Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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.)
301 N. Canon Drive, Suite 305
Beverly Hills, CA 90210
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:
Title of each class
Name of Exchange where registered
Common Stock, par value $0.001 per share
The Nasdaq Capital Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None.
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). Yes 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. Yes o No x
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o
Accelerated filer
Smaller reporting company
Emerging growth company
o
x
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 registrant’s voting and non-voting common stock held by non-affiliates of the registrant as of June 30,
2017 (the last business day of the most recently completed second fiscal quarter) was approximately $16,713,372, computed by reference
to the last sale price of $3.42 for the common stock on the Nasdaq Capital Market reported for such date.
As of March 30, 2018, there were 8,202,794 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Genius Brands International, Inc.
Table of Contents
Page Number
PART I.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II.
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
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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CAUTIONARY NOTE REGARDING 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 thereof 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. These
statements include, among other things, statements regarding:
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our ability to generate revenue or achieve profitability;
our ability to obtain additional financing on acceptable terms, if at all;
fluctuations in the results of our operations from period to period;
general economic and financial conditions;
our ability to anticipate changes in popular culture, media and movies, fashion and technology;
competitive pressure from other distributors of content and within the retail market;
our reliance on and relationships with third-party production and animation studios;
our ability to market and advertise our products;
our reliance on third-parties to promote our products;
our ability to keep pace with technological advances;
performance of our information technology and storage systems;
a disruption or breach of our internal computer systems;
our ability to retain key personnel;
the impact of federal, state or local regulations on us or our vendors and licensees;
our ability to protect and defend against litigation, including intellectual property claims;
the volatility of our stock price;
the marketability of our stock;
our broad discretion to invest or spend the proceeds of our financings in ways with which our stockholders may not agree and may
have limited ability to influence; and
other risks and uncertainties, including those listed in Item 1A, “Risk Factors.”
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" in Item 1A. 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") and our electronic
filings with the SEC (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 SEC’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 on Form 10-K, 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.
Business.
Overview
PART I
Genius Brands International, Inc. (“we”, “us”, “our”, or the “Company”) is a global content and brand management company that creates
and licenses multimedia content. Led by industry veterans, we distribute our content in all formats as well as a broad range of consumer
products based on its characters. In the children's media sector, our portfolio features “content with a purpose” for toddlers to tweens, which
provides enrichment as well as entertainment including the award-winning Baby Genius; new preschool property Rainbow Rangers;
preschool property Llama Llama that debuted on Netflix; tween music-driven brand SpacePop; adventure comedy Thomas Edison's Secret
Lab® available on public broadcast stations and our Genius Brands Network on Comcast's Xfinity on Demand, Roku, AppleTV, and
Amazon Prime; Warren Buffett's Secret Millionaires Club, created with and starring iconic investor Warren Buffett. We are also
developing an all-new adult-themed animated series, Stan Lee's Cosmic Crusaders, with Stan Lee's Pow! Entertainment and The Hollywood
Reporter.
In addition to the wholly-owned or partially-owned properties listed above, we represent Llama Llama in the licensing and merchandising
space.
Recent Developments
January 2018 Private Placement
On January 8, 2018, we entered into a Securities Purchase Agreement with certain accredited investors pursuant to which we sold
approximately $1,800,000 of common stock and warrants to such investors (the “January 2018 Private Placement”). We issued and sold
warrants to purchase 592,000 shares of common stock at an exercise price of $3.00 per share. In addition, we issued to Chardan Capital
Markets, LLC, as placement agent, warrants to purchase 93,000 shares of common stock at an exercise price of $3.00 per share.
Our Products
Original Content
We own and produce original content that is meant to entertain and enrich toddlers to tweens as well as families. It is generally a three-year
cycle from the inception of an idea, through production of the content and development and distribution of a range of consumer products to
retail, creating an inevitable lag time between the creation of the intellectual property to the realization of economic benefit of those assets.
Our goal is to maintain a robust and diverse portfolio of brands, appealing to various interests and ages, featuring evergreen topics with
global appeal. Our portfolio of intellectual property can be licensed, re-licensed, and exploited for years to come, with revenue derived from
multiple sources and territories. Our portfolio of original content includes:
Content in Production
Rainbow Rangers: From Shane Morris, the writer of Frozen, and Rob Minkoff, the director of The Lion King, Rainbow Rangers is an
animated series about the adventures of seven magical girls from Kaleidoscopia, a fantastic land on the other side of the rainbow. The
Rangers serve as Earth’s guardians and first-responders. When there’s trouble for the people or animals of the Earth, the Rangers ride a
rainbow across the sky to save the day. We have partnered with Mattel Inc.’s Fisher Price Toys as the master toy partner for the new series,
and Viacom’s Nick Jr. has licensed the series for broadcast in the US. International broadcast agreements are currently being negotiated in
numerous territories.
Content in Development
Baby Genius: For more than ten years, Baby Genius has earned worldwide recognition for creating award-winning products for toddlers. Its
catalogue of 500 songs, 125 music videos, and toys features classic nursery rhymes, learning songs, classical music, holiday favorites and
more. Recognizing a need in the marketplace for established pre-school content, the Baby Genius channel was launched featuring the
award-winning collection of Baby Genius Videos along with third party content providers sharing the Genius Brands “Content with a
Purpose” message. The Baby Genius brand is synonymous with safe, enriching content for preschoolers and is being re-launched as a life
style brand incorporating a new website, content and consumer products designed with today’s family in mind.
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Stan Lee’s Cosmic Crusaders : Stan Lee’s Cosmic Crusaders is a co-production between us, Stan Lee’s POW! Entertainment, and The
Hollywood Reporter of an adult-themed animated series whose launch coincided with “Stan Lee’s 75 Years in Business” salute in The
Hollywood Reporter’s Comic-Con issue. Stan Lee’s Cosmic Crusaders is based on a concept by Stan Lee and written by Deadpool co-
creator Fabian Nicieza. With 52 eleven-minute episodes in development, the first four episodes premiered exclusively on THR.com with
one episode that aired during Comic-Con International 2016. Stan Lee’s Cosmic Crusaders is the first series to launch on THR.com and
will be promoted through The Hollywood Reporter’s YouTube channel, Facebook, Twitter and Instagram pages.
Already Released Content
Llama Llama: We completed production of fifteen half-hour animated episodes in 2017 which premiered on Netflix in early 2018. Llama
Llama’s creators include Oscar-winning director Rob Minkoff (The Lion King), director Saul Blinkoff (Doc McStuffins), showrunner Joe
Purdy, art director Ruben Aquino ( Frozen) and Emmy-winning producers Jane Startz and Andy Heyward. Based on the NY Times #1 best-
selling children’s books of the same name, the animated series centers on young Llama Llama’s first steps in growing up and facing
childhood milestones. Each episode is structured around a childhood milestone and a life lesson learned by Llama Llama and his friends,
told with a sense of humor, vitality, and understanding. The global licensing program was unveiled in June 2016 at the Licensing Expo held
in Las Vegas.
SpacePop: SpacePop is a music and fashion driven animated property that has garnered over 17 million views and over 63,000 subscribers
since its launch in May 2016. With 108 three-minute webisodes produced, SpacePop had a best-in-class production team which included
Steve Banks (head writer and story editor of Sponge Bob Square Pants) as content writer; Han Lee (Pink Fizz, Bobby Jack) for original
character designs; multiple Grammy Award-winning producer and music veteran Ron Fair (Fergie, Mary J. Blige, Black Eyed Peas,
Pussycat Dolls, Christina Aguilera and more), singer-songwriter Stefanie Fair (founding member of RCA’s girl group Wild Orchid with
Fergie) for the original SpacePop theme music; and veteran music producer and composer John Loeffler (Kidz Bop, Pokemon) for original
songs. SpacePop products range from apparel and accessories, to beauty, cosmetics, candy, books and music.
Thomas Edison’s Secret Lab : Thomas Edison’s Secret Lab is a STEM-based comedy adventure series by Emmy-nominated writer Steve
Banks (SpongeBob Square Pants), multi-Emmy Award-winning writer Jeffrey Scott ( Dragon Tales), and Emmy Award-winning producer
Mark Young (All Dogs Go To Heaven 2 ). The series includes 52 eleven-minute episodes as well as 52 ninety-second original music videos
produced by Grammy Award-winning producer Ron Fair. The animated series follows the adventures of Angie, a 12-year-old prodigy who,
along with her young science club, discovers Thomas Edison’s secret lab.
Warren Buffett’s Secret Millionaire’s Club : With 26 thirty-minute episodes and 26 four-minute webisodes, this animated series features
Warren Buffett who acts as a mentor to a group of entrepreneurial kids who have international adventures that lead them to encounter
neighborhood and community problems to solve. Warren Buffett’s Secret Millionaire’s Club empowers kids by helping them learn about
the business of life and the importance of developing healthy life habits at an early age.
Licensed Content
In addition to the wholly-owned or partially-owned properties listed above, we represent Llama Llama in the licensing and merchandising
space.
Genius Brands Network
Seeing a need for a destination devoted to providing "Content with a Purpose," we launched the Genius Brands Network comprised of the
Kid Genius Cartoon Network and Baby Genius TV. The network is distributed across multiple platforms including advertising video-on-
demand (“AVOD”), subscription video-on-demand (“SVOD”) and over-the-top (“OTT”) providing kids and parents a clear choice in
premium entertaining, enriching and engaging programming.
The Kid Genius Cartoon Network provides smart TV for kids. Our shows are designed for kids to tweens and anyone in between. Our Kid
Genius Cartoon Network exposes kids to new and intriguing subjects that stimulate their senses and imagination on a daily basis. Parents
will enjoy watching their kids be entertained with enriching and educational series. Featured series include Dino Squad, Thomas Edison's
Secret Lab, Inspector Gadget and more. The Kid Genius Cartoon Channel Plus was launched in September 2017 on Amazon Prime. Kid
Genius Cartoon Channel Plus is a subscription video-on-demand services available for $3.99 per month to the approximately 80 million
Amazon Prime members. The channel features a variety of owned and licensed content.
