan and Genius Brands International, Inc. (Incorporated
by reference to the Company’s quarterly report on Form 10-Q filed with the SEC on May 15, 2012)
Securities Purchase Agreement dated as of June 27, 2012 between Genius Brands International, Inc. and each of the purchasers
signatory thereto (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on July 3, 2012)
Security Agreement dated as of June 27, 2012 between the Company and its Subsidiaries and the holders of the Company’s 16%
Senior Secured Convertible Debentures. (Incorporated by reference to the Company’s current report on Form 8-K filed with the
SEC on July 3, 2012)
10.22
Form of the Company’s 16% Senior Secured Convertible Debenture (Incorporated by reference to the Company’s current report
on Form 8-K filed with the SEC on July 3, 2012)
10.23
Form of Common Stock Warrant issued to the holders of the Company’s 16% Senior Secured Convertible Debentures
(Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on July 3, 2012)
10.24
Agreement and Plan of Reorganization between Genius Brands International, Inc., A Squared Entertainment LLC, A Squared
Holdings LLC and A2E Acquisition LLC dated November 15, 2013 (Incorporated by reference to the Company’s current report
on Form 8-K filed with the SEC on November 20, 2013)
10.25
Employment Agreement between Genius Brands International, Inc. and Jeanene Morgan dated October 29, 2013 (Incorporated
by reference to the Company’s current report on Form 8-K filed with the SEC on October 31, 2013)
10.26
Employment Agreement between Genius Brands International, Inc. and Klaus Moeller dated on October 29, 2013 (Incorporated
by reference to the Company’s current report on Form 8-K filed with the SEC on October 31, 2013)
10.27
Registration Rights Agreement dated November 15, 2013 between Genius Brands International, Inc. and A Squared Holdings
LLC (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November 20, 2013)
10.28
Form of Subscription Agreement (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC
on November 20, 2013)
10.29
Form of Registration Rights Agreement between Genius Brands International, Inc. and the Investors signatory thereto
(Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November 20, 2013)
10.30
Employment Agreement dated November 15, 2013 between Genius Brands International, Inc. and Andrew Heyward
(Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November 20, 2013)
36
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.36
21.1**
31.1**
31.2**
32.1**
32.2**
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
__________
*
Employment Agreement dated November 15, 2013 between Genius Brands International, Inc. and Amy Moynihan
Heyward (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November
20, 2013)
Termination Agreement dated November 15, 2013 between Genius Brands International, Inc. and Klaus Moeller
(Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November 20, 2013)
Salary Conversion Agreement dated November 14, 2013 between Genius Brands International, Inc. and Klaus
Moeller (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November
20, 2013)
Salary Conversion Agreement dated November 14, 2013 between Genius Brands International, Inc. and Jeanene
Morgan (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November
20, 2013)
Salary Conversion Agreement dated November 14, 2013 between Genius Brands International, Inc. and Larry
Balaban (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November
20, 2013)
Salary Conversion Agreement dated November 14, 2013 between Genius Brands International, Inc. and Howard
Balaban (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November
20, 2013)
Salary Conversion Agreement dated November 14, 2013 between Genius Brands International, Inc. and Michael
Meader (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November
20, 2013)
Engagement Letter dated November 15, 2013 between Genius Brands International, Inc. and ROAR LLC
(Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on November 20, 2013)
List of Subsidiaries
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Schema Document
XBRL Calculation Linkbase Document
XBRL Definition Linkbase Document
XBRL Label Linkbase Document
XBRL Presentation Linkbase Document
Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended, and 17 CFR 200.83. Omitted portions have been filed separately with the Securities and Exchange
Commission.
Filed herewith
**
37
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
April 15, 2014
April 15, 2014
Genius Brand International, Inc.
By:
/s/ /Andrew Heyward
Andrew Heyward
Chief Executive Officer (Principal Executive Officer)
/s/ Richard Staves
Richard Staves
Interim Chief Financial Officer (Principal Financial and
Accounting Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
By:
/s/ Andrew Heyward
Andrew Heyward
Chief Executive Officer (Principal Executive Officer)
/s/ Richard Staves
Richard Staves
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Amy Moynihan Heyward
Amy Moynihan Heyward
President and Director
/s/ Lynne Segall
Lynne Segall
Director
/s/ Jeffrey Weiss
Jeffrey Weiss
Director
/s/ Joseph Davis
Joseph Davis
Director
/s/ Anthony Thomopoulos
Anthony Thomopoulos
Director
/s/ Bernard Cahill
Bernard Cahill
Director
/s/ Klaus Moeller
Klaus Moeller
Director
38
TABLE OF CONTENTS
Audited Financial Statements for the Twelve-month Period Ended December 31, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page No.
F-2
F-3
F-4
F-5
F-6
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Genius Brands International, Inc.
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Genius Brands International, Inc. and Subsidiaries as of December 31,
2013 and 2012, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended.
These financial statements are the responsibility of 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 the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable 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 of internal 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 and
disclosures 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 our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Genius
Brands International, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the
years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ HJ Associates & Consultants, LLP
HJ Associates & Consultants, LLP
Salt Lake City, Utah
April 15, 2014
F-2
Genius Brands International, Inc.
Consolidated Balance Sheets
As of December 31, 2013 and 2012
ASSETS
12/31/2013
12/31/2012
Current Assets:
Cash and Cash Equivalents
Accounts Receivable, net
Inventory
Prepaid and Other Assets
Total Current Assets
Property and Equipment, net
Capitalized Product Development in Process
Net Assets from Discontinued Operations
Intangible Assets, net
Goodwill
Investment in Stan Lee Comics LLC
Debenture Issuance Costs
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable
Accrued Expenses
Accrued Salaries and Wages
Disputed Trade Payable
Short Term Debt – Related Party
Accrued Interest
Derivative Valuation
Total Current Liabilities
Long Term Liabilities:
Notes Payable (Net of Discount of $0 and $485,147, respectively)
Notes Payable and Accrued Interest – Related Parties
Total Liabilities
Stockholders’ Equity (Deficit):
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and
outstanding
Common Stock, $0.001 par value, 700,000,000 and 250,000,000 shares authorized,
respectively; 5,918,704 and 719,127 shares issued and outstanding, respectively
Additional Paid in Capital
Accumulated Deficit
Total Stockholders’ Equity (Deficit)
$
527,110 $
893,826
224,351
582,056
2,227,343
78,748
54,575
–
1,865,706
10,365,805
–
–
$
14,592,177 $
$
889,919 $
704,539
59,958
925,000
516,659
–
–
3,096,075
–
–
3,096,075
447,548
1,084,233
326,072
139,983
1,997,836
23,736
145,398
101,219
356,070
–
–
191,762
2,816,021
971,097
496,662
516,083
–
–
45,716
68,962
2,098,520
514,853
447,891
3,061,264
–
–
5,919
28,914,238
(17,424,055)
11,496,102
719
9,962,062
(10,208,024)
(245,243)
Total Liabilities & Stockholders’ Equity (Deficit)
$
14,592,177 $
2,816,021
See accompanying notes to consolidated financial statements.
F-3
Genius Brands International, Inc.
Consolidated Statements of Operations
Years ended December 31, 2013 and 2012
Revenues:
Product Sales
Television & Home Entertainment
Licensing & Royalties
Total Revenues
Cost of Sales (Excluding Depreciation)
Gross Profit
Operating Expenses:
Product Development
Professional Services
Rent Expense
Marketing & Sales
Depreciation & Amortization
Salaries and Related Expenses
Stock Compensation Expense
Other General & Administrative
Total Operating Expenses
Loss from Operations
Other Income (Expense):
Other Income
Interest Expense
Interest Expense - Related Parties
Gain (loss) on distribution contracts
Gain (loss) on extinguishment of debt
Gain (loss) on disposition of assets
Gain (loss) on exchange of warrants
Gain (loss) on derivative valuation
Net Other Income (Expense)
Loss before Income Tax Expense
Income Tax Expense
Net Loss from Continuing Operations
Net Loss from Discontinued Operations
Net Loss
Net Loss per common share from continuing operations
Net Loss per common share from discontinued operations
Total Net Loss per common share
$
2013
2012
1,682,780 $
505,552
368,206
2,556,538
6,277,663
–
292,536
6,570,199
1,504,138
4,836,321
1,052,400
1,733,878
139,082
451,537
24,898
308,355
160,654
1,329,715
539,185
460,818
3,414,244
32,792
181,172
38,982
727,695
149,823
1,689,064
264,122
612,513
3,696,163
(2,361,844)
(1,962,285)
208
(1,663,632)
(30,189)
4,997
(614,073)
(251,192)
(312,144)
(1,886,943)
(4,752,968)
388
(332,055)
(50,259)
–
76,280
–
–
200,322
(105,324)
(7,114,812)
(2,067,609)
–
–
(7,114,812)
(101,219)
(2,067,609)
–
$
(7,216,031)
(2,067,609)
$
$
(5.03) $
(0.07)
(5.10) $
(3.00)
–
(3.00)
Weighted average shares outstanding
1,413,631
689,286
See accompanying notes to consolidated financial statements.
F-4
Genius Brands International, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
Balance, December 31, 2011
606,988 $
607 $
Common Stock
Shares
Amount
Additional
Paid-in
Capital
7,019,175 $
Noncontrolling Accumulated
Common Stock Issued for
Cash
Common Stock Issued for
Services
Common Stock Issued in
exchange for repayment of
Note Payable
Warrants Granted for
Debenture Issuance Costs
Warrants Granted for Debt
Discount
Stock Compensation Expense
Acquisition of Noncontrolling
Interest
Net Loss
Balance, December 31, 2012
Common Stock Issued for
Cash
Common Stock Issued for
Services and Prepaid
Services
Common Stock Issued in
exchange for repayment of
Note Payable
Common Stock Issued in
exchange for repayment of
Accounts Payable
Common Stock Issued in
exchange for Warrants, net
of costs
Common Stock Issued for
Bonuses to Officers and
Directors
Common Stock Issued for
Merger with A Square
Entertainment
Stock Compensation Expense
Net Loss
10,000
14,861
10
15
199,990
324,699
87,278
87
1,745,459
–
–
–
–
–
719,127
–
–
–
–
–
719
28,929
379,688
264,122
–
–
9,962,062
296,429
297
968,240
126,899
127
535,347
1,685,236
1,685
6,180,411
10,020
10
28,046
53,810
54
336,336
55,000
55
187,445
2,972,183
–
–
2,972
–
–
10,399,666
316,685
–
Balance, December 31, 2013
5,918,704 $
5,919 $ 28,914,238 $
Interest
Deficit
Total
(5,366) $ (8,135,049) $ (1,120,633)
–
–
–
–
–
–
–
–
–
–
–
–
200,000
324,714
1,745,546
28,929
379,688
264,122
5,366
–
–
(5,366)
(2,067,609)
(10,208,024)
–
(2,067,609)
(245,243)
–
–
–
–
–
–
–
–
968,537
535,474
–
6,182,096
–
–
–
28,056
336,390
187,500
–
–
(7,216,031)
10,402,638
–
316,685
–
–
(7,216,031)
– $ (17,424,055) $ 11,496,102
See accompanying notes to consolidated financial statements.