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Baby Genius TV provides enriching and entertaining content for toddlers through preschoolers. Toddlers to preschoolers learn lessons
through music and characters that ignite their imagination. Parents will feel safe knowing that their littles ones are enjoying the educational
content of our shows. Series include Baby Genius, Rainbow Valley Fire Department, The New Adventures of Madeline and more.
Distribution
Content
Today’s global marketplace and the manner in which content is consumed has evolved to a point where we believe there is only one viable
strategy, ubiquity. Kids today expect to be able to watch what they want whenever they want and wherever they want. As such, content
creators now must offer direct access on multiple fronts. This includes not only linear broadcast but also digital platforms. We have strong
ties to and actively solicit placement for our content from the largest linear broadcasters such as Nickelodeon, The Disney Channel, Cartoon
Network, Sprout, and PBS. Similarly, on the digital side, we are partnered with Comcast’s Xfinity platform as well as AppleTV, Roku,
Samsung TV, Amazon Fire, Amazon Prime, Netflix, and YouTube. We replicate this model of ubiquity around the world defining content
distribution strategies by market that blends the best of linear, VOD, and digital distribution.
Finally, we expanded our long term strategic partnership with Sony Pictures Home Entertainment from domestic to global in January 2017.
Consumer Products
A source of our revenue is our licensing and merchandising activities from our underlying intellectual property content. We work directly
licensing properties to a variety of manufacturers, wholesalers, and retailers. We currently have across all brands in excess of 65 licensees
and hundreds of licensed products in the market. Products bearing our marks can be found in a wide variety of retail distribution outlets
reaching consumers in retailers such as Wal-Mart, Target, Claire’s, Kohl’s, Best Buy, Hudson News, Barnes & Noble, Amazon.com and
many more. We often negotiate dedicated retail space on a direct basis with retailers that will include branded signage to give our brands
prominence and clear communication with the consumer. License agreements that we enter into often include financial guarantees and
commitments from the manufacturers guaranteeing a minimum stream of revenue for us. As licensed merchandise is sold at retail, these
advances and/or minimum guarantees can earn out at which point we could earn additional revenue.
Marketing
We believe that generating awareness and consumer interest in our brands requires a dedicated 360-degree approach to marketing which we
regularly deploy. Beyond the content creation and achieving distribution, consumers must become engaged with the content in all aspects of
their lives. Successful marketing campaigns for our brands have included utilizing influencers (individuals with a strong, existing social
media presence who drive awareness of our brands to their followers) and influencer marketing, participating in cross promotional
consumer product campaigns as well out of home advertising campaigns within theme parks and malls. Our Genius Brands Network, with
distribution in over 60 million households, provides reach for cross promotion of content and consumer products. We also deploy digital
and print advertising to support the brands as well as work with external public relations professionals to promote our efforts to both
consumer and trade. We regularly initiate grass roots marketing campaigns and strategic partnerships with brands that align and offer value
to us.
Competition
We compete against other creators of children’s content including Disney, Nickelodeon, Cartoon Network, and Sesame Street as well as
other small and large creators. In the crowded children’s entertainment space, we compete with these other creators for both content
distribution across linear, VOD, and digital platforms as well as retail shelf space for our licensed products. To compete, we are focused on
our strategic positioning of “content with a purpose” which we believe is a point of differentiation embraced by the industry, as well as
parents and educators. Additionally, the Kid Genius Cartoon Network, Baby Genius TV, and Kid Genius Cartoon Channel Plus enables us
to increase the awareness of our brands through an owned platform.
Customers and Licensees
Typically, our business is not reliant on one or a few major customers; however, in 2017, over 80% of our revenue was attributable to the
recognition of revenues earned from Netflix upon the delivery of the first season of Llama Llama. As of December 31, 2017, we had
partnered with over 65 consumer products licensees going to market with nearly 300 stock keeping units (“SKU”). As of the same date, we
licensed our content to over 40 broadcasters in over 90 territories globally as well as a number of VOD and online platforms that have a
global reach. This broad cross-section of customers includes companies such as Comcast, Netflix, Sony, YouTube, Mattel, Target, Kohls,
Claire’s, Penguin Publishing, Manhattan Toys, Roku, Apple TV, Amazon, Google, Bertelsmann Music Group, Discovery International, and
others both domestically and internationally.
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Government Regulation
The FCC requires broadcast networks to air a required number of hours of Educational and Informational content (E/I). We are subject to
online distribution regulations, namely the FTC’s Children’s Online Privacy Protection Act (COPPA) which regulates the collection of
information of children 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 some of 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 states and other countries in which we plan to market our
products. Although we do not manufacture and may not directly distribute 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 which include our corporate website located at www.gnusbrands.com, as well as www.spacepopgirls.com,
www.kidgeniustv.com, www.babygenius.com, www.smckids.com, www.slam7.com, and www.edisonsecretlab.com. These websites are
subject to laws and regulations directly applicable to Internet communications and commerce, which is a currently developing area of the
law. The United States has enacted Internet laws related to 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, we are not significantly impacted by federal, state and local
environmental laws and do not have significant costs associated with compliance with such laws and regulations.
Employees
As of December 31, 2017, we had 19 full-time equivalent employees and an additional seven temporary, contracted part-time or full-time
equivalents in certain functions, such as legal, accounting and production management. We employ on an outsourced, as-needed basis,
contractors in the fields of investor relations, public relations and production.
Intellectual Property
As of December 31, 2017, we own the following properties and related trademarks: Secret Millionaires Club, Thomas Edison’s Secret
Lab, “Baby Genius”, “Kid Genius”, “Wee Worship”, “A Squared,” “Kaflooey,” and “Ready, Play, Learn” as well as several other names
and trademarks on characters that had been developed for our content and brands. Additionally, we have trademark applications pending
for Rainbow Rangers and SpacePop.
As of December 31, 2017, we hold 14 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.
As of December 31, 2017, we also held 96 motion picture, 13 sound recording and one literary work copyrights related to our video, music
and written work products.
We have a two-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. Stan Lee Comics, LLC is the owner of
the Stan Lee’s Mighty 7 and the Stan Lee’s Cosmic Crusaders properties.
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We have 50/50 ownership agreements with the following partners and their related brands: Martha Stewart’s Martha & Friends; and Gisele
Bündchen’s Gisele & the Green Team.
In addition to the wholly-owned or partially-owned properties listed above, we represent Llama Llama in the licensing and merchandising
space.
Company Information
We were incorporated in California on January 3, 2006 and reincorporated in Nevada in October 2011. We commenced operations in
January 2006, assuming all of the rights and obligations of our then Chief Executive Officer, under an Asset Purchase Agreement between
us and Genius Products, Inc., in which we obtained all rights, copyrights, and trademarks to the brands “Baby Genius,” “Kid Genius,” “123
Favorite Music” and “Wee Worship,” and all then existing productions under those titles. In October 2011, we (i) changed our domicile to
Nevada from California, and (ii) changed our name to Genius Brands International, Inc. from Pacific Entertainment Corporation (the
“Reincorporation”). In connection with the Reincorporation, we changed our trading symbol 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 the sole member of A Squared (the “Parent Member”), and A2E Acquisition LLC, its newly formed, wholly-owned Delaware
subsidiary (“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which
occurred concurrently with entering into the Merger Agreement, the Acquisition Sub merged with and into A Squared, and A Squared, as
the surviving entity, became our wholly-owned subsidiary. As a result of the Merger, we acquired the business and operations of A
Squared.
Our principal executive offices are located at 301 North Canon Drive, Suite 305, Beverly Hills, California 90210. Our telephone number is
310-273-4222. We maintain an Internet website at www.gnusbrands.com. The information contained on, connected to or that can be
accessed via our website is not part of this prospectus.
Item 1A.
Risk Factors.
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding any
statement in this Form 10-K or elsewhere. The following information should be read in conjunction with Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes
beginning on Page F-1 of this Form 10-K.
Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown,
including but not limited to those described below. Any one or more of such factors could directly or indirectly cause our actual results of
operations and financial condition to vary materially from past or anticipated future results of operations and financial condition. Any of
these factors, in whole or in part, could materially and adversely affect our business, financial condition, results of operations and stock
price.
Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance
should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results
or trends in future periods.
RISKS RELATING TO OUR BUSINESS
We have incurred net losses since inception.
We have a history of operating losses and incurred net losses in each fiscal quarter since our inception. For the year ended December 31,
2017, we generated net revenues of $5,335,728 and incurred a net loss of $4,908,736, while for the previous year, we generated net
revenue of $866,875 and incurred a net loss of $6,213,135. 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.
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We will need to generate additional revenue and/or reduce costs to achieve profitability. We are beginning to generate revenues derived
from our existing properties, properties in production, and new brands being introduced into the marketplace. However, the ability to
sustain these revenues and generate significant additional revenues or achieve profitability will depend upon numerous factors some of
which are outside of our control.
We will need additional financing to continue our operations. If we are unable to obtain additional financing on acceptable terms,
we will need to curtail or cease our development plans and operations.
As of December 31, 2017, we had approximately $7,498,072 of available cash, cash equivalents, and restricted cash. Additional funds may
be required to fund operations which could be raised through the issuance of equity securities and/or debt financing. There is no assurance
that any type of financing on terms acceptable to us will be available or will otherwise occur. Debt financing must be repaid regardless of
whether we generate revenues or cash flows from operations and may be secured by substantially all of our assets. Any equity financing or
debt financing that requires the issuance of warrants or other equity securities to the lender would cause the percentage ownership by our
current stockholders to be diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights,
preferences or privileges senior to those of existing stockholders. Any equity financing at a price below the then current conversion price of
our Series A Convertible Preferred Stock will result in an adjustment to the conversion ratio, applicable to such securities, resulting in the
issuance of additional shares of our common stock upon the conversion of our Series A Convertible Preferred Stock, which would further
dilute our other stockholders.
If we are not able to obtain sufficient capital, we may then be forced to limit the scope of our operations.