F-5
Genius Brands International, Inc.
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities:
Net Loss
Adjustments to reconcile net loss to net cash provided in operating activities:
Depreciation Expense
Amortization Expense
Accretion of Discount on Convertible Debentures and Interest Expense Related to Debenture
$
Conversion
Accretion of Discount on Bridge Notes and Convertible Debentures
Issuance of Common Stock for Interest Expense
Issuance of Common Stock for Services
Issuance of Common Stock on Bonuses to Officers and Directors
Stock Compensation Expense
(Gain) Loss on Settlement or Extinguishment of Debt
(Gain) Loss on Derivative Valuation
(Gain) Loss on Exchange of Warrants
(Gain) Loss on Distribution Contracts
(Gain) Loss on Disposition of Assets
(Gain) Loss on Discontinued Operations
Decrease (increase) in operating assets:
Accounts Receivable
Inventory
Prepaid Expenses & Other Assets
Other Receivables
Increase (decrease) in operating liabilities:
Accounts Payable
Accrued Salaries
Accrued Interest
Accrued Interest - Related Party
Other Accrued Expenses
Net cash (used) in operating activities
Cash Flows from Investing Activities:
Investment in Intangible Assets
Purchase of Fixed Assets
Merger with A Squared Entertainment
Net cash provided (used) by investing activities
2013
2012
(7,216,031) $
(2,067,609)
13,730
146,924
–
1,294,350
51,859
167,260
222,500
316,685
614,073
1,886,943
312,144
(4,997)
251,192
101,219
279,804
101,721
36,716
466,762
(354,498)
196,318
11,135
–
(16,126)
(1,120,317)
11,056
138,767
163,825
–
–
324,714
–
264,122
(76,280)
(200,322)
–
–
–
–
(63,194)
14,710
28,503
–
38,917
322,564
26,667
50,259
87,978
(935,323)
(57,739)
(1,898)
–
(59,637)
(67,461)
(2,825)
283,199
212,913 $
$
See accompanying notes to consolidated financial statements.
F-6
Genius Brands International, Inc.
Consolidated Statements of Cash Flows - continued
Cash Flows from Financing Activities:
Sale of Common Stock, net of offering costs
Costs for Warrant Exchange
Proceeds from Debenture
Issuance Costs on Debenture
Proceeds from Bridge Notes
Payments of Related Party Notes
Net cash provided by financing activities
Net increase in Cash and Cash Equivalents
Beginning Cash and Cash Equivalents
Ending Cash and Cash Equivalents
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
Schedule of non-cash financing and investing activities:
Common Stock issued for Merger, net of cash
Conversion of Debentures and Accrued Interest to Common Stock
Conversion of Warrants to Common Stock
Warrants granted for Debenture Issuance Costs
Discount on Debentures attributed to Warrants
Derivative Valuation on Debentures
Conversion of Short Term Bridge Notes and Accrued Interest to Common Stock
Conversion of Related Party Notes and Accrued Interest to Common Stock
Conversion of Accrued Salaries to Common Stock
Accrued Salaries converted to Short Term Note Payable
Common Stock issued as Settlement for Accounts Payable
Common Stock issued for Pre-Paid Services
Common Stock issued for Issuance Costs
Common Stock issued for Derivative Liabilities
Common Stock issued for Debt Discount
2013
2012
968,537 $
(15,264)
–
(275,000)
309,000
(307)
986,966
79,562
447,548
527,110 $
200,000
–
1,000,000
(162,833)
–
–
1,037,167
42,207
405,341
447,548
– $
– $
–
4,012
10,119,439 $
1,201,474 $
312,144 $
– $
– $
– $
543,719 $
472,360 $
612,443 $
221,000 $
50,100 $
333,215 $
15,264
3,107,608
342,500
–
–
–
28,929
379,688
269,284
–
1,745,546
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-7
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 1: Organization and Business
Organization and Nature of Business
Genius Brands International, Inc. (“we”, “us”, “our” or the “Company”), creates, produces and distributes original “content with a
purpose” for kids, meaning multi-media, multi-format content for kids that we believe is as entertaining as it is enriching. In most cases, the
Company wholly owns the original content it produces, and works with a variety of partners who are experts in their respective categories, to
develop and distribute it in multiple formats around the world. The Company owns and is developing a portfolio of original children’s
entertainment to appeal to toddlers to teens.
The Company commenced operations in January 2006, assuming all of the rights and obligations of its then Chief Executive Officer,
Klaus Moeller, under an Asset Purchase Agreement between the Company and Genius Products, Inc., in which we obtained all rights,
copyrights, and trademarks to the brands “Baby Genius,” “Little Genius,” “Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all
then existing productions under those titles. On October 17, 2011 and October 18, 2011, Genius Brands International, Inc., filed Articles of
Merger with the Secretary of State of the State of Nevada and with the Secretary of State of the State of California, respectively. As previously
described on the Company’s Schedule 14C Information Statement, filed with the Securities and Exchange Commission on September 21,
2011, by filing the Articles of Merger, 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, on October
12, 2011, the Company filed an Issuer Company-Related Action Notification Form with the Financial Industry Regulatory Authority
(“FINRA”) and on November 29, 2011 our trading symbol 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 company and
sole member of A Squared (the “Parent Member”) and A2E Acquisition LLC, our newly formed, wholly-owned Delaware subsidiary
(“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurred
concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving
entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of
A Squared. A Squared created, produced and distributed original “content with a purpose” for kids 6-11, whereas Genius Brands previously
focused on toddlers. Today the merged company is focused on providing “content with a purpose” for toddlers to tweens, in all media
formats, relevant consumer products categories, in territories around the world.
On April 2, 2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and
outstanding common stock on a one-for-one hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory
Authority) on April 7, 2014. All common stock share and per share information in this Annual Report, including the accompanying
consolidated financial statements and notes thereto, have been adjusted to reflect retrospective application of the reverse split, unless otherwise
indicated
F-8
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Liquidity
Historically, the Company has incurred net losses. As of December 31, 2013, the Company had an accumulated deficit of $17,424,055
and a total stockholders’ equity of $11,496,102. At December 31, 2013, the Company had current assets of $2,227,343, including cash of
$527,110 and current liabilities of $3,096,075, including short-term debt to related parties which bears no interest and has no stated maturity of
$516,659 and certain disputed trade payables of $925,000 to which the Company disputes the claim, resulting in a working capital deficit of
$868,732. For the year ended December 31, 2013, the Company reported a net loss of $7,216,031 and net cash used by operating activities of
$1,120,317. Management believes that its sales and cash provided by operations, the non-recurrence of certain legal and accounting expenses
related to the Merger, and the funds from the issuance of common stock in the fourth quarter will be sufficient to fund planned operations for
the next twelve months. However, there can be no assurance that operations and operating cash flows will continue at the current levels or
improve in the near future. If the Company is unable to obtain profitable operations and positive operating cash flows, it may need to seek
additional funding or be forced to scale back its development plans or to significantly reduce or terminate operations. Subsequent to December
31, 2013, the Company issued 102,858 shares of the Company’s common stock in a private placement to certain investors at $3.50 per share.
The Company received gross proceeds of $360,000. Additionally, subsequent to December 31, 2013, the Company entered into 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 due by
January 17, 2015.
Note 2: Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid debt instruments with initial maturities of three months or less to be cash equivalents.
Reverse Stock Split
On April 2, 2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and
outstanding common stock on a one-for-one hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory
Authority) on April 7, 2014. All common stock share and per share information in this Form 10K, including the accompanying consolidated
financial statements and notes thereto, have been adjusted to reflect retrospective application of the reverse split, unless otherwise indicated
Business Combination
On November 15, 2013, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with A
Squared Entertainment LLC, a Delaware limited liability company (“A Squared”), A Squared Holdings LLC, a California limited liability
company and sole member of A Squared (the “Parent Member”) and A2E Acquisition LLC, our newly formed, wholly-owned Delaware
subsidiary (“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurred
concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving
entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of
A Squared.
The audited financial statements have been prepared using the acquisition method of accounting in accordance with FASB Accounting
Standards Codification (“ASC”) 805, Business Combinations.
See Note 3 – Business Combination for additional information.
F-9
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Principles of Consolidation
The accompanying consolidated financial statements 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 statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified in these consolidated financial statements so as to conform with
current year classifications.
Significant Accounting Policies
Allowance for Sales Returns - An Allowance for Sales Returns is estimated based on average sales during the previous year. Based on
experience, sales growth, and our customer base, the Company concluded that the allowance for sales returns at December 31, 2013 and 2012
should be $43,000 and $53,000, respectively.
Inventories - Inventories are stated at the lower of cost (average) or market and consist of finished goods such as DVDs, CDs and
other products. A reserve for slow-moving and obsolete inventory is established for all inventory deemed potentially non-saleable by
management in the period in which it is determined to be potentially non-saleable. The current inventory is considered properly valued and
saleable. The Company concluded that there was an appropriate reserve for slow moving and obsolete inventory of $93,607 and $57,305
established as of December 31, 2013 and 2012, respectively.
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 5 to 39 years. Maintenance, repairs, and renewals, which
neither materially add to the value of the assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from
dispositions of property and equipment are reflected in the statement of operations.