We expect that as our business continues to evolve 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 could have a material 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 could be forced to cease our
activities and dissolve our company. In such an event, we will need to satisfy various creditors and other claimants, severance, lease
termination and other dissolution-related obligations.
Our revenues and results of operations may fluctuate from period to period.
Cash flow and projections for any entertainment company producing original content can be expected to fluctuate until the animated
content and ancillary consumer products are in the market and could fluctuate thereafter even when the content and products are in the
marketplace. There is significant lead time in developing and producing animated content before that content is in the marketplace.
Unanticipated delays in entertainment production can delay the release of the content into the marketplace. Structured retail windows that
dictate when new products can be introduced at retail are also out of our control. While we believe that we have mitigated this in part by
creating a slate of properties at various stages of development or production as well as representing certain established brands which
contribute immediately to cash flow, any delays in the production and release of our content and products or any changes in the preferences
of our customers could result in lower than anticipated cash flows.
As with our cash flows, our revenues and results of operations depend significantly upon the appeal of our content to our customers, the
timing of 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 from period to period. The results of one period may not be indicative of the results of
any future period. 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.
Production cost will be amortized according to the individual film forecasting methodology. 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, we would be required to adjust amortization of related production
costs. These adjustments would adversely impact our business, operating results and financial condition.
6
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
our products. In addition, an increase in price levels generally, or in price levels in a particular sector, could result in a shift in consumer
demand away from the animated content and consumer products we offer, which could also decrease our revenues, increase our costs, or
both.
Inaccurately anticipating changes and trends in popular culture, media and movies, fashion, or technology can negatively affect our
sales.
While trends in the toddler to tween sector change quickly, we respond to trends and developments by modifying, refreshing, extending,
and expanding our product offerings on an on-going basis. However, we operate in extremely competitive industries where the ultimate
appeal and popularity of content and products targeted to this sector can be difficult to predict. We believe our focus on “content with a
purpose” serves an underrepresented area of the toddler to tween market; however, if the interest of our audience trends away from our
current properties toward other offerings based on current media, movies, animated content or 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 face competition from a variety of retailers that sell similar merchandise and have better resources than we do.
The industries in which we operate are 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.
Indirectly through our licensing arrangements, we compete for retailers as well as other outlets for the sale and promotion of our licensed
merchandise. Our primary competition comes from competitors such as The Walt Disney Company, Nickelodeon Studios, and the Cartoon
Network.
We have sought a competitive advantage by providing “content with a purpose” which are both entertaining and enriching for children and
offer differentiated value that parents seek in making purchasing decisions for their children. While we do not believe that this value
proposition is specifically offered by our competitors, our competitors have greater financial resources and more developed marketing
channels than we do which could impact our ability, through our licensees, to secure shelf space thereby decreasing our revenues or
affecting our profitability and results of operations.
The production of our animated content is accomplished through third-party production and animation studios around the world,
and any failure of these third-parties could negatively impact our business.
As part of our business model to manage cash flows, we have partnered with a number of third-party production and animation studios
around the world for the production of our new content in which these partners fund the production of the content in exchange for a portion
of revenues generated in certain territories. We are reliant on our partners to produce and deliver the content on a timely basis meeting the
predetermined specifications for that product. The delivery of inferior content could result in additional expenditures by us to correct any
problems to ensure marketability. Further, delays in the delivery of the finished content to us could result in our failure to deliver the
product to broadcasters to which it has been pre-licensed. While we believe we have mitigated this risk by aligning the economic interests
of our partners with ours and managing the production process remotely on a daily basis, any failures or delays from our production
partners could negatively affect our profitability.
If we fail to honor our obligations under the terms of our third-party supplier or loan agreements, our business may be adversely
affected.
On January 10, 2017, we entered into an amendment of our home entertainment Distribution Agreement with Sony pursuant to which,
among other things, Sony agreed to pay $1,489,583 which was owed and payable by us to DADC for certain disk manufacturing and
replication services, thereby terminating the agreement with DADC.
7
In connection with such transaction, we (i) granted Sony home entertainment rights in territories worldwide in addition to the United States
and Canada and (ii) issued Sony 301,231 shares of our common stock at $4.945 per share, Sony’s exclusive territory for exercising its home
entertainment distribution rights under the distribution agreement was extended from the United States and Canada to worldwide, and the
amount of advances subject to recoupment by Sony out of royalty payments that would otherwise be due to us under the Distribution
Agreement was increased by the amount of the payment to DADC. Future cash flow from the distributed products under the distribution
agreement, if any, will be impacted by the additional recoupment obligation and additional rights granted. In connection with the above
issuance of our shares, we entered into a subscription agreement with Sony, effective as of January 17, 2017.
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 licensees 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.
The failure of others 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 properties. In addition, although we may have
agreements for the advertising and promotion of our products through our licensees, we will not be in direct control of those marketing
efforts and those efforts may not be done in a manner that will maximize sales of our products and may have a material adverse effect on
our business and operations.
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, continue 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. As it is also impossible to predict the overall effect these factors could have on
our ability to compete effectively in a changing market, if we are not able to keep pace with these technological advances, our revenues,
profitability and results from operations may be materially adversely affected.
Failure in our information technology and storage systems could significantly disrupt the operation of our business.
Our ability to execute our business plan and maintain operations depends on the continued and uninterrupted performance of our
information technology (“IT”) systems. IT systems are vulnerable to risks and damages from a variety of sources, including
telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up
measures, some of our and our vendors’ servers are potentially vulnerable to physical or electronic break-ins, including cyber-attacks,
computer viruses and similar disruptive problems. These events could lead to the unauthorized access, disclosure and use of non-public
information. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate
from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implement
adequate preventative measures. If our computer systems are compromised, we could be subject to fines, damages, litigation and
enforcement actions, and we could lose trade secrets, the occurrence of which could harm our business. Despite precautionary measures to
prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate
and maintain data could adversely affect our ability to operate our business.
Our internal computer systems, or those of our collaborators or other contractors or consultants, may fail or suffer security
breaches, which could result in a material disruption and cause our business and reputation to suffer.
In the ordinary course of business, our internal computer systems and those of our current and any future collaborators and other
contractors or consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and
telecommunication and electrical failures. While we do not believe that we have experienced any such material system failure, accident or
security breach to date, if such an event were to occur and cause interruptions in our operations, it could adversely affect our business
operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions. Any such access,
disclosure or other loss of such information could result in legal claims or proceedings and damage our reputation.
8
Loss of key personnel may adversely affect our business.
Our success greatly depends on the performance of our executive management team, including Andy Heyward, our Chief Executive
Officer. 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 a substantial interest in our voting stock.
As of December 31, 2017, our management team and Board of Directors beneficially own or control (including conversions, options or
warrants exercisable or convertible within 60 days) a combined 2,528,225, or 28.9%, of our shares currently outstanding (including
conversions, options or warrants exercisable or convertible within 60 days). 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. Additionally, management
has the ability to control any proposals submitted to shareholders, including corporate actions and board changes which may not be in
accordance with the votes of other shareholders.
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 vendors and licensees may be subject to various laws and government regulations, violation of which could subject these
parties to sanctions which could lead to increased costs or the interruption of normal business operations that could negatively
impact our financial condition and results of operations.
Our vendors and licensees may operate in a highly regulated environment in the US and international markets. Federal, state and local
governmental entities and foreign governments may regulate aspects of their businesses, including the production or distribution of our
content or products. These regulations may include accounting standards, taxation requirements (including changes in applicable income
tax rates, 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 believe our vendors and licensees take all the steps necessary to comply with these laws and regulations,
there can be no assurance that they are compliant or will be in compliance in the future. Failure to comply could result in monetary
liabilities and other sanctions which could increase our costs or decrease our revenue resulting in a negative impact on our business,
financial condition and results of operations.
Protecting and defending against intellectual property claims may have a material adverse effect on our business.
Our ability to compete in the animated content and 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, or no, practical protection in some jurisdictions. It may be possible for
unauthorized third parties to copy and distribute our productions or portions of our productions. In addition, although we own most of the
music and intellectual property included in our products, there are some titles which the music or other elements are 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. If litigation is 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.
RISKS RELATING TO OUR COMMON STOCK
Our stock price may be subject to substantial volatility, and stockholders may lose all or a substantial part of their investment.
Our common stock currently trades on the Nasdaq Capital Market. There is limited public float, and trading volume historically has been
low and sporadic. As a result, the market price for our common stock may not necessarily be a reliable indicator of our fair market value.
The price at which our common stock trades may fluctuate as a result of a number of factors, including the number of shares available for
sale in the market, quarterly variations in our operating results, actual or anticipated announcements of new releases by us or competitors,
the gain or loss of significant customers, changes in the estimates of our operating performance, market conditions in our industry and the
economy as a whole.
9
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.
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 us to issue up to 10,000,000 shares of blank check preferred stock. Any additional preferred stock
that we issue in the future 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 our company. Although we have no present intention to issue any additional shares of
authorized preferred stock, there can be no assurance that we will not do so in the future.
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 our 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 our Board of
Directors. If we do not pay dividends, our common stock may be less valuable because the return on investment will only occur if its stock
price appreciates.
Our outstanding Series A Convertible Preferred Stock contains anti-dilution provisions that, if triggered, could cause substantial
dilution to our then-existing common stock holders which could adversely affect our stock price.
Our outstanding Series A Convertible Preferred Stock contains anti-dilution provisions to benefit the holders thereof. As a result, if we, in
the future, issue common stock or grant any rights to purchase our common stock or other securities convertible into our common stock for
a per share price less than the then existing conversion price of the Series A Convertible Preferred Stock, an adjustment to the then current
conversion price would occur. This reduction in the conversion price could result in substantial dilution to our then-existing common
stockholders as well as give rise to a beneficial conversion feature reported on our statement of operations. Either or both of which could
adversely affect the price of our common stock.
10
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to
decline.
If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period
under Rule 144, or shares issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to
as an “overhang” and, in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or
not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity
or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
In general, under Rule 144, a non-affiliated person who has held restricted shares of our common stock for a period of six months may sell
into the market all of their shares, subject to us being current in our periodic reports filed with the Commission.
As of March 30, 2018, approximately 5,264,959 shares of common stock of the 8,202,794 shares of common stock issued and outstanding
are free trading. Additionally, as of March 30, 2018, there are 1,176,667 shares of common stock underlying the Series A Convertible
Preferred Stock that could be sold pursuant to Rule 144. As of the same date, there are 2,238,359 shares of common stock underlying
outstanding warrants that could be sold pursuant to Rule 144 to the extent permitted by any applicable vesting requirements as well as
1,861,030 shares of common stock underlying registered warrants. Lastly, as of March 30, 2018, there are 1,294,045 shares of common
stock underlying outstanding options granted and 372,622 shares reserved for issuance under our Genius Brands International, Inc.
Amended 2015 Incentive Plan, all of which are unregistered but will become eligible for sale in the public market to the extent permitted by
any applicable vesting requirements and Rule 144 under the Securities Act.
Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from
influencing significant corporate decisions and depress our stock price.
Based on the number of shares outstanding as of December 31, 2017, our officers, directors and stockholders who hold at least 5% of our
stock beneficially own a combined total of approximately 54.2% of our outstanding common stock, including shares of common stock
subject to preferred shares, stock options, and warrants that are currently convertible or exercisable or will be convertible or exercisable
within 60 days after December 31, 2017. If these officers, directors, and principal stockholders or a group of our principal stockholders act
together, they will be able to exert a significant degree of influence over our management and affairs and control matters requiring
stockholder approval, including the election of directors and approval of mergers, business combinations or other significant transactions.
The interests of one or more of these stockholders may not always coincide with our interests or the interests of other stockholders. For
instance, officers, directors, and principal stockholders, acting together, could cause us to enter into transactions or agreements that we
would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control
of our company otherwise favored by our other stockholders.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
We lease approximately 3,251 square feet of general office space at 301 North Canon Drive, Suite 305, Beverly Hills, CA 90210 pursuant
to a 35-month sub-lease that commenced on May 1, 2015. We pay rent of approximately $136,542 annually, subject to annual escalations
of 3%.
On February 6, 2018, we entered into lease for approximately 6,969 square feet of general office space at 131 South Rodeo Drive, Suite
250, Beverly Hills, CA 90212 pursuant to a 91-month lease that commences on May 25, 2018. We will pay rent of approximately $364,130
annually, subject to annual escalations of 3.5%.
Item 3.
Legal Proceedings.
We are not party to any litigation in any court, and management is not aware of any contemplated proceeding by any governmental
authority against us.
Item 4.
Mine Safety Disclosures.
Not applicable.
11
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the Nasdaq Capital Market under the symbol “GNUS” on November 21, 2016. Prior to that, our
common stock traded on the OTCQB of the OTC Markets Group Inc. under the same symbol.
The table below sets forth (i) for the periods during which our Company was quoted on the OTCQB, the high and low bid prices for our
common stock as reported on the OTCQB during the periods indicated, and (ii) for the periods during which our Company has been listed
on the Nasdaq Capital Market, the high and low closing prices for our common stock as reported by the Nasdaq Capital Market for the
periods indicated.
The quotations below, as provided by OTC Markets Group, Inc., reflect inter-dealer prices and do not include retail markup, markdown or
commissions. In addition, these quotations may not necessarily represent actual transactions. The bid quotations and sales prices reflect a
one-for-three reverse stock split we effected on November 9, 2016.
Period (Listed on The Nasdaq Capital Market)
November 21, 2016 through December 31, 2016
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
Period (Quoted on OTCQB)
First Quarter 2016
Second Quarter 2016
Third Quarter 2016
October 1, 2016 through November 20, 2016
Quarter High Quarter Low
5.20
7.05 $
$
3.67
5.73 $
$
3.40
4.99 $
$
3.00
4.12 $
$
2.43
3.77 $
$
Quarter High Quarter Low
1.80
3.75 $
$
3.69
7.14 $
$
5.55
6.51 $
$
5.34
7.13 $
$
The last reported closing price for our common stock on the Nasdaq Capital Market on March 30, 2018 was $2.74 per share.
Stockholders
As of March 30, 2018, the number of shares of common stock outstanding was 8,202,794. As of March 30, 2018, there were approximately
207 record holders of our shares of issued and outstanding common stock. This number does not include persons or entities that hold their
stock in nominee or “street” name through various brokerage firms.
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.
12
Equity Compensation Plan Information
The following table reflects, as of December 31, 2017, compensation plans pursuant to which we are 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)
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
8.14
–
8.14
1,294,045 $
–
1,294,045 $
(c)
Number of
securities
remaining
available for future
issuance under
equity
compensation
plans (excluding
securities reflected
in column (a))
372,622
–
372,622
Plan category
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Total
Issuances of Unregistered Sales of Securities
During the year ended December 31, 2017, the Company issued 455,000 shares of common stock pursuant to the conversion of 1,365
shares of Series A Convertible Preferred Stock at a conversion price of $3.00. These securities were issued solely to “accredited investors”
in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act, as amended.
13
Item 6.
Selected Financial Data
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this
Item.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in
conjunction with our audited financial statements and related notes for the years ended December 31, 2017 and 2016. Certain statements
made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases
and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and are subject to the safe harbor created thereby. Forward looking statements reflect intent, belief, current expectations,
estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us.
Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these
words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking
statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not
guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our
actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.
These differences can arise as a result of the risks described above in the section entitled “Item 1A. Risk Factors” and elsewhere in this
report, as well as other factors that may affect our business, results of operations, or financial condition. Forward looking statements in
this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the
date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking
statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure
you that the forward-looking statements contained in this report will, in fact, transpire.
Overview
The management’s discussion and analysis is based on our financial statements, which have been prepared in accordance with 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
Genius Brands International, Inc. (“we”, “us”, “our”, or the “Company”) is a global content and brand management company that creates
and licenses multimedia content. Led by industry veterans, we distribute our content in all formats as well as a broad range of consumer
products based on the characters that we have created or licensed. In the children's media sector, our portfolio features “content with a
purpose” for toddlers to tweens, which provides enrichment as well as entertainment including the award-winning Baby Genius; new
preschool property Rainbow Rangers; preschool property Llama Llama that debuted on Netflix; tween music-driven brand SpacePop;
adventure comedy Thomas Edison's Secret Lab® available on public broadcast stations and our Genius Brands Network on Comcast's
Xfinity on Demand, Roku, AppleTV, and Amazon Prime; Warren Buffett's Secret Millionaires Club, created with and starring iconic
investor Warren Buffett. We are also developing an all-new adult-themed animated series, Stan Lee's Cosmic Crusaders, with Stan Lee's
Pow! Entertainment and The Hollywood Reporter.
14
In addition to the wholly-owned or partially-owned properties listed above, we represent Llama Llama in the licensing and merchandising
space.
On November 4, 2016, we effected a reverse stock split on a one-to-three basis. The reverse stock split became effective on November 9,
2016. The reverse stock split was implemented to facilitate our successful uplisting on the Nasdaq Capital Market. Unless otherwise noted,
all share and per share data give effect to such reverse stock split of our common stock.
Recent Developments
January 2018 Private Placement
On January 8, 2018, we entered into a Securities Purchase Agreement with certain accredited investors pursuant to which we sold
approximately $1,800,000 of common stock and warrants to such investors (the “January 2018 Private Placement”). We issued and sold
warrants to purchase 592,000 shares of common stock at an exercise price of $3.00 per share. In addition, we issued to Chardan Capital
Markets, LLC, as placement agent, warrants to purchase 93,000 shares of common stock at an exercise price of $3.00 per share.
Results of Operations
Years Ended December 31, 2017 and 2016
Our summary results for the years ended December 31, 2017 and 2016 are below.
Revenues
Television & Home Entertainment
Licensing & Royalties
Genius Brands Network
Product Sales
Total Revenue
December 31,
2017
4,815,491 $
472,134
38,779
9,324
5,335,728 $
$
$
December 31,
2016
Change
% Change
356,150 $
463,213
33,644
13,868
866,875 $
4,459,341
8,921
5,135
(4,544)
4,468,853
1,252%
2%
15%
(33)%
516%
Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television, VOD, or SVOD in
domestic and international markets and the sale of DVDs for home entertainment through our partners. Fluctuations in Television & Home
Entertainment revenue occur period over period based on the achievement of revenue recognition criteria such as the start of a license
period and the delivery of the content to the customer. During the year ended December 31, 2017 compared to December 31, 2016,
Television & Home Entertainment revenue increased $4,459,341 or 1252% due to the delivery of Llama Llama to Netflix in December
2017 without comparable activity in the prior period.
Licensing and royalty revenue includes items for which we license the rights to our copyrights and trademarks of our brands and those of
the brands for which we act as a licensing agent. During the year ended December 31, 2017 compared to December 31, 2016, this category
increased $8,921 or 2% primarily due to increases in revenues from our SpacePop property.
The Genius Brands Network generates revenue in the form of either flat rate promotions, advertising impressions served, or our share of
subscriptions to our channels. Revenues from the Genius Brands Network increased 15% over the prior year as the Network’s household
reach grew thus increasing the number of impressions served as well as the introduction of the SVOD platform on Amazon Prime.
Product sales represent physical products in which we hold intellectual property rights such as trademarks and copyrights to the characters
and which are manufactured and sold by us directly. During the year ended December 31, 2017, product sales associated with Warren
Buffett’s Secret Millionaire Club decreased by $4,544 (33%) as a result of a different product offering and price point as compared to that
period in the prior year.