Intangible Assets - Intangible Assets acquired, either individually or with a group of other assets, are initially recognized and measured
based on fair value. In the 2005 acquisition of the assets from Genius Products, fair value was calculated using a discounted cash flow
analysis of the revenue streams for the estimated life of the assets. In the 2013 acquisition of the identifiable artistic-related assets from A
Squared, fair value was determined through an independent appraisal. The Company determined that these assets are indefinite-lived.
Additional, the Merger transaction with A Squared gave rise to goodwill representing the future economic benefits arising from the assets of
A Squared that could not be individually identified and recognized.
The Company develops new video, music, books and digital applications, in addition to adding content, improved animation and
songs/features to their existing productions. The costs of new product development and significant improvement to existing products are
capitalized while routine and periodic alterations to existing products are expensed as incurred. The Company begins amortization of new
products when it is available for general release. Annual amortization cost of intangible assets are computed based on the straight-line method
over the remaining economic life of the product, generally such deferred costs are amortized over five years.
F-10
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
The Company reviews all intangible assets periodically to determine if the value has been impaired following the guidance of ASC 350-
20 – Goodwill and ASC 350-30 – General Intangibles Other Than Goodwill.
Capitalized Production Cost - The Company capitalizes production costs for episodic series produced in accordance with ASC 926-20,
Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue
based on the initial market revenue evidenced by a firm commitment over the period of commitment. The Company expenses all capitalized
costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes.
The Company capitalizes production costs for films produced in accordance with ASC 926-20, Entertainment-Films - Other Assets -
Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production
based on the relative fair value of the film(s) delivered and recognized as revenue. The Company evaluates their capitalized production costs
annually and limits recorded amounts by their ability to recover such costs through expected future sales.
The Company also develops new videos, music, books and digital applications in addition to adding content, improved animation and
bonus songs/features to its existing product catalog. In accordance with ASC 350 - Intangible Assets and ASC 730 - Research and
Development, the costs of new product development and significant improvement to existing products are capitalized while routine and
periodic alterations to existing products are expensed as incurred.
Revenue Recognition - The Company recognized revenue related to product sales when (i) the seller’s price is substantially fixed, (ii)
shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and
(iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer as required by ASC
605 - Revenue Recognition.
Revenues associated with the sale of products, are recorded when shipped to customers pursuant to approved customer purchase orders
resulting in the transfer of title and risk of loss. Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each
financial reporting date.
The Company recognizes revenue in accordance with ASC 926-605, Entertainment-Films - Revenue Recognition. Accordingly, the
Company recognizes revenue when (i) persuasive evidence of a sale with customer exists, (ii) the film is complete and has been delivered or is
available for delivery, (iii) the license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale, (iv)
the arrangement fee is fixed or determinable, and (v) collection of the arrangement fee is reasonably assured.
For its distribution, TV, and home entertainment income the Company generally enters in to flat fee arrangements to deliver multiple
films or episodes. The Company allocates revenue to each film or episode based on their relative fair market values and recognizes revenue as
each film or episode is complete and available for delivery.
The Company’s licensing and royalty revenue represents both (a) variable payments based on net sales from brand licensees for content
distribution rights. These license agreements are held in conjunction with third parties that are responsible for collecting fees due and remitting
to the Company its share after expenses. Revenue from licensed products is recognized when realized or realizable based on royalty reporting
received from licensees and (b) licensing income the Company recognizes revenue as an agent in accordance with ASC 605-45, Revenue
Recognition - Principal Agent. Accordingly, the Company’s revenue is its gross billings to its customers less the amounts it pays to suppliers
for their products and services.
Shipping and Handling - The Company records shipping and handling expenses in the period in which they are incurred and are
included in the Cost of Goods Sold.
F-11
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
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, using the Black-Scholes calculation as of the date of grant.
Advertising Costs - The Company’s marketing and sales costs are primarily related to advertising, trade shows, public relation fees and
production and distribution of collateral materials. In accordance with ASC 720 regarding Advertising Costs, the Company expenses
advertising costs in the period in which the expense is incurred. Marketing and Sales costs incurred by licensees are borne fully by the
licensee and are not the responsibility of the Company. Advertising expense for the years ended December 31, 2013 and 2012 was $113,879
and $54,454, respectively.
Earnings Per Share - Basic earnings (loss) per common share (“EPS”) is calculated by dividing net loss by the weighted average
number of common shares outstanding for the period. Diluted EPS is calculated by dividing net 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. Stock options to purchase 37,150 shares of common stock at December 31, 2013 have not been included as they would be anti-
dilutive.
Income Taxes- Deferred income tax assets and liabilities are recognized based on differences between the financial statement and tax
basis of assets and liabilities using presently enacted tax rates. At each balance sheet date, the Company evaluates the available evidence about
future taxable income and other possible sources of realization of deferred tax assets, and records a valuation allowance that reduces the
deferred tax assets to an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not
will be realized.
Concentration of Risk - The Company’s cash is maintained at one financial institution 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 are insured by the FDIC up to $250,000 per account. As of December 31, 2013, the Company had one account with an
uninsured balance of $123,053. As of December 31, 2012, the Company had one account with an uninsured balance of $135,971.
For fiscal year 2013, the Company had three customers whose total revenue exceeded 10% of the total consolidated revenue. These
customers account for 21.5%, 19.8%, and 13.7% of total revenue, respectively. Those three accounts made up 0%, 6.3%, and 39.2% of
accounts receivable, respectively. For fiscal year 2012, the revenue from two customers comprised 43.8% and 17.7% of the Company’s total
revenue. Those two accounts made up 0%, and 28.5% of the total accounts receivable balance at December 31, 2012, respectively. The major
customers for the year ending December 31, 2013 are not necessarily the same as the major customers at December 31, 2012. There is
significant financial risk associated with a dependence upon a small number of customers. The Company periodically assesses the financial
strength of these customers and establishes allowances for any anticipated bad debt. At December 31, 2013 and 2012, no allowance for bad
debt has been established for the major customers as these amounts are believed to be fully collectible.
F-12
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Fair value of financial instruments - The carrying amounts of cash, receivables and accrued liabilities approximate fair value due to the
short-term maturity of the instruments.
We adopted ASC 820 as of January 1, 2008 for financial instruments measured at fair value on a recurring basis. ASC Topic 820
defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United
States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in
measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
·
·
·
Level 1, 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 Accounting Standards Update No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU No. 2013-11”). ASU No. 2013-11 requires
an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a
deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with limited exceptions. ASU No.
2013-11 is effective for interim and annual periods beginning after December 15, 2013 and may be applied retrospectively.
Management does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a
material effect on the accompanying consolidated financial statements.
Note 3: Business Combination
Overview
On November 15, 2013, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with A
Squared Entertainment LLC, a Delaware limited liability company (“A Squared”), A Squared Holdings LLC, a California limited liability
company and sole member of A Squared (the “Parent Member”) and A2E Acquisition LLC, our newly formed, wholly-owned Delaware
subsidiary (“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurred
concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving
entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of
A Squared. A Squared is a children’s entertainment production company that produces original content for children and families that provide
entertaining and educational media experiences. A Squared also creates comprehensive consumer product programs in the forms of toys,
books and electronics. A Squared works with broadcasters, digital and online distributors and retailers worldwide as well as major toy
companies, video game companies and top licensees in the kids and family arena.
F-13
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Immediately following the Merger, the Company’s pre-Merger shareholders and option holders owned approximately 50% of the
Company’s common stock on a fully-diluted basis, and former A Squared shareholders owned approximately 50% of the Company’s
common stock on a fully diluted basis.
Pursuant to the terms and conditions of the Merger:
· At the closing of the Merger, the membership interests of A Squared issued and outstanding immediately prior to the closing of
the Merger were cancelled and the Parent Member received shares of our common stock. Accordingly, an aggregate of 2,972,183
shares of our common stock were issued to the Parent Member.
· 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 remains a director of the Company.
· 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 were to resign as directors of the Company
and Andrew Heyward, Amy Moynihan Heyward, Lynne Segall, Jeffrey Weiss, Joseph “Gray” Davis, William McDonough and
Bernard Cahill were to be 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 structured as a merger of equals, the merger will be treated as a business combination for accounting
purposes. The audited financial statements have been prepared using the acquisition method of accounting in accordance with ASC 805,
Business Combinations. Genius Brands is the deemed accounting acquirer, and A Squared is the deemed accounting acquiree based on the
following factors: the transfer of the Company’s equity as consideration for the merger, the relative size of the pre-merger assets and revenue
bases with the Company holding a significantly larger asset and revenue base as compared to A Squared, and the fact that the Company paid a
premium over the pre-combination fair value of A Squared.
F-14
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Purchase Price Allocation
The following table summarizes the final purchase accounting for the fair value of the assets acquired and liabilities assumed at the date
of the Merger:
The following table summarizes the final purchase accounting for the fair value of the assets acquired and liabilities assumed at the date
of the Merger:
Cash
Accounts Receivable
Prepaid Expenses and Other Assets
Property and equipment, net
Identifiable artistic-related intangible assets (a)
Total assets acquired
Accounts Payable
Accrued Expenses
Short Term Debt – Related Party
Disputed Trade Payable
Total liabilities assumed
Net assets acquired
Consideration (b)
Goodwill
$
Allocated Fair
Value
283,199
89,398
145,574
75,385
1,740,000
2,333,556
(404,757)
(450,000)
(516,966)
(925,000)
(2,296,723)
36,833
10,402,638
$
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.
Proforma
Included in the consolidated statement of operations for the period ended December 31, 2013 are revenues of $555,866 and net
income of $168,936 attributed to A Squared Entertainment LLC from the date of acquisition.
The table below presents the proforma revenue and net loss for the years ended December 31, 2013 and December 31, 2012,
assuming the Merger had occurred on January 1, 2012, pursuant to ASC 805-10-50.
Revenues
Net Loss (1)
2013
$
$
2,752,830 $
(5,855,925) $
2012
7,538,926
(1,772,236)
(1) Net loss during the twelve months ended December 31, 2013 includes merger related costs of $339,180 as well as the elimination
of interest expense of $1,693,821 and loss on derivative valuation of $1,886,943. Net loss during the twelve months ended
December 31, 2012 includes merger related costs of $339,180 as well as the elimination of interest expense of $50,259 and gain
on derivative valuation of $200,322.