Expenses
Marketing and Sales
Direct Operating Costs
General and Administrative
Total Operating Expenses
December 31,
2017
$
$
662,373 $
4,257,427
5,329,718
10,249,518 $
December 31,
2016
1,035,128 $
279,217
6,017,391
7,331,736 $
Change
% Change
(372,755)
3,978,210
(687,673)
2,917,782
(36)%
1,425%
(11)%
40%
15
Marketing and sales expenses decreased $372,755 for the year ended December 31, 2017 compared to the prior year period primarily due to
modest decreases in spending related to sponsorships and promotions pursuant to our SpacePop marketing plan as well as fees paid to a
consultant for execution of a distribution contract in the prior period without similar activity in the current period.
Direct operating costs include costs of our product sales, non-capitalizable film costs, film and television cost amortization expense, and
participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other
creative talent with which we are obligated to share net profits of the properties on which they have rendered services. Increases in direct
operating costs in the year ended December 31, 2017 compared to the prior period reflect increases in film amortization expense,
participation expense, and dubbing costs related to the delivery of Llama Llama to Netflix in the fourth quarter of 2017.
General and administrative expenses consist primarily of salaries, employee benefits, share-based compensation related to stock options,
insurances, rent, depreciation and amortization as well as other professional fees related to finance, accounting, legal and investor relations.
General and administrative costs for the year ended December 31, 2017, decreased $687,673 compared to the same period in 2016. This
change resulted from decreases in share-based compensation expense of $917,839 offset by increases in professional fees of $158,809,
salaries and wages of $71,157, and bad debt expense of $66,502. Fluctuations in other general and administrative expenses comprise the
balance of the variance.
Liquidity and Capital Resources
Working Capital
As of December 31, 2017, we had current assets of $10,834,926, including cash, cash equivalents, and restricted cash of $7,498,072, and
current liabilities of $3,718,647, including certain trade payables of $925,000 of which we dispute the claim, resulting in working capital of
$7,116,279, compared to a working capital deficit of $479,404 as of December 31, 2016.
Increases in working capital were the result of three transactions:
· On January 10, 2017, we entered into an amendment of our home entertainment distribution agreement with Sony pursuant to
which, among other things, Sony paid DADC $1,489,583 which was the total sum owed and payable by us to DADC.
· On February 9, 2017, we entered into a private transaction with certain of our existing warrant holders for which we received net
proceeds of $3,401,924, after deducting the placement agent fee and related offering expenses, from the exercise of the original
warrants held by such warrant holders (the “Private Transaction”). In connection with such transaction, we issued warrants to
purchase an aggregate of 799,991 shares of our common stock with and exercise price of $3.30 per share and warrants to purchase
an aggregate of 371,699 shares of our common stock with an exercise price of $5.30 per share.
· On October 3, 2017, we sold, in a registered direct offering, 1,647,691 shares of common stock at an offering price of $3.90 per
share and, in a concurrent private placement, warrants to purchase an aggregate of 1,647,691 shares of common stock for net
proceeds of approximately $5,699,534 after deducting the placement agent fee and related offering expenses (the “October 2017
Registered Direct Offering”).
Credit Facility
On August 8, 2016, Llama Productions LLC, our wholly-owned subsidiary, closed a $5,275,000 multiple draw-down, secured, non-
recourse, non-revolving credit facility (the “Facility”) with Bank Leumi USA to produce our animated series Llama Llama (the “Series”).
The Series is configured as fifteen half-hour episodes comprised of thirty 11-minute programs that were delivered to Netflix in the fourth
quarter of 2017. The Facility is secured by the license fees we will receive from Netflix for the delivery of the Series as well as our
copyright in the Series. The Facility has a term of 40 months and has an interest rate of either Prime plus 1% or one, three, or six-month
LIBOR plus 3.25%. As a condition of the loan agreement with Bank Leumi, we deposited $1,000,000 into a cash account to be used solely
for the production of the series. During the fourth quarter of 2017, the Facility was reduced from $5,275,000 to $4,843,416 and a portion of
the collateral was released to the Company leaving $568,673 in restricted cash as of December 31, 2017.
Comparison of Cash Flows for the Years Ended December 31, 2017 and 2016
Our total cash, cash equivalents, and restricted cash were $7,498,072 and $2,887,921 at December 31, 2017 and 2016, respectively.
Cash used in operations
Cash used in investing activities
Cash provided by financing activities
Increase (decrease) in cash
December 31,
2017
(7,153,312) $
(140,751)
11,904,214
4,610,151 $
December 31,
2016
(3,716,277) $
(11,494)
1,428,072
(2,299,699) $
$
$
Change
% Change
(3,437,035)
(129,257)
10,476,142
6,909,850
(92)%
(1,125)%
734%
300%
16
During the year ended December 31, 2017, our primary sources of cash were $3,401,924 in net proceeds from the Private Transaction,
$5,699,534 in net proceeds from the October 2017 Registered Direct Offering, and $2,802,756 in net proceeds from the Llama Llama
production facility. During the comparable period in 2016, our primary source of cash was the $2,000,000 advance from the Sony
Distribution Agreement as well as $1,318,072 in net proceeds from the Llama Llama production facility. During both periods, these funds
were primarily used to fund operations including the continued investment in our film and television assets as well as marketing support for
our brands.
Operating Activities
Cash used in operating activities for the year ended December 31, 2017 was $7,186,870 as compared to cash used in operating activities of
$3,716,277 during the prior period. The use of cash in the current period is based on the operating results discussed above as well as net
investments in film and television costs of $2,825,426 related to the development and production of Rainbow Rangers, Llama Llama, and
SpacePop. The cash used in operating activities in the prior period resulted primarily from the $2,000,000 advance from the Sony
Distribution Agreement offset by our operating results and increases in film and television costs of $1,390,450 related to the production of
Llama Llama and SpacePop.
Investing Activities
Cash used in investing activities for the year ended December 31, 2017 was $107,193 for the enhancement of our information technology
infrastructure as well as redesigns of our corporate websites as compared to a use of $11,494 during the comparable period for the
development of certain intangible and fixed assets.
Financing Activities
Cash generated from financing activities for the year ended December 31, 2017 was $11,904,214 as compared to $1,428,072 generated in
the comparable period in 2016. During the year ended December 31, 2017, the sources of cash generated from financing activities were
$3,401,924 in net proceeds from the Private Transaction, $5,699,534 in net proceeds from the October 2017 Registered Direct Offering,
and $2,802,756 in net proceeds from the Llama Llama production facility. During the year ended December 31, 2016, cash generated from
financing activities included $110,000 from the exercise of certain warrants outstanding as well as $1,318,072 in net proceeds from the
Llama Llama production facility.
Capital Expenditures
As of December 31, 2017, we do not have any material commitments for capital expenditures.
Critical Accounting Policies
Our accounting policies are described in the notes to the financial statements. Below is a summary of the critical accounting policies,
among others, that management believes involve significant judgments and estimates used in the preparation of its financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Genius Brands International, Inc., its wholly-owned
subsidiaries A Squared and Llama Productions as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”). All significant inter-
company balances and transactions have been eliminated in consolidation.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted
for by the purchase method. In accordance with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are
presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if
indicators of impairment arise. We complete the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each
fiscal year. To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we
have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted cash
flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment regarding
the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of the fair market
value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible assets in future periods.
Other intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured
based on fair value. In accordance with FASB ASC 350 Intangible Assets, the costs of new product development and significant
improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
Annual amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
17
Film and Television Costs
We capitalize production costs for episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets -
Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue based on the initial market
revenue evidenced by a firm commitment over the period of commitment. We expense all capitalized costs that exceed the initial market
firm commitment revenue in the period of delivery of the episodes.
We capitalize production costs for films produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs.
Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the
relative fair value of the film(s) delivered and recognized as revenue. We evaluate our capitalized production costs annually and limit
recorded amounts by our ability to recover such costs through expected future sales.
Additionally, for both episodic series and films, from time to time, we develop additional content, improved animation and bonus
songs/features for our existing content. After the initial release of the film or episodic series, the costs of significant improvement to
existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
We recognize revenue in accordance with FASB ASC 926-605 Entertainment-Films - Revenue Recognition. Accordingly, we recognize
revenue when (i) persuasive evidence of a sale with a 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.
Our licensing and royalty revenue represents revenue generated from license agreements that are held in conjunction with third parties that
are responsible for collecting fees due and remitting to us our share after expenses. Revenue from licensed products is recognized when
realized or realizable based on royalty reporting received from licensees. Licensing income that we recognize as an agent is in accordance
with FASB ASC 605-45 Revenue Recognition - Principal Agent. Accordingly, our revenue is our gross billings to our customers less the
amounts we pay to suppliers for their products and services.
We sell advertising on our Genius Brands Network in the form of either flat rate promotions or impressions served. For flat rate promotions
with a fixed term, we recognize revenue when all five revenue recognition criteria under FASB ASC 605 are met. For impressions served,
we deliver a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM per
impression. Impressions served are reported to us on a monthly basis, and revenue is reported in the month the impressions are served.
We recognize revenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer
to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for
future performance to directly bring about the resale of the product by the buyer as required by FASB ASC 605 Revenue Recognition.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
18
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU
2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the
transfer of non-financial assets unless those contracts are within the scope of other standards (e.g. insurance contracts). This ASU will
supersede all revenue recognition requirements in Topic 605, Revenue Recognition, and industry-specific guidance throughout the industry
topics of the codification. The guidance's core principle is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. In applying the revenue principles, an entity will identify the contract(s) with a customer, identify the performance obligations,
determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance
obligation is satisfied (either over time or at a point in time). The ASU further states that an entity should disclose sufficient information to
enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral
of the Effective Date”, which approved a one-year deferral of the effective date of the ASU from the original effective date of annual
reporting periods beginning after December 15, 2016, to annual reporting periods (including interim reporting periods) beginning after
December 15, 2017, with an option for early adoption of the standard on the original effective date. Additionally, in March 2016, the FASB
issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)”, which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued
ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, that amended
the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB
issued ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 805): Rescission of SEC Guidance Because
of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016, EITF Meeting”, which
rescinded from the FASB Accounting Standards Codification certain SEC paragraphs as a result of two SEC Staff Announcements. The
FASB also issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients”, which clarified guidance on assessment of collectability, presentation of sale taxes, measurement of noncash consideration,
and certain transition matters.
During 2017, the Company initiated and executed a project to evaluate the impact of these changes, which included a review of existing
contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a
comparison of that new treatment to the Company’s existing accounting policies, to identify differences. The standard will be applied using
the modified retrospective approach where the Company will record a cumulative effect adjustment as of the date of adoption, January 1,
2018.
The Company has completed its analysis of its existing revenue contracts and has substantially completed its new revenue accounting
policy documentation under the new standard. The Company has identified the following six material and distinct performance obligations:
·
·
License rights to exploit Functional Intellectual Property (Functional Intellectual Property or “functional IP” is defined as intellectual
property that has significant standalone functionality for example ability be played or aired. Functional intellectual property derives
a substantial portion of its utility from its significant standalone functionality.)
License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or “symbolic IP” is intellectual property that
is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its
association with the entity’s past or ongoing activities, including its ordinary business activities for example the Company’s
licensing and merchandising programs associated with its animated content.)
· Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for the Company’s
current contracts, it could become significant in the future.)
· Options on future seasons of content at fixed terms. (While this performance obligation is not significant for the Company’s current
contracts, it could become significant in the future.)
·
Fixed fee advertising revenue generated from the Genius Brands Network
· Variable fee advertising revenue generated from the Genius Brands Network
As a result of the change, beginning January 1, 2018, the Company will begin recognizing revenue related to licensed rights to exploit
functional IP in two ways. For minimum guarantees, the Company will recognize fixed revenue upon delivery of content and the start of
the license period. For functional IP contracts with a variable component, the Company will estimate revenue such that it is probable there
will not be a material reversal of revenue in future periods. Revenue under these types of contracts was previously recognized when royalty
statements were received. The Company will begin recognizing revenue related to licensed rights to exploit symbolic IP substantially
similarly to functional IP. Although it has a different recognition pattern from functional IP, the valuation method is substantially the same,
depending on the nature of the license.
The Company is in the process of preparing the transition adjustment that will be reflected in its March 31, 2018 quarterly financial
statements. The Company expects that disclosure contained in the notes to the consolidated financial statements relating to revenue
recognition will expand under the new standard. The Company is evaluating the new disclosure requirements, including any necessary
changes to business processes, systems, and controls to support the additional required disclosures.
The Company is also currently evaluating the potential impact on the Company’s internal control over financial reporting to identify any
necessary changes.
19
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases”. The standard requires lessees to recognize the assets
and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to
make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The
new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied
at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the
beginning of an interim or annual reporting period. We are currently evaluating the potential impact of adopting this guidance on our
consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of
the FASB Emerging Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash
equivalents on the statement of cash flows under a retrospective transition approach. The guidance will become effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We have prospectively
adopted ASU 2016-18. The impact to our consolidated financial position, results of operations and cash flows is minimal.
In January 2017, the FASB issued Accounting Standards Update 2017-04, “Simplifying the Test for Goodwill Impairment”, which
requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of
a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of
the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of
a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of
January 1, 2017, permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial
statements.
In May 2017, the FASB issued Accounting Standard Update 2017-09, “Compensation-Stock Compensation: Scope of Modification
Accounting”, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification
(equity or liability) of the new award are different from the original award immediately before the original award is modified. The standard
is effective beginning January 1, 2018, with early adoption permitted. We are currently evaluating the potential impact of adopting this
guidance on our consolidated financial statements.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this
Item.
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
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-
15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive
officer and principal 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 GAAP and includes those policies and procedures that:
·
·
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our
assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets
that could have a material effect on the financial statements.
Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. 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.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control – Integrated Framework (2013 Framework).
Based on this assessment, our management, with the participation of our Chief Executive Officer (principal executive officer) and our
Chief Financial Officer (principal financial and accounting officer), has concluded that, as of December 31, 2017, our internal control over
financial reporting was effective based on those criteria.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to
ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is
accumulated and communicated to our management, including our principal executive officer and principal financial and
accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31,
2017, the end of the period covered by this Annual Report on Form 10-K. Based upon the evaluation of our disclosure controls and
procedures as of December 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of our last fiscal year that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
21
Item 10.
Directors, Executive Officers and Corporate Governance
Board of Directors, Executive Officers, Promoters and Control Persons
PART III
The following table sets forth information about our directors and executive officers as of March 30, 2018:
Name
Position
Andy Heyward
Rebecca D. Hershinger
Gregory B. Payne
Bernard Cahill *
Joseph “Gray” Davis *
P. Clark Hallren *
Amy Moynihan Heyward
Margaret Loesch *
Lynne Segall*
Anthony Thomopoulos *
_______
* Denotes directors who are “independent” under applicable SEC and Nasdaq rules.
Chief Executive Officer and Chairman of the Board of Directors
Chief Financial Officer
Chief Operating Officer, Corporate Secretary
Director
Director
Director
Director
Director
Director
Director
Age
69
44
63
52
75
56
51
72
65
80
Our directors hold office until the earlier of their death, resignation or removal or until their successors have been elected and qualified.
Background Information
Andy Heyward, 69, has been the Company’s Chief Executive Officer since November 2013 and the Company’s Chairman of the Board
since December 2013. Mr. Heyward 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 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. Mr. Heyward was chosen as a director because of his extensive experience in children’s
entertainment and as co-founder of A Squared Entertainment.
Rebecca D. Hershinger, 44, has been the Chief Financial Officer since April 2016. She served as the Chief Financial Officer of the
Company from October 2014 through June 2015 and as a consultant to the Company beginning in March 2014. In 2012, she founded CFO
Advisory Services Inc., an accounting and business advisory services firm, headquartered in Park City, UT. From 2008 through 2012, Ms.
Hershinger was Chief Financial Officer and Vice President, Finance & Corporate Development for SpectrumDNA, Inc., formerly a social
media marketing and application development company that had been located in Park City, UT. Ms. Hershinger was an independent
financial consultant in San Francisco between 2007 and 2008. Ms. Hershinger was employed by Metro-Goldwyn-Mayer, Inc. in Los
Angeles, California from 1999 to 2005, holding various positions ultimately rising to the level of Vice President, Finance & Corporate
Development. Between 1995 and 1998, Ms. Hershinger worked as an analyst for JP Morgan Chase & Co in Los Angeles and New York.
Ms. Hershinger received her Bachelor of Science in Business Administration from Georgetown University, McDonough School of
Business, in Washington, D.C. and a Master in Business Administration (MBA) from The Wharton School, University of Pennsylvania.
She also completed studies at the International Finance & Comparative Business Policy Program at Oxford University, Oxford England.
On March 6, 2018, Ms. Hershinger notified us that she would voluntarily resign from her position, effective upon the expiration of her
employment agreement at the close of business on April 17, 2018.
22
Gregory B. Payne, 63, has been the Corporate Secretary of the Company since November 2013, the Chief Operating Officer since July
2017, and the Chief Operating Officer and EVP Legal / Business Affairs 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.
On February 28, 2018, we entered into an agreement with Mr. Payne pursuant to which we and Mr. Payne agreed to the cessation of Mr.
Payne’s employment with us upon the earlier to occur of the following: (1) once Mr. Payne’s replacement had been found, after a two-
week transition period (the “Transition Period”) or (2) May 31, 2018 (the “End Date”).
Bernard Cahill, 52, has been a Director of the Company since December 2013. Mr. Cahill 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.
Joseph “Gray” Davis, 75, has been a Director of the Company since December 2013. Mr. Davis served as the 37 th 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.
P. Clark Hallren, 56, has been a Director of the Company since May 2014. Since August 2013, Mr. Hallren has been a realtor with HK
Lane/Christie’s International Real Estate and since August 2012, Mr. Hallren has served as an outside consultant to individuals and entities
investing or operating in the entertainment industry. From August 2012 to August 2014, Mr. Hallren was a realtor with Keller Williams
Realty and from August 2009 to August 2012, Mr. Hallren founded and served as managing partner of Clear Scope Partners, an
entertainment advisory company. From 1986 to August 2009, Mr. Hallren was employed by JP Morgan Securities Inc. in various capacities,
including as Managing Director of the Entertainment Industries Group. In his roles with JP Morgan Securities, Mr. Hallren was responsible
for marketing certain products to his clients, including but not limited to, syndicated senior debt, public and private subordinated debt,
public and private equity, securitized and credit enhanced debt, interest rate derivatives, foreign currency and treasury products. Mr. Hallren
holds Finance, Accounting and Economics degrees from Oklahoma State University. He also currently holds Series 7, 24 and 63 securities
licenses. Mr. Hallren was chosen as a director of the Company based on his knowledge and experience in the entertainment industry as well
as in banking and finance.
Amy Moynihan Heyward, 51, has been a Director of the Company since December 2013. Ms. Heyward is the co-founder and served as the
President of A Squared from 2009 until 2016. Prior to 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 commercial and trade experience in creating and managing international brands and as co-founder of A
Squared Entertainment.
Margaret Loesch, 72, has been a Director of the Company since March 2015 and the Executive Chairman of the Genius Brands Network
since December 2016. Beginning in 2009 through 2014, Ms. Loesch, served as Chief Executive Officer and President of The Hub Network,
a cable channel for children and families, including animated features. The Company has, in the past, provided The Hub Network with
certain children’s programming. From 2003 through 2009 Ms. Loesch served as Co-Chief Executive Officer of The Hatchery, a family
entertainment and consumer product company. From 1998 through 2001 Ms. Loesch served as Chief Executive Officer of the Hallmark
Channel, a family related cable channel. From 1990 through 1997 Ms. Loesch served as the Chief Executive Officer of Fox Kids Network,
a children’s programming block and from 1984 through 1990 served as the Chief Executive Officer of Marvel Productions, a television and
film studio subsidiary of Marvel Entertainment Group. Ms. Loesch obtained her bachelors of science from the University of Southern
Mississippi. Ms. Loesch was chosen to be a director based on her 40 years of experience at the helm of major children and family
programming and consumer product channels.