Note 4: Investment in Stan Lee Comics LLC
In November 2009, A Squared Entertainment LLC (“A Squared”) formed a joint venture, Stan Lee Comics, LLC, with POW
Entertainment Inc. (“POW”), a California corporation, and Archie Comic Publications, Inc. (“Archie”), a New York corporation, to create,
distribute, and exploit comic books and other intellectual property based on exclusive properties created by Stan Lee and owned by POW
Entertainment, Inc. Each of A Squared, POW, and Archie own one-third of Stan Lee Comics, LLC.
Upon formation, the parties agreed that POW would contribute certain properties to Stan Lee Comics, LLC as consideration for its
ownership interest. Similarly, A Squared would contribute certain creative development functions and be entitled to the exercise of all audio-
visual development, production and distribution rights in all media, as well as all merchandising rights, in and to the contributed properties as
visual development, production and distribution rights in all media, as well as all merchandising rights, in and to the contributed properties as
consideration for its ownership interest. Finally, Archie would be entitled to all comic book publication and distribution rights in and to the
contributed properties as consideration for its ownership interest. Each party would be entitled to one-third of any net proceeds derived from
the contributed properties or their derivative works after recoupment of production cost and fees. Stan Lee Comics, LLC is the owner of the
Stan Lee and the Mighty 7 property.
Upon closing of the Merger, the Company assumed the rights to Stan Lee Comics, LLC held by A Squared Entertainment, LLC.
Pursuant to ASC 323-30, as of December 31, 2013, the Company has recorded the Investment in Stan Lee Comics LLC at $0 as no
monetary consideration was paid by A Squared Entertainment LLC, or assumed by the Company in the Merger, for the ownership interest in
Stan Lee Comics, LLC.
F-15
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 5: Property and Equipment, Net
The Company has property and equipment as follows as of December 31, 2013 and 2012:
Furniture and Equipment
Computer Equipment
Leasehold Improvements
Software
Less Accumulated Depreciation
Property and Equipment, Net
12/31/2013
12/31/2012
12,385 $
32,493
99,778
15,737
(81,645)
78,748 $
13,288
68,216
7,655
–
(65,423)
23,736
$
$
The increase in property and equipment is primarily the result of the assumption of $75,385 in net assets due to the Merger. These
increases were offset by certain non-Merger related dispositions of $70,481 in gross assets which gave rise to a loss on disposition of assets
of $9,469.
During the years ended December 31, 2013 and 2012, the Company recorded depreciation expense of $13,730 and $11,056,
respectively.
Note 6: Goodwill and Intangible Assets, Net
Goodwill
In association with the Merger, the Company recognized $10,365,805 in Goodwill, representing the excess of the fair value of the
consideration for the Merger over net identifiable assets acquired (See Note 3 – Business Combination for additional information). Pursuant to
ASC 350-20, Goodwill is not subject to amortization but is subject to annual review to determine if certain events warrant impairment to the
Goodwill asset. As of December 31, 2013, no impairment was warranted or recognized.
Intangible Assets, Net
The Company had following intangible assets as of December 31, 2013 and 2012:
Identifiable artistic-related assets (a)
Trademarks (b)
Product Masters (b)
Other Intangible Assets (b)
Less Accumulated Amortization (c)
Intangible Assets, Net
12/31/2013
12/31/2012
1,740,000 $
129,831
3,257,129
–
(3,261,254)
1,865,706 $
–
129,831
3,279,369
290,161
(3,343,291)
356,070
$
$
(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. They are tested annually for the
recognition of impairment expense. As of December 31, 2013, no impairment was warranted or recognized.
(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. At December 31, 2013, it was determined that certain “Other Intangible Assets” totaling $470,685 in
gross asset value, with accumulated amortization of $228,961, were to be retired giving rise to an associated loss on disposition of
assets totaling $241,723. During the prior period, the Company did not recognize any similar impairment.
(c) During the years ended December 31, 2013 and 2012, the Company recognized $146,924 and $138,767, respectively, in
amortization expense related to these intangible assets.
F-16
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 7: Accrued Liabilities
As of December 31, 2013 and 2012, the Company has the following accrued liabilities:
Accrued Salaries and Wages
Accrued Salaries and Wages (a)
Disputed Trade Payables
Disputed Trade Payables (b)
Accrued Expenses
Allowance for Sales Returns
Distribution Arrangements Payable
Deferred Revenue
Royalties Payable
Music Advances (c)
Other Accrued Expenses
Total Accrued Expenses
Total Accrued Liabilities
12/31/2013
12/31/2012
$
59,958 $
516,083
925,000
–
43,000
13,905
–
9,638
450,000
187,996
704,539
53,000
217,858
110,177
59,033
–
56,594
496,662
$
1,689,497 $
1,012,745
(a) Accrued but unpaid salaries and vacation benefits total $59,958 and $516,083 as of December 31, 2013 and 2012, 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 (“Bridge Notes”). Cash was received in the aggregate of $309,000. Four officers and directors of the
Company converted outstanding salaries payable to the new notes in the aggregate of $221,000.
On November 15, 2013, in association with the Merger, the Company issued 124,146 shares of common stock were to
members of the Pre-Merger management team as well as the Company’s Chief Financial Officer as consideration for the
cancellation of accrued, but unpaid, salary and benefits in the amount of $612,443. The Company recognized a gain on the
settlement of debt in the amount of $190,349.
(b) As part of the Merger, the Company assumed certain liabilities from a previous member of A Squared Entertainment, LLC
which has claimed certain liabilities totaling $925,000. The Company disputes the basis for this liability and has not heard from
the claimant for two years.
(c) The Company assumed these accrued expenses in association with the Merger.
F-17
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 8: Notes Payable and Accrued Interest
As of December 31, 2013 and 2012, the Company had the following notes payable and accrued interest balances outstanding:
12/31/2013
12/31/2012
Notes Payable
Debenture - $1,000,000 16% senior secured convertible (a)
Debt Discount - $1,000,000 16% senior secured convertible (a)
Reissued Debenture - $1,163,333 16% senior secured convertible (a)
Debt Discount - $1,163,333 16% senior secured convertible (a)
Bridge Notes - 12% convertible (b)
Total Notes Payable
Less: Current Portion
Long Term Portion
Accrued Interest
Debenture - $1,000,000 16% senior secured convertible issued June 27,2012 (a)
2006 Debenture - $2,500,000 Terminated July 2009 (c)
Bridge Notes - $530,000 12% convertible issued August 30, 2013 (b)
Accrued Interest
$
$
$
$
– $
–
–
–
–
–
–
– $
– $
–
–
– $
1,000,000
(485,147)
–
–
–
514,853
–
514,853
26,667
19,049
–
45,716
(a) On June 27, 2012, the Company entered into a Securities Purchase Agreement whereby the Company issued and sold (i) a $1,000,000
16% senior secured convertible debenture due June 27, 2014 (the “Debenture”), and (ii) a common stock purchase warrant (the
“Debenture Warrant”) to purchase up to 50,000 shares of the Company’s common stock. The initial closing of the Debenture and
Warrant Transaction occurred on June 27, 2012 (“Original Issue Date”). The Company issued the Debenture and the Debenture
Warrant for the purchase price of $1,000,000. The Debenture is convertible, in whole or in part, into shares of Common Stock upon
notice by the holder to the Company, subject to certain conversion limitations set forth in the Debenture. The conversion price for the
Debenture is $21.00 per share, subject to adjustments. Interest on the Debenture accrues at the rate of 16% annually and is payable
quarterly on February 1, May 1, August 1 and November 1, beginning on November 1, 2012, on any redemption, conversion and at
maturity. Interest is payable in cash or at the Company’s option in shares of the Company’s common stock; provided certain conditions
are met.
On August 29, 2013, pursuant to an agreement between the Company and certain holders, the original Debenture was assigned and
exchanged for an aggregate of $1,163,333 in new notes with the same provisions (the “Reissued Debenture”). The Reissued
Debenture was recorded as a modification of debt in accordance with ASC 470-50-40-6 wherein $150,000 in prepayment fees and
$13,333 in accrued but unpaid interest at the time of the exchange was added to the principal. The interest rate and maturity date were
not changed. Commencing on December 27, 2013, the Company was to be obligated to redeem a certain amount under the Reissued
Debentures on a quarterly basis, in an amount equal to $300,000 on each of December 27, 2013 and March 27, 2014 and $488,033 on
June 27, 2014. At the assignment to new note holders, the conversion rate of the Reissued Debentures was changed to $1.212 per
share.
F-18
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
On September 6, 2013, a holder of the Reissued Debenture issued notice of voluntary conversion for $75,000 of the issuance price
reducing the aggregate amount of the outstanding debentures to $1,088,333. The Company issued 61,882 shares of common stock. In
conjunction with this issuance there was a reduction in the derivative liability of $200,495, a reduction in the debt discount of $67,500,
and a loss on the conversion was recorded in the amount of $67,376.
On November 15, 2013, the Company issued 929,444 shares of common stock to holders of its Reissued Debentures, in the aggregate
principal amount of $1,088,333, plus accrued but unpaid interest in the aggregate amount of $38,141, in connection with the automatic
conversion of the Debentures upon consummation of the Merger. In association with the conversion, the Company recognized a loss
on the settlement of debt in the amount of $807,532, a reduction of the debt discount of $805,000, and a reduction of the derivative
liability of $2,867,602.
For year ended December 31, 2013 compared to the same period of 2012, interest expense for the Debenture and Reissued Debenture
was recorded in amounts of $144,808 and $81,333, respectively.
As of the date of issuance on June 27, 2012, a debt discount was recorded in the aggregate amount of $648,972 for the issuance of
warrants and the derivative value of the convertible feature of the Debenture at inception.
As of June 27, 2012, the warrants were valued in the amount of $379,688, based on the Black-Scholes valuation using the following
assumptions:
Risk-free interest rate
Expected life in years
Dividend yield
Expected volatility
0.73%
5
0
63.65%
As of June 27, 2012, the debt discount for the convertible feature of the debenture was valued in the amount of $269,284 using the
Black-Scholes calculation with the following assumptions:
Risk-free interest rate
Expected life in years
Dividend yield
Expected volatility
0.31%
2
0
60.01%
On August 29, 2013, the date of assignment of the Debentures, a debt discount was recorded in the aggregate amount of $1,163,333
for the derivative value of the convertible feature of the Reissued Debenture upon the exchange date using the Black-Scholes
calculation with the following assumptions:
Risk-free interest rate
Expected life in years
Dividend yield
Expected volatility
0.14%
.83
0
63.22%
Interest expense for the amortization of the debt discount for the convertible feature of the Debenture and Reissued Debenture is
calculated on a straight-line basis over the remaining life of the debenture. For the year ended December 31, 2013, total accretion
expense of the debt discount of the debentures was $983,607, resulting in a debt discount balance of $0. For the year December 31,
2012, accretion expense was recorded in the amount of $163,825 for a debt discount balance of $485,147.