23
Lynne Segall, 65, has been a Director of the Company since December 2013. Ms. Segall 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.
Anthony Thomopoulos, 80, has been a Director of the Company since February 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 Andy Heyward and Amy
Moynihan Heyward, who are married.
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.
16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors, and any persons who own more than 10% of common stock, to file
reports of ownership of, and transactions in, our common stock with the SEC and furnish copies of such reports to us. Based solely on our
review of the copies of such forms and amendments thereto furnished to us and on written representations from our officers, directors, and
any person whom we understand owns more than 10% of our common stock, we found that during 2017, all Section 16(a) filing were made
with the SEC on a timely basis.
24
Code of Conduct and Ethics
We have adopted a Corporate Code of Conduct and Ethics and Whistleblower Policy that applies to all of our officers, directors and
employees. A copy of the Code of Conduct and Ethics may be obtained, free of charge, by submitting a written request to the Company or
on our website at www.gnusbrands.com. Disclosure regarding any amendments to, or waivers from, provisions of the code of conduct and
ethics that apply to our directors, principal executive and financial officers will be posted on the “Investor Relations-Corporate
Governance” section of our website at www.gnusbrands.com or included in a Current Report on Form 8-K within four business days
following the date of the amendment or waiver.
Board Committees
During 2017, our Board of Directors held four meetings.
The following table sets forth the three standing committees of our Board and the members of each committee and the number of meetings
held by our Board of Directors and the committees during 2017:
Director
Andy Heyward
Bernard Cahill
Joseph “Gray” Davis
P. Clark Hallren
Amy Moynihan Heyward
Margaret Loesch
Lynne Segall
Anthony Thomopoulos
Meetings in 2017:
Board
Chair
X
X
X
X
X
X
X
4
Audit
Committee
Compensation
Committee
Nominating
Committee
X
Chair
X
4
X
Chair
3
Chair
1
To assist it in carrying out its duties, the Board of Directors has delegated certain authority to an Audit Committee, a Compensation
Committee and a Nominating Committee as the functions of each are described below.
Audit Committee
Messrs. Hallren, Cahill, and Thomopoulos serve on our Audit Committee. Our Audit Committee’s main function is to oversee our
accounting and financial reporting processes, internal systems of control, independent auditor relationships and the audits of our financial
statements. The Audit Committee’s responsibilities include:
·
·
·
·
·
·
selecting, hiring, and compensating our independent auditors;
evaluating the qualifications, independence and performance of our independent auditors;
overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as
they relate to financial statements or accounting matters;
approving the audit and non-audit services to be performed by our independent auditor;
reviewing with the independent auditor the design, implementation, adequacy and effectiveness of our internal controls and our
critical accounting policies; and
preparing the report that the SEC requires in our annual proxy statement.
The Board of Directors has adopted an Audit Committee Charter and the Audit Committee reviews and reassesses the adequacy of the
Charter on an annual basis. The Audit Committee members meet Nasdaq’s financial literacy requirements and are independent under
applicable SEC and Nasdaq rules, and the board has further determined that Mr. Hallren (i) is an “audit committee financial expert” as such
term is defined in Item 407(d) of Regulation S-K promulgated by the SEC and (ii) also meets Nasdaq’s financial sophistication
requirements.
25
Compensation Committee
Messrs. Thomopoulos and Hallren serve on the Compensation Committee and are independent under the applicable SEC and Nasdaq rules.
Our Compensation Committee’s main functions are assisting our Board of Directors in discharging its responsibilities relating to the
compensation of outside directors, the Chief Executive Officer and other executive officers, as well as administering any stock incentive
plans we may adopt. The Compensation Committee’s responsibilities include the following:
·
·
·
·
reviewing and recommending to our board of directors the compensation of our Chief Executive Officer and other executive
officers, and the outside directors;
conducting a performance review of our Chief Executive Officer;
reviewing our compensation policies; and
if required, preparing the report of the Compensation Committee for inclusion in our annual proxy statement.
The Board of Directors has adopted a Compensation Committee Charter and the Compensation Committee reviews and reassesses the
adequacy of the Charter on an annual basis.
The Compensation Committee’s policy is to offer our executive officers competitive compensation packages that will permit us to attract
and retain highly qualified individuals and to motivate and reward these individuals in an appropriate fashion aligned with the long-term
interests of our Company and our stockholders.
Compensation Committee Risk Assessment. We have assessed our compensation programs and concluded that our compensation practices
do not create risks that are reasonably likely to have a material adverse effect on us.
Nominating Committee
Ms. Segall serves on our Nominating Committee. The Nominating Committee’s responsibilities include:
·
·
·
·
identify qualified individuals to serve as members of the Company’s board of directors;
review the qualifications and performance of incumbent directors;
review and consider candidates who may be suggested by any director or executive officer or by any stockholder of the Company;
review considerations relating to board composition, including size of the board, term and age limits, and the criteria for
membership on the board;
The Board of Directors has adopted a Nominating Committee Charter which the Nominating Committee reviews and reassesses the
adequacy of the Charter on an annual basis.
26
Item 11.
Executive Compensation
Executive Compensation
The following table provides information regarding the total compensation for services rendered in all capacities that was earned during the
fiscal year indicated by our named officers for fiscal year 2017 and 2016.
Summary Compensation Table
Name and Principal Position
Andy Heyward (2)
Chief Executive Officer
Year Salary ($)
200,000
2017
200,000
2016
Rebecca D. Hershinger (3)
Chief Financial Officer
2017
2016
190,000
190,000
Bonus
($)
Stock
Awards
($) (1)
Option
Awards
($) (1)
500
500
500
500
–
–
–
–
All Other
Compensation
($)
140,000
46,000
–
–
Total ($)
340,500
246,500
–
322,884
–
–
190,500
513,384
Gregory B. Payne (4)
Chief Operating Officer
and Corporate Secretary
___________________
(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
2017
2016
225,000
190,000
225,500
190,500
500
500
–
–
–
–
–
–
Topic 718.
(2) In association with the Merger, Mr. Heyward was appointed Chief Executive Officer of the Company on November 15, 2013. Per his
employment agreement, Mr. Heyward is entitled to an annual salary of $200,000.
On October 1, 2016, Llama Productions LLC entered into an animation production services agreement with Mr. Heyward for services
as a producer for which he is to receive $186,000 through the course of production of the Company’s animated series Llama Llama.
(3) On April 18, 2016, the Company entered into an employment agreement with Ms. Hershinger, whereby Ms. Hershinger agreed to serve
as the Company’s Chief Financial Officer for a period of one year, with a mutual option for an additional one-year period, in
consideration for an annual salary of $175,000, which salary was to be increased to $190,000 per year not later than October 1, 2016.
On April 17, 2017, the Company and Ms. Hershinger extended the employment agreement for one additional year. On March 6, 2018,
Ms. Hershinger notified the Company that she would voluntarily resign from her position, effective upon the expiration of her
employment agreement at the close of business on April 17, 2018.
On September 13, 2016, the Company granted Ms. Hershinger 85,088 stock options with strike prices of $6.00 to $12.00, a term of five
years, and vesting ranging from immediate to between seven months to two years and seven months after the grant date anniversary.
(4) In association with the Merger, Mr. Payne was appointed Corporate Secretary of the Company for which he is entitled to an annual
salary of $175,000. Mr. Payne’s annual compensation was increased to $190,000 on October 1, 2016. On July 13, 2017, the Company
entered into an employment agreement with Mr. Payne, whereby Mr. Payne agreed to serve as the Company’s Chief Operating Officer
for a period of one year, with a mutual option for an additional one year period, in consideration for an annual salary of $225,000.
On February 28, 2018, the Company entered into an agreement with Mr. Payne pursuant to which Mr. Payne and the Company agreed
to the cessation of Mr. Payne’s employment with the Company upon the earlier to occur of the following: (1) once Mr. Payne’s
replacement has been found, after a two week transition period (the “Transition Period”) or (2) May 31, 2018 (the “End Date”). The
Agreement provides that until the end of the Transition Period, Mr. Payne shall receive his full salary and benefits and that upon the
End Date, Mr. Payne shall be entitled to receive a payment equal to the greater of (1) 50% of his remaining current salary or (2) three
months of his current salary, plus, in either case, payment of accrued vacation and California employee entitlements.
27
Outstanding Equity Awards at Fiscal Year
The following table sets forth outstanding stock option awards as of December 31, 2017. As of December 31, 2017, the Company has not
granted any stock awards to its executive officers or any other employees.
Number of
securities
underlying
unexercised
options (#)
exercisable
125,000
250,000
–
20,003
18,334
–
–
20,003
18,334
36,667
–
Number of
securities
underlying
unexercised
options (#)
unexercisable
–
–
68,750
–
–
36,667
10,084
–
–
–
10,084
Equity incentive
plan awards:
Number of
securities
underlying
unexercised
unearned options
(#)
Option exercise
price ($)
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
6.00
9.00
12.00
6.00
6.00
9.00
12.00
2.82
6.00
9.00
12.00
Option
expiration
date
12/14/20
12/14/20
12/14/20
9/13/21
9/13/21
9/13/21
9/13/21
10/19/20
12/14/20
12/14/20
12/14/20
Andy Heyward (1)
Name
Rebecca D. Hershinger
Gregory B. Payne
______________________
(1) Excluded from this table is 5,000 stock options granted to Mr. Heyward on October 19, 2015, with immediate vesting, at a strike
price of $2.82 with a five-year term for his service on the Board of Directors.
Retirement Benefits
As of December 31, 2017, we did not provide any retirement plans to our executive officers or employees.
Potential Payments upon Termination or Change-in-Control
As of December 31, 2017, we did not provide for any potential payments upon termination or change of control.
Employment Agreements
On November 15, 2013, the Company entered into an employment agreement with Andy Heyward (the “Andy 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 Andy 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 Andy 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.