F-19
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(b) 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 (“Bridge Notes”). The Bridge Notes have a stated conversion rate of $1.212 and can be voluntarily converted at
any time by the holder and mandatorily by the Company upon certain conditions. Cash was received in the aggregate of $309,000.
Four officers and directors of the Company converted outstanding salaries payable to the new notes in the aggregate of $221,000. At
issuance, a debt discount of $530,000 was recorded. Costs related to the issuance of the Bridge Notes were recognized in 2013 totaling
$30,715.
On November 15, 2013, the Company issued an aggregate of 448,613 shares of common stock to holders of the Company’s 12%
convertible promissory notes in aggregate principal amount of $530,000 and accrued, but unpaid, interest of $13,719 in connection
with the automatic conversion of the Bridge Notes upon consummation of the Merger. During 2013, total accretion of the debt
discount was $530,000 resulting in a debt discount balance of $0. During 2013, interest expense associated with the non-related party
holders of these notes totaled $7,999.
(c) Debenture Interest accrued and unpaid for the 2006 issuance of $2.5 million in debentures (the “2006 Debentures”) is $0 as of
December 31, 2013 and $19,049 as of December 31, 2012. Accrual of interest on this series of debentures was terminated effective
July 24, 2009 in accordance with the conversion agreement upon establishment of a secondary trading market for our common stock.
Subsequent to the conversion, additional interest on the debenture was erroneously accrued. Therefore, in 2013, in conjunction with the
Merger, the Company discovered the error, and a $19,049 gain on settlement of debt was recorded to reduce the accrued interest
balance to $0.
Note 9: Short-Term Debt, Notes Payable, and Accrued Interest - Related Parties
As of December 31, 2013 and 2012, the Company had the following short-term debt, notes payable and accrued interest balances
outstanding to related parties:
Short-Term Debt and Notes Payable – Related Parties
Member Advances (a)
Officer Loans to Company (b)
Subordinated Officer Loans to Company (c)
Bridge Notes 12% Convertible (d)
Total Short-Term Debt and Notes Payable
Less: Current Portion
Long Term Portion
Accrued Interest – Related Parties
Officer Loans to Company (b)
Subordinated Officer Loans (c)
Accrued Interest
F-20
12/31/2013
12/31/2012
$
516,659 $
–
–
–
516,659
(516,659)
– $
– $
–
– $
$
$
$
–
194,163
159,753
–
353,916
–
353,916
49,087
44,888
93,975
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(a) As part of the Merger, the Company acquired certain 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 current Chief Executive Officer, Andrew Heyward. As of December 31, 2013, these advances totaled $516,659.
These advances are interest free, and these advances have no stated maturity. The Company has applied an imputed interest rate of
6% in accordance with ASC 835-30-45. On February 24, 2014, the Company repaid a portion of the Member Advances to its
Chief Executive Officer, Andrew Heyward, in the amount of $100,000.
(b) Throughout 2009, 2008 and 2007, the Company borrowed funds from Messrs. Moeller, Meader, Larry Balaban and Howard
Balaban. On December 31, 2009, the Officers agreed to issue new note agreements for the outstanding balances, including
accrued but unpaid interest, with a maturity date of December 31, 2010 (the “Officer Loans”). Subsequent agreements amended
the stated interest rate to 6% per annum and extended the maturity to January 15, 2015.
On November 15, 2013, in connection with the Merger, the Company issued an aggregate of 73,238 shares of common stock to
members of the pre-merger management team as consideration for the cancellation of an aggregate of $194,163 in principal and
$62,167 in accrued but unpaid interest thereon made to the Company by such individuals in connection with the Merger. The
Company recognized a gain on the settlement of debt in the amount of $7,324.
For the year ended December 31, 2013 compared to the same period of 2012, interest expense for these Officer Loans were
recorded in amounts of $13,080 and $14,132, respectively.
On February 1, 2008, Isabel Moeller, sister of our former Chief Executive Officer, Klaus Moeller, loaned $310,000 to the
Company at an interest rate equal to 8% per annum. The funds were borrowed from Ms. Moeller in order to reduce outstanding
obligations due to Genius Products, Inc. at that time. Subsequent agreements extended the maturity date to January 15, 2015 and
reduced the stated interest rate to six (6%) percent per annum. Repayments on the principle balance were made in the aggregate of
$24,000 during February and April 2011. On April 1, 2011, Ms. Moeller agreed to convert $200,000 of the outstanding balance
to shares of common stock of the Company. On March 31 2012, Ms. Moeller agreed to convert the remaining balance of
outstanding principal and interest, in the amount of $173,385, to shares of common stock of the Company. Interest expense for the
twelve months ended December 31, 2013 and 2012 was $0 and $2,562, respectively, as the note was paid in full in 2012.
(c) On March 31, 2011, four of the Company’s officers agreed to convert accrued but unpaid salaries through December 31, 2010 to
subordinated long term notes payable (the “Subordinated Officer Loans”). In February 2011, as a result of an agreement by each
of the four officers to retroactively decrease the amount of the annual salary for 2010 from $125,000 per annum per officer to
$80,000, the amount of the Subordinated Officer Loans was reduced to an aggregate of $1,620,137. In March 2012, the officers
agreed to convert the aggregate sum of $1,572,161 to shares of common stock of the Company. As of March 2012, the remaining
note, with a principal balance of $159,753, had a maturity of January 15, 2015 and a stated interest rate of six percent (6%) per
annum.
On October 31, 2013, 43,207 shares of restricted common stock were issued in full payment of the remaining Subordinated
Officer Loan with a principal amount of $159,753 and accrued but unpaid interest in the amount of $56,278. The Company
recognized a gain on the settlement of debt of $90,733.
For the years ended December 31, 2013 and 2012, the interest recorded for these Subordinated Officer Loans was $11,390 and
$33,565, respectively.
(d) 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 (“Bridge Notes”). The Bridge Notes have a stated conversion rate of $1.212 and can be voluntarily
converted at any time by the holder and mandatorily by the Company upon certain conditions. Cash was received in the aggregate
of $309,000. Four officers and directors of the Company converted outstanding salaries payable to the new notes in the aggregate
of $221,000. At issuance, a debt discount of $530,000 was recorded. Costs related to the issuance of the Bridge Notes were
recognized in 2013 totaling $30,715.
On November 15, 2013, the Company issued an aggregate of 448,613 shares of common stock to holders of the Company’s 12%
convertible promissory notes in aggregate principal amount of $530,000 and accrued, but unpaid, interest of $13,719 in
connection with the automatic conversion of the Bridge Notes upon consummation of the Merger. During 2013, total accretion of
the debt discount was $530,000 resulting in a debt discount balance of $0. During 2013, interest expense associated with the
related party holders of these notes totaled $5,720.
F-21
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 10: Derivative Valuation
The Company recognized a derivative liability for the conversion feature and warrants for the $1.0 million senior secured debenture (the
“Debenture”) issued on June 27, 2012 as an embedded derivative. It was valued on the respective transaction dates of June 27, 2012 for
issuance of the debentures and August 30, 2013, the date on which it was assigned to other holders, using a Black-Scholes pricing model.
Warrants to purchase 50,000 shares of common stock were issued as part of the Debenture and were exchanged pursuant to an agreement
between the holder and the Company on August 29, 2013 on a one for one basis with no receipt of cash. 3,810 warrants to purchase shares of
common stock were issued to a placement agent and several of its designees in connection with the Debenture. These warrants have a cashless
exercise provision effective six months after the issuance date. In accordance with ASC 815-10-25, we measured the subsequent derivative
valuation using a Black-Scholes pricing model on December 31, 2012 and recorded the additional derivative liability as of that date.
On August 29, 2013, pursuant to an agreement between the Company and certain holders, the original Debenture was assigned and
exchanged for an aggregate of $1,163,333 in new notes with the same provisions (the “Reissued Debentures”). The additional value
represented an increase of $150,000 in prepayment fees and $13,333 in accrued but unpaid interest. The interest rate and maturity date were
not changed.
At the end of each quarterly reporting date the values are evaluated and adjusted to current market value. The amount recorded as of
December 31, 2013 and 2012 was $0 and $68,962, respectively. For the year ended December 31, 2013, a loss on the derivative valuation
was recorded in the amount of $1,886,943. For the year ended December 31, 2012, a gain on the derivative valuation in the amount of
$200,322 was recognized.
Derivative liability activity for the years ended December 31, 2013 and 2012 was as follows:
Derivative Liability at December 31, 2011
Liability on June 27, 2012 related to Issuances of Debt and Warrants
Change in Fair Value at the End of the Year
Derivative Liability at December 31, 2012
$
– $
–
53,219
53,219
– $
269,284
(253,541)
15,743
Warrants
Conversion
Feature
Total
–
269,284
(200,322)
68,962
Change in Fair Value related to Original Debenture prior to
Cancellation of Warrants and Assignment of Debenture on August 29,
2013
Elimination of Liability Due to Cancellation of Warrants and
Reassignment of Debt on August 29, 2013
Liability on August 29, 2013 related to Assignment of Debt
Decrease in Liability on September 9, 2013 due to $75,000 Note
Payable Conversion
Change in Fair Value Conversion date
Elimination of Liability on November 11, 2013 due to Full
Conversion of Remaining Balance of $1,088,333
Derivative Liability at December 31, 2013
$
F-22
(13,708)
(39,511)
–
–
–
–
– $
(4,113)
(17,821)
(11,630)
5,077,705
(200,495)
(2,009,608)
(2,867,602)
– $
(51,141)
5,077,705
(200,495)
(2,009,608)
(2,867,602)
–
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 11: Stockholders’ Equity
As part of the Reincorporation, the total number of authorized shares of common stock was changed to 250,000,000 shares of $0.001
par value. The common stock and additional paid in capital accounts were restated as of December 31, 2012, and for the years then ended, to
recognize the change from no par common stock to a par value of $0.001 per share. The Company conducted a consent solicitation of its
stockholders (“Stockholders”) of record as of September 3, 2013 (the “Record Date”) to approve certain corporation actions. The
Stockholders, representing at least a majority of outstanding shares of the Company’s voting capital as of the Record Date voted by written
consent to approve an amendment to the company’s Article of Incorporation in order to increase the number of common stock authorized to
700,000,000 from 250,000,000. As of December 31, 2013, the total number of authorized shares of common stock was 700,000,000.
As part of the aforementioned consent solicitation, the 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 a reverse split of the Company’s
common stock in a ratio to be determined by the Board which would not be less than One for Ten (1:10) and not more than One for One-
Hundred (1:100), which was to be effective no later than September 30, 2014, at the sole discretion of the Board and in lieu of issuing any
fractional shares resulting from the reverse split, to issue the next whole share (the “Reverse Split”).
On April 2, 2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and
outstanding common stock on a one-for-one hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory
Authority) on April 7, 2014. All common stock share and per share information in this Form 10K, including the accompanying consolidated
financial statements and notes thereto, have been adjusted to reflect retrospective application of the reverse split, unless otherwise indicated.
The total number of authorized shares of common stock was not adjusted in conjunction with the reverse split.
As of December 31, 2013 and 2012, there were 5,918,704 and 719,127 shares of common stock outstanding, respectively.
The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001. The Board of Directors is authorized,
subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares of preferred
stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges as shall be determined by our board of directors, which may include, among others,
dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights. As of December 31, 2013 and 2012, no shares
were outstanding and the Board of Directors has not authorized issuance of preferred shares.
2012 Activity
On March 31, 2012, the Company issued 87,278 shares of common stock in exchange for outstanding notes payable, including
principal and interest, in the cumulative amount of $1,745,546, or $20.00 per share, for certain related parties and officers of the Company.
On April 11, 2012, the Company agreed to issue 10,000 shares of common stock in exchange for investor relations services valued at
$235,000, or $23.00 per share.
On May 2, 2012, the Company issued 1,111 shares of common stock in exchange for marketing services valued at $22,214, or $20.00
per share.
On May 10, 2012, the Company issued 2,500 shares of restricted common stock to one service provider for investor relations services
valued at approximately $42,500, or $17.00 per share.
F-23
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
On May 10, 2012, the Company issued 10,000 shares of common stock for cash to an accredited investors in the amount of $200,000,
or $20.00 per share.
On June 20, 2012, the Company issued 1,250 shares of common stock in exchange for legal services valued at $25,000, or $20.00 per
share.
2013 Activity
On February 1, 2013, the Company issued 4,706 shares of common stock in exchange for interest payable on the Debenture due on
that date in the amount of $40,000, or $8.50 per share.
On May 1, 2013, the Company issued 2,782 shares of common stock in exchange for services valued at $16,135, or $6.00 per share.
On May 1, 2013, the Company issued 625 shares of common stock in exchange for services valued at $3,125, or $5.00 per share.
On May 26, 2013, the Company issued 4,000 shares of common stock in exchange for services valued at $20,000, or $5.00 per share.
On August 29, 2013, 50,000 warrants to purchase the Company’s common stock were exchanged on a one for one basis with no
receipt of cash and the warrants were cancelled. In association with this transaction, there was a reduction in a derivative liability of $30,964, a
reduction in debt issuance cost of $14,464, and a loss on the exchange of warrants recognized in the amount of $308,500.
On September 6, 2013, a holder of the Reissued Debenture issued notice of voluntary conversion for $75,000 of the issuance price
reducing the aggregate amount of the outstanding debentures to $1,088,333. The Company issued 61,882 shares of common stock. In
conjunction with this issuance there was a reduction in the derivative liability of $200,495, a reduction in the debt discount of $67,500, and a
loss on the conversion was recorded in the amount of $67,376.
On September 13, 2013, 28,000 shares of common stock were issued in exchange for services valued $112,000, or $4.00 per share.
On September 19, 2013, pursuant to an agreement to cancel a consulting agreement, 4,000 shares of common stock were issued valued
at $16,000, or $4.00 per share.
On October 8, 2013, the board of directors granted one director 5,000 shares as a bonus for service to the Company. The shares were
valued at $17,500, or $3.40 per share.
On October 18, 2013, the Company exchanged 3,810 warrants to purchase common stock issued to the placements agent, and its
designees, of the July 2012 Debenture issuance for shares of restricted common stock of the Company on a one for one basis with no
exchange of cash. There was a reduction in the derivative liability of $8,547 and a loss on the exchange of warrants recognized in the amount
of $3,644.
On October 30, 2013, the Company issued 10,020 shares of restricted common stock to two parties in exchange for services valued at
$50,100, or $2.80 per share. The Company recognized a gain on the settlement of account payable in the amount of $22,044.
F-24
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
On October 31, 2013, 43,206 shares of restricted common stock were issued in full payment of the Subordinated Officer Loan with a
principal amount of $159,753 and accrued but unpaid interest in the amount of $56,278. The Company recognized a gain on the conversion of
debt in the amount of $90,733.
On November 8, 2013, the Company issued 10,000 shares restricted common stock to a director as a bonus for service to the Company
valued at $35,000, or $3.50 per share.
On November 15, 2013, the board of directors granted five officers and employees 10,000 shares each as a bonus for service to the
Company. The shares were valued at valued at $170,000, or $3.50 per share.
On November 15, 2013, in association with the Merger, the Company issued the following shares of common stock:
·
·
·
·
·
·
2,972,183 shares of common stock, valued at $10,402,638 or $3.50 per share, were issued to the Parent Member in exchange
for the member interests of A Squared issued and outstanding immediately prior to the Merger.
448,613 shares of common stock were issued to holders of the Company’s 12% convertible promissory notes in aggregate
principal amount of $530,000 and accrued, but unpaid, interest of $13,719 in connection with the automatic conversion of the
Bridge Notes upon consummation of the Merger.
73,238 shares of common stock were issued to members of the pre-merger management team as consideration for the
cancellation of an aggregate of $194,163 in principal and $62,167 in accrued but unpaid interest thereon made to the Company
by such individuals in connection with the Merger. The Company recognized a gain on the settlement of debt in the amount of
$7,324.
929,444 shares of common stock were issued to holders of its 16% senior secured convertible debentures, in the aggregate
principal amount of $1,088,333, plus accrued but unpaid interest in the aggregate amount of $38,141, in connection with the
automatic conversion of the Debentures upon consummation of the Merger. The association with the conversion, the Company
recognized a loss on the settlement of debt in the amount of $807,532, a reduction of the debt discount of $805,000, and a
reduction of the derivative liability of $2,867,602.
77,492 shares of common stock were issued to two parties in exchange for strategic digital marketing and business development
services. These shares were valued at $333,215, or $4.30 per share.
124,146 shares of common stock were issued to members of the Pre-Merger management team as well as the Company’s Chief
Financial Officer as consideration for the cancellation of accrued, but unpaid, salary and benefits in the amount of $612,443.
The Company recognized a gain on the settlement of debt in the amount of $190,349.
Additionally, through December 31, 2013, the Company sold 296,429 shares of its common stock in a private placement to certain
investors at $3.50 per share. Through December 31, 2013, the Company received gross proceeds of $1,037,500 and recognized offering costs
of $68,962.
F-25
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 12: Stock Options
The Company has adopted the provisions of ASC 718 - Compensation which requires companies to measure the cost of employee
services received in exchange for equity instruments based on the grant date fair value of those awards and to recognize the compensation
expense over the requisite service period during which the awards are expected to vest.
On December 29, 2008, the Company adopted the Pacific Entertainment Corporation 2008 Stock Option Plan (the “Plan”), which
provides for the issuance of qualified and non-qualified stock options to officers, directors, employees and other qualified persons. The Plan is
administered by the Board of Directors of the Company or a committee appointed by the Board of Directors. The number of shares of the
Company’s common stock initially reserved for issuance under the Plan was 110,000. On September 2, 2011, the shareholders holding a
majority of the Company’s outstanding common stock adopted an amendment to the Company’s 2008 Stock Option Plan to increase the
number of shares of common stock issuable under the plan to 500,000.
2012 Activity
On January 1, 2012 and April 1, 2012, the Company issued two Stock Option Grants to an employee for the purchase of up to 250
shares of common stock each, which were fully vested as of March 31, 2012 and June 30, 2012, respectively, with a life of five years and an
exercise price of $50.00. The Company’s calculation of the fair market value of the stock-based award that was granted was $1,265 for all of
the options granted. The full value of the options was expensed in 2012.
On May 2, 2012, pursuant to an employment agreement with the Chief Financial Officer, the Company issued an option to purchase up
to 2,000 shares of common stock. The option fully vests on December 31, 2014, has a five year term and an exercise price of $44.00. The
Company’s calculation of the fair market value of the stock-based award that was granted was $11,588 for all of the options granted. The
amount expensed in 2012 was $2,897.
On July 6, 2012, the Company issued an option to purchase 1,000 shares of common stock pursuant to a services agreement with a
consultant. The option is fully vested as of July 6, 2012, has a five year term and an exercise price of $44.00. The Company’s calculation of
the fair market value of the stock-based award that was granted was $6,889 for all of the options granted. The full value of the options was
expensed in 2012.
On December 31, 2012 the Company issued Stock Option Grant notices to nineteen employees and service providers under the 2008
Stock Option Plan, as amended. Options to purchase 7,550 shares of common stock at an average exercise price of $15.00 per share were
granted with a 5 year life, fully vesting on December 31, 2012. The Company’s calculation of the average fair market value of the stock-based
award that was granted was $13,794 for all of the options granted. The full value of the options was expensed in 2012.
As of December 31, 2012, options to purchase up to 2,550 shares of the Company’s common stock previously issued in 2009 through
2012 expired due to the termination of employees.
The Company used the Black-Scholes valuation model to estimate the grant date fair value of the options granted in 2012. The
Company used the following assumptions for the 2012 valuations:
Risk-free interest rate
Expected life in years
Dividend yield
Expected volatility
.64% - .89%
5
0.0%
59.15% - 67.62%
F-26
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
2013 Activity
On May 15, 2013, Stock Option Grant Notices were issued to each of five officers to purchase up to 7,500 shares of common stock,
vesting on the grant date, at an exercise price of $20.00 per share. The options have expiration dates five years from the grant date.
On May 15, 2013, options to purchase up to 2,500 shares of common stock were issued to an employee, vesting on the date of grant, at
an exercise price of $20.00 per share. The options have an expiration date five years from the date of the grant notice.
On May 15, 2013, pursuant to amendments to employment agreements with Messrs. Moeller, Meader, Larry Balaban and Howard
Balaban, Stock Option Grant Notices previously granted to each employee to purchase up to 20,000 shares of common stock expiring on
January 20, 2014 were cancelled effective immediately.
On September 10, 2013 Stock Option Grant Notice was issued to an employee to purchase up to 1,000 shares of common stock,
vesting on the grant date, at an exercise price of $44.00. The options have an expiration date five years from the date of the grant notice.
On November 15, 2013, in connection with the Merger, the Company and Klaus Moeller entered into an agreement to terminate Mr.
Moeller’s employment agreement dated as of October 29, 2013. Under the terms of the Moeller Employment Termination Agreement, Mr.
Moeller agreed to cancel options to purchase an aggregate of up to 19,500 shares of the Common Stock.
Also, on November 15, 2013, in connection with the Merger, the Company and certain of our pre-Merger officers agreed to cancel
outstanding options to purchase up to an aggregate of 58,500 shares of Common Stock.
As of December 31, 2013, options to purchase up to 4,300 shares of the Company’s common stock previously issued in 2009 through
2013 expired due to the termination of employees.
The Company used the Black-Scholes valuation model to estimate the grant date fair value of the options granted in 2013. The
Company used the following assumptions for the 2013 valuations:
Risk-free interest rate
Expected life in years
Dividend yield
Expected volatility
F-27
0.84%
5
0.0%
69.09%
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
The following schedule summarizes the changes in the Company’s stock option plan during 2013 and 2012:
Options
Outstanding
Number
of
Shares
Exercise
Price
per Share
Weighted
Average
Remaining
Contractual
Aggregate
Intrinsic
Value
Weighted
Average
Exercise
Price
per Share
Balance at December 31, 2011
Options Granted
Options Exercised
Options Expired
Balance at December 31, 2012
Options Granted
Options Exercised
Options Expired
Balance at December 31, 2013
149,950
11,050
–
(2,550)
158,450
41,000
–
(162,300)
37,150
$18.00 - 55.00
$6.00 – 50.00
–
$18.00 – 55.00
$6.00 – 55.00
$20.00 – 44.00
–
$6.00 – 55.00
$6.00 – 55.00
Life
4.47 years
5.18 years
-
-
3.55 years
4.35 years
-
-
3.55 years
$
$
$
$
$
– $
– $
– $
– $
– $
43.00
26.00
–
–
42.00
21.00
–
–
32.00
41.00
32.00
Exercisable December 31, 2012
Exercisable December 31, 2013
130,450
37,150
$6.00 – 55.00
$6.00 – 55.00
2.81 years
3.41 years
During the year ended December 31, 2013 and 2012, the Company recognized stock based compensation expense of $316,685 and
$264,122, respectively.
Note 13: Warrants
In connection with the sale of shares of its common stock in 2010, the Company issued warrants to purchase a total of 4,712 shares of
its common stock at $40.00 per share exercisable for a three-year period. As of December 31 2013, all of these warrants have expired. In June
2012, the Company issued warrants to purchase up to 53,810 shares of the Company’s common stock. In August 2013, 50,000 of these
warrants were exchanged for common stock on a one for one basis with no receipt of cash and the warrants were cancelled. In October 2013,
the Company exchanged the remaining 3,810 warrants for shares of restricted common stock of the Company on a one for one basis with no
exchange of cash.
F-28
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
The following schedule summarizes the changes in the Company’s warrants during 2013 and 2012:
Balance at December 31, 2011
Warrants Granted
Warrants Exercised
Warrants Expired or Cancelled
Balance at December 31, 2012
Warrants Granted
Warrants Exercised
Warrants Expired or Cancelled
Balance at December 31, 2013
Exercisable at December 31, 2012
Exercisable at December 31, 2013
Note 14: Income Taxes
Number of
Warrants
Exercise Price per
Share
Weighted Average
Exercise Price per
Share
4,712 $
53,810 $
–
–
58,522 $
–
–
(58,522) $
–
40.00 $
33.00 $
33.00 – 40.00 $
–
–
33.00 – 40.00 $
– $
58,522 $
– $
33.00 – 40.00 $
– $
40.00
33.00
34.00
–
–
34.00
–
34.00
–
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax liabilities consist of the following components as of December 31, 2013 and 2012:
Deferred tax assets:
NOL Carryover
Returns Reserve
Inventory Reserve
Accrued Related Party Interest
Accrued Officer Compensation
Accrued Compensated Absences
Charitable Contributions
Deferred tax liabilities:
Depreciation and Amortization
Valuation Allowance
Net deferred tax asset
$
2013
2012
3,252,200 $
16,800
36,500
–
–
14,800
1,300
2,531,500
20,700
22,300
36,700
158,600
38,100
1,900
80,100
(58,700)
$
(3,401,700)
– $
(2,751,100)
–
F-29
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
The income tax provision differs from the amount of income tax determined by applying the U.S. federal tax rate to pretax income from
continuing operations for the years ended December 31, 2013 and 2012 due to the following:
Book Loss
Meals and Entertainment
Stock Compensation for Services
Stock issued for debt extinguishment
Related Party Interest
Accrued Compensated Absences
Accrued Officer Compensation
Returns Reserve
Inventory Reserve
Depreciation and Amortization
Valuation Allowance
2013
2012
$
$
(2,813,900) $
5,900
525,900
1,762,000
(12,500)
(23,300)
(158,600)
(3,900)
14,200
10,200
694,000
– $
(806,400)
2,800
229,600
(66,800)
(45,700)
11,200
116,800
(12,100)
5,800
33,300
531,500
–
At December 31, 2013, the Company had net operating loss carry forwards of approximately $8,339,000 that may be offset against
future taxable income from the year 2014 through 2033. No tax benefit has been reported in the December 31, 2012 financial statements since
the potential tax benefit is offset by a valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal income tax
reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as
to use in future years.
The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (“Topic
740”), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax
consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net
deferred tax asset to an amount that is more likely than not to be realized.
Topic 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements. Topic
740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the
technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount
to recognize in the financial statements.
At the adoption date of January 1, 2008, the Company had no unrecognized tax benefit which would affect the effective tax rate if
recognized.
The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the
provision for income taxes. As of December 31, 2013, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction and in the state of California. The Company is currently subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
F-30
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 15: Employment Agreements
On April 26, 2011, the Company and each of Messrs. Moeller, Meader, Larry Balaban and Howard Balaban (the “Pre-Merger
Executives”) agreed to terminate all then existing employment agreements for the Pre-Merger Executives and enter into new five-year
employment agreements unless written termination is provided by either party. Each employment agreement provides for a graduated base
salary beginning at $165,000 per annum retroactive to March 20, 2011, continuing to December 31, 2011, increasing to $195,000 for 2012
and $225,000 for 2013. After 2013, the agreement provided for base salary increases at the discretion of the Board of Directors, with a
minimum 5% increase. In addition to base salary, each Pre-Merger Executive was to receive an annual car allowance of $11,400, and four
weeks paid vacation per annum.
On January 10, 2013, Messrs. Moeller, Meader and Howard Balaban agreed to reduce the amount of payments for salary effective
January 1, 2013 through January 19, 2013 to $165,000 and a further reduction to $140,000 commencing January 20, 2013, continuing until
further notice by each one to the Board of Directors. The agreements with each of Messrs. Moeller, Meader and Howard Balaban included the
accrual of unpaid salary, the right to convert any or all of the accrued but unpaid salary to common stock of the Company at a conversion price
of $21.00 per share and an amendment to all outstanding stock option grant notices to allow each to retain all rights until the expiration date
upon termination unless for cause, as defined in the employment agreement.
On March 28, 2013, Mr. Meader voluntarily resigned his position as President effective April 1, 2013. The Company agreed to the
retention of all stock options granted to Mr. Meader as of the date of termination, vesting and expiration dates in accordance with the original
grant notices in exchange for a general release of all claims against the Company. The Company entered into a consulting agreement with Mr.
Meader to provide continued services for an initial period of twelve months.
On May 2, 2012, the Company entered into a five-year “at will” employment agreement with Jeanene Morgan to serve as the
Company’s Chief Financial Officer. The agreement provided a base salary of $165,000 per annum from January 1, 2012 to December 31,
2012, increasing to $190,000 on January 1, 2013 and $215,000 on January 1, 2014. After 2014, the agreement provided for base salary
increases at the discretion of the Board of Directors with a minimum 5% increase. The Board of Directors, in its sole discretion, may grant
Ms. Morgan a year-end bonus with a value of no less than 2% of EBITDA of the Company (assuming a positive figure) and up to 100% of
Ms. Morgan’s base salary. Ms. Morgan was granted an option to purchase 2,000 shares of the Company’s common stock. Ms. Morgan was
permitted to participate in all benefit plans of the Company and received four weeks paid vacation.
On January 10, 2013, Ms. Morgan agreed to defer the payment of the salary increase which would have become effective January 1,
2013. The deferral would continue until further notice by Ms. Morgan to the Board of Directors. The agreement included the accrual of unpaid
salary, the right to convert any or all of the accrued but unpaid salary to common stock of the Company at a conversion price of $21.00 per
share and an amendment to all outstanding stock option grant notices to allow Ms. Morgan to retain all rights until the expiration date upon
termination unless for cause, as defined in the employment agreement.
On October 29, 2013, the Company executed new two year employment agreements with Messrs. Klaus Moeller, Howard Balaban
and Larry Balaban, with an effective date of October 1, 2013, whereby the employees agreed to a reduction of salary. Each was to was receive
(i) an annual salary of $20,800 (except that if the Company generates cash flow from operations of at least $300,000 on an annual basis, the
annual salary shall be $100,000 plus an additional payment of $75,000 per annum, payable in cash or shares of the Company’s common stock
in quarterly installments of $18,750 each, and (ii) the acceleration of vesting of all previously issued option grants to Mr. Moeller under the
Company’s 2008 Stock Option Plan as well as participation in other Company benefit plans and the ability to receive a year-end performance
bonus, at the discretion of the Company’s Board of Directors. In the event employment is terminated by the Company without “Cause” as
defined in the agreement, the employee shall be entitled to severance payments for twelve months, based on the annual salary rate of $100,000.
F-31
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
On October 29, 2013, the Company and Ms. Morgan agreed to execute a new employment agreement, effective October 1, 2013,
whereby Ms. Morgan agreed to continue to serve as the Company’s Chief Financial Officer for a period of two years in consideration for (i) a
reduction in annual salary to $175,000 and (ii) the acceleration of vesting of all previously issued option grants to Ms. Morgan under the
Company’s 2008 Stock Option Plan as well as participation in other Company benefit plans and the ability to receive a year-end performance
bonus, at the discretion of the Company’s Board of Directors. In the event Ms. Morgan’s employment is terminated by the Company without
“Cause” (as defined in the Morgan Employment Agreement), Ms. Morgan shall be entitled to severance payments for twelve months.
Additional information regarding Ms. Morgan’s agreement is available on the Form 8-K filed on October 30, 2013.
On November 15, 2013, as a closing condition to the Merger, each of Messrs. Moeller, Larry Balaban and Howard Balaban resigned
their executive positions with the Company. Accrued but unpaid salaries and benefits payable to these individuals were converted into the
Company’s common stock.
On November 15, 2013, as a closing condition to the Merger, the Company entered into five-year employment agreements with
Andrew Heyward, to serve as Chief Executive Officer, and Amy Moynihan Heyward, to serve as President of the Company, for which each
will receive an annual base salary of $200,000 and $180,000, respectively.
Subsequent to December 31, 2013, Jeanene Morgan resigned from her position as Chief Financial Officer of the Company.
Note 16: Lease Commitments
The Company has no capital leases subject to the Capital Lease guidelines in the FASB Accounting Standards Codification.
Rental expenses incurred for operating leases during the years ended December 31, 2013 and 2012 were $24,898 and $38,982,
respectively.
Warehouse space of approximately 2,000 square feet in Rogers, Minnesota was rented on a month to month basis and was vacated as
of October 31, 2013. In November 2012, the Company signed a nine month lease to occupy three offices in San Diego, California, which
terminated as of April 30, 2013.
Currently, the Company leases approximately 2,807 square feet of office space at 9401 Wilshire Boulevard, Beverly Hills, California
pursuant to a standard office lease dated February 3, 2012. The lease has a term of 3 years, from May 1, 2012 through April 30, 2015. The
monthly rent is $10,807 which is to be adjusted upward 3% each year on the anniversary of the lease.
The following is a schedule of future minimum lease payments required by the non-cancelable operating lease agreement:
Year
2014
2015
Amount
136,245
45,860
182,105
$
$
F-32
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 17: Commitment and Contingencies
In the normal course of the its business, the Company enters into agreements which call for the payment of royalties or “profit”
participations for the use of third party intellectual property. For properties such as Gisele & The Green Team, Martha & Friends and Stan
Lee and the Mighty 7, the Company is obligated to share net profits with the underlying rights holders on a certain basis, defined in the
respective agreements.
In addition, the Company has also entered into an agreement with XingXing Digital Corporation, an animation company based in China
pursuant to which in exchange for the investment of 100% of the costs of the animation, XingXing is entitled to receive a specified percentage
of the net proceeds received by the Company from the exploitation of those series on which XingXing has provided animation services. The
series covered by this arrangement are Secret Millionaires Club and Gisele & the Green Team .
The Company has also entered into a similar arrangement with another production vendor, BangZoom Entertainment, which calls for a
payment of $120,000 from the net profits received by the Company from the exploitation of the series Secret Millionaires Club. The payment
represents the deferral of certain costs and fees for audio/video post-production work performed by such vendor in connection with that series.
The Company is obligated to pay in cash to the investors from the fourth quarter 2013 private placement a fee of 1% per month of the
investors’ investment for every thirty (30) day period up to a maximum of 6% upon the occurrence of certain events, including: (i) following
the Filing Date that the registration statement has not been filed and (ii) following the Effectiveness Date that the registration statement has not
been declared effective.
Note 18: Discontinued Operations
On September 20, 2010, the Company entered into a joint venture agreement between the Company and Dr. Shulamit Ritblatt to form
Circle of Education, LLC, a California limited liability company, for the purpose of creation and distribution of a curriculum to promote school
readiness for children ages 0-5 years (“COE”). The Company obtained an initial voting and economic interest of seventy-five percent of the
outstanding units of the newly formed company in exchange for the contribution of all intellectual property rights the Company had in the
Circle of Education program.
In March 2012, the Company and Dr. Ritblatt agreed to terminate the joint venture agreement. COE transferred equal right of
ownership in the intellectual property developed as of the date of termination (“IP”) to each of the Company and Dr. Ritblatt, and in exchange
for the rights to the IP, Dr. Ritblatt transferred her units of COE to the Company. Each party will have the right to continue development of the
IP and products based on the IP with no further obligation to the other party. Subject to certain limitations for specific channels of distribution
reserved for each party for a period of twelve months from the execution of the agreements, both parties have non-exclusive and non-
restrictive rights to the use, sublicense or sale of the IP and products created based on the IP.
The Company consolidated the results for the twelve month period ended December 31, 2012 and December 31, 2011 with the results
of COE. There were no sales or cost of sales in the twelve month period ended December 31, 2012 and December 31, 2011. COE had general
and administrative costs of $0 and $21,461 for the twelve month period ended December 31, 2012 and 2011, respectively. Costs in 2011
included legal costs related to the creation of the agreements and registration of the entity in the aggregate of $18,068, sales and marketing
costs of $1,181 and product development costs of $2,212 for a total loss of $21,461. As the Company has an economic interest of 100 percent
of the total subsidiary as a result of the agreement to terminate COE, the Company recognized 100 percent of the loss, or $5,366, as
noncontrolling interest on the financial statements for the twelve months ended December 31, 2011.
F-33
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
On December 31, 2013, given no activity during the years ended December 31, 2013 and 2012, the Company discontinued all activities
related to COE. Net Assets of Discontinued Operations on the Consolidated Balance Sheet at December 31, 2012 totaled $101,219, which
gave rise to a loss on discontinued operations in 2013 of $101,219.
Note 19: Fair Value Measurements
We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial
instruments measured at fair value on a recurring basis. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in
accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in
measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
· Level 1, 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.
We measure certain financial instruments at fair value on a recurring basis. As of December 31, 2013, there were no assets or liabilities
measured at fair value on a recurring basis. As of December 31, 2012, assets and liabilities measured at fair value on a recurring basis were as:
Total
Level 1
Level 2
Level 3
Assets
Total assets measured at fair value
Liabilities
Derivative Liability
Convertible Debenture, net of discount
Total liabilities measured at fair value
$
$
– $
–
68,962
514,853
583,815 $
F-34
– $
–
–
–
– $
– $
–
–
–
– $
–
–
68,962
514,853
583,815
Genius Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
Note 20: Subsequent Events
Pursuant to FASB ASC 855, Management has evaluated all events and transactions that occurred from December 31, 2013 through the
date of issuance of these financial statements. During this period, we did not have any significant subsequent events, except as disclosed
below:
On January 17, 2014, the Company entered into an exclusive long-term 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 will receive a total of $1,500,000, $750,000 of which was received during the
first quarter of 2014 with the remaining $750,000 due by January 17, 2015.
On February 24, 2014, the Company repaid a portion of the Member Advances to its Chief Executive Officer, Andrew Heyward, in
the amount of $100,000.
On February 27, 2014, William McDonough resigned from his position as a director of the Company. Mr. McDonough did not resign
due to any disagreement with the Company or its management regarding any matters relating to the Company's operations, policies or
practices.
On February 27, 2014, the Company’s Board of Directors appointed Anthony Thomopoulos as a director of the Company. Mr.
Thomopoulos has no family relationship with any of the executive officers or directors of the Company. There are no arrangements or
understandings between Mr. Thomopoulos and any other person pursuant to which he was appointed as a director of the Company.
On March 7, 2014, Jeanene Morgan resigned from her position as Chief Financial Officer of the Company.
On March 12, 2014, the Company appointed Richard Staves as its interim Chief Financial Officer. Mr. Staves previously served as the
Chief Financial Officer of A Squared Entertainment LLC, which was acquired by the Company on November 15, 2013, from January 2011 to
November 2011 and from June 2012 and November 2013. Mr. Staves has no family relationship with any of the executive officers or
directors of the Company. There are no arrangements or understandings between Mr. Staves and any other person pursuant to which he was
appointed as an officer of the Company.
On April 2, 2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and
outstanding common stock on a one-for-one hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory
Authority) on April 7, 2014. All common stock share and per share information in this Form 10K, including the accompanying consolidated
financial statements and notes thereto, have been adjusted to reflect retrospective application of the reverse split, unless otherwise indicated
Subsequent to December 31, 2013, the Company issued 102,858 shares of the Company’s common stock in a private placement to
certain investors at $3.50 per share. The Company received gross proceeds of $360,000. Additionally, the Company issued 8,143 shares of
common stock valued at $28,500, or $3.50 per share, as an extinguishment of an accounts payable balance for services rendered in relation to
the private placement.
F-35
Name
A Squared Entertainment LLC
Subsidiaries
State of Incorporation
Delaware
Exhibit 21.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Andrew Heyward certify that:
1. I have reviewed this Annual Report on Form 10-K of Genius Brand International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
April 15, 2014
By:
/s/ Andrew Heyward
Andrew Heyward
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard Staves, certify that:
1. I have reviewed this Annual Report on Form 10-K of Genius Brand International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
April 15, 2014
By:
/s/ Richard Staves
Richard Staves
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Genius Brand International, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew Heyward, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
April 15, 2014
By:
/s/ Andrew Heyward
Andrew Heyward
Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Genius Brand International, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard Staves, Interim Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
April 15, 2014
By:
/s/ Richard Staves
Richard Staves
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)