On April 18, 2016, the Company entered into an employment agreement with Rebecca D. Hershinger (the “Rebecca D. Hershinger
Employment Agreement”), whereby Ms. Hershinger agreed to serve as the Company’s Chief Financial Officer for a period of one year,
with a mutual option for an additional one-year period, in consideration for an annual salary of $175,000, which salary was to be increased
to $190,000 per year not later than October 1, 2016. On April 17, 2017, the Company and Ms. Hershinger extended the employment
agreement for one additional year. Under the terms of the Rebecca D. Hershinger Employment Agreement, Ms. Hershinger shall be entitled
to receive a grant of stock options commensurate with those given to the Company’s Executive Vice President and an annual discretionary
bonus based on her performance. Additionally, the Rebecca D. Hershinger Employment Agreement may be terminated either (i) upon the
end of the term, (ii) at any time by the Company for Cause (as defined in the Employment Agreement) or (iii) upon an event of retirement,
death or disability. Upon the termination or expiration of the Rebecca D. Hershinger Employment Agreement and for a period of three
years thereafter, certain amounts paid to Ms. Hershinger, including any discretionary bonus and stock based compensation, but excluding
her base salary, reimbursement of certain expenses, and paid time off days, will be subject to the Company’s clawback right upon the
occurrence of certain events which are adverse to the Company. On March 6, 2018, Ms. Hershinger notified the Company that she would
be voluntarily resigning from the position of Chief Financial Officer upon expiration of the extension on April 17, 2018.
28
On July 13, 2017, the Company entered into an employment agreement with Gregory B. Payne (the “Gregory B. Payne Employment
Agreement”), whereby Mr. Payne agreed to serve as the Company’s Chief Operating Officer for a period of one year, with a mutual option
for an additional one-year period, in consideration for an annual salary of $225,000. Under the terms of the Gregory B Payne Employment
Agreement, Mr. Payne shall be entitled to an annual discretionary bonus based on his performance. Additionally, the Gregory B. Payne
Employment Agreement may be terminated either (i) upon the end of the term, (ii) at any time by the Company for Cause (as defined in the
Employment Agreement) or (iii) upon an event of retirement, death or disability. Upon the termination or expiration of the Gregory B.
Payne Employment Agreement and for a period of three years thereafter, certain amounts paid to Mr. Payne, including any discretionary
bonus and stock based compensation, but excluding his base salary, reimbursement of certain expenses, and paid time off days, will be
subject to the Company’s clawback right upon the occurrence of certain events which are adverse to the Company. On February 28, 2018,
the Company entered into an agreement with Mr. Payne pursuant to which Mr. Payne and the Company agreed to the cessation of Mr.
Payne’s employment with the Company upon the earlier to occur of the following: (1) once Mr. Payne’s replacement has been found, after
a two-week transition period (the “Transition Period”) or (2) May 31, 2018 (the “End Date”). The Agreement provides that until the end of
the Transition Period, Mr. Payne shall receive his full salary and benefits and that upon the End Date, Mr. Payne shall be entitled to receive
a payment equal to the greater of (1) 50% of his remaining current salary or (2) three months of his current salary, plus, in either case,
payment of accrued vacation and California employee entitlements.
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, 2017 and 2016 in the director's capacity as director.
Name
Andy Heyward
Bernard Cahill
Joseph “Gray” Davis
P. Clark Hallren
Amy Moynihan Heyward
Margaret Loesch
Lynne Segall
Anthony Thomopoulos
Year
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Fees
Earned
($) (1)
Stock
Awards
($)
Option
Awards
($)
All Other
Compensation
($)
20,000
20,000
10,000
15,000
20,000
20,000
20,000
20,000
20,000
17,500
17,500
20,000
12,500
20,000
20,000
20,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total ($)
-
-
20,000
20,000
-
-
-
-
-
10,000
-
-
-
-
-
-
-
-
10,000
15,000
20,000
20,000
20,000
30,000
20,000
17,500
17,500
20,000
12,500
20,000
20,000
20,000
______________________
(1) Directors earn $5,000 for each meeting attended physically, $2,500 per meeting for each meeting attended telephonically, and nothing
for non-attendance. These cash payments are paid to the Board member at the subsequent board meeting.
(2) On August 15, 2016, Mr. Hallren received $10,000 for consulting services provided to the Company.
29
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 March 30, 2018 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 current 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 8,202,794 shares of common stock
outstanding as March 30, 2018. 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 301 N Canon Drive #305, Beverly Hills, CA 90210.
Amount and
Nature of Beneficial
Ownership (1)
Percent of
Class (1)
Name of Beneficial Owner
Directors and Named Executive Officers
Andy Heyward
Rebecca D. Hershinger
Gregory B. Payne
Bernard Cahill
Joseph “Gray” Davis
P. Clark Hallren
Amy Moynihan Heyward
Margaret Loesch
Lynne Segall
Anthony Thomopoulos
2,329,200 (2)
38,337 (3)
75,088 (4)
29,230 (5)
11,251 (6)
11,251 (6)
2,329,200 (2)
11,251 (6)
11,251 (6)
11,366 (7)
25.4%
*
*
*
*
*
25.4%
*
*
*
27.1%
12.1%
11.1%
9.99%
7.9%
5.4%
8.5%
All current executive officers and directors as a group (consisting of 10 persons)
2,528,225
5% Stockholders
A Squared Holdings LLC
Bard Associates, Inc. (8)
Brio Capital Management LLC (10)
Anson Investments Master Fund, LP (12)
Wolverine Flagship Fund Trading Limited (14)
Iroquois Capital Management LLC and related entities (16)
___________________
* Indicates ownership less than 1%
990,728
941,117 (9)
819,459 (11)
667,084 (13)
470,000 (15)
747,698 (17)
(1) Applicable percentage ownership is based on 8,202,794 shares of common stock outstanding as of March 30, 2018, together with
securities exercisable or convertible into shares of common stock within 60 days of March 30, 2018. 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 30, 2018 are deemed to be beneficially owned by the person holding
such securities for the purpose of computing the number of shares beneficially owned and percentage of ownership of such person,
but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) Consists of (i) 990,728 shares of common stock held by A Squared Holdings LLC over which Andy Heyward and Amy Moynihan
Heyward hold voting and dispositive power; (ii) 33,334 shares of common stock issuable upon conversion of 100 shares of the
Company’s Series A Convertible Preferred Stock; (iii) 377,237 shares of common stock held by Andy Heyward; (iv) 1,234 shares
held by Heyward Living Trust; (v) 166,667 shares issuable upon exercise of warrants held by Andy Heyward; (vi) 380,000 shares of
common stock issuable now or within 60 days of March 30, 2018, upon the exercise of stock options granted to Andy Heyward, and
(vii) 380,000 shares of common stock issuable now or within 60 days of December 31, 2017, upon the exercise of stock options
granted to Amy Moynihan Heyward. Andy Heyward and Amy Moynihan Heyward are spouses who own such shares jointly, and thus
both maintain joint voting and dispositive power over such shares.
(3) Consists of 38,337 shares of common stock issuable now or within 60 days of March 30, 2018 upon exercise of stock options granted
to Ms. Hershinger.
(4) Consists of (i) 84 shares held by Mr. Payne’s spouse and (ii) 75,004 shares of common stock issuable now or within 60 days of
(5)
March 30, 2018 upon the exercise of stock options granted to Mr. Payne.
Includes (i) 13,812 shares of common stock owned directly by Bernard Cahill; (ii) 4,167 shares of common stock owned by Mr.
Cahill’s spouse, and (iii) 11,251 shares of common stock issuable now or within 60 days of March 30, 2018 upon the exercise of
stock options granted to Mr. Cahill.
30
(6) Consists of 11,251 shares of common stock issuable now or within 60 days of March 30, 2018 upon the exercise of stock options
granted.
(7) Consists of (i) 115 shares of common stock and (ii) 11,251 shares of common stock issuable now or within 60 days of March 30,
2018 upon the exercise of stock options granted to Mr. Thomopoulos.
(8) The address of this beneficial owner is 135 South LaSalle Street, Suite 3700, Chicago, Illinois 60603. Bard Associates, Inc. has the
sole voting and dispositive power over the shares. This beneficial owner acts as an investment adviser in accordance with Section
340.13d-1(b)(1)(ii)(E).
(9) Consists of (i) 641,103 shares of common stock and (ii) 300,014 shares issuable upon exercise of warrants. The warrants may not be
exercised to the extent that the holder or any of its affiliates would own more than 4.99% of the outstanding common stock of the
Company after such exercise. The number of shares deemed beneficially owned is limited accordingly.
(10) The address of this beneficial owner is 100 Merrick Road, Suite, 401 W. Rockville Center, NY 11570. Brio Capital Master Fund Ltd.
has sole voting and dispositive power over the shares.
(11) Includes shares of common stock, shares of common stock issuable upon conversion of Series A Convertible Preferred Stock, and
shares of common stock issuable upon exercise of certain warrants held by Brio Capital Master Fund Ltd. This stockholder owns 300
shares of the Company’s Series A Convertible Preferred Stock which are convertible into 100,000 shares of common stock as well as
warrants which are exercisable into 366,667 shares of common stock. The Series A Convertible Preferred Stock may not be converted
to the extent that the holder or any of its affiliates would own more than 9.99% of the outstanding common stock of the Company
after such conversion, and the Series A Convertible Preferred Stock may not be voted to the extent that the holder or any of its
affiliates would control more than 9.99% of the voting power of the Issuer. The number of shares deemed beneficially is limited
accordingly. The warrants may not be exercised to the extent that the holder or any of its affiliates would own more than 9.99% of the
outstanding common stock of the Company after such exercise. The number of shares deemed beneficially owned is limited
accordingly.
(12) The address of this beneficial owner is 155 University Avenue, Suite 207, Toronto, Ontario, Canada, M5H 3B7. Anson Investments
Master Fund LP has sole voting and dispositive power over the shares.
(13) Includes shares of common stock and shares of common stock issuable upon exercise of certain warrants held by Anson Investments
Master Fund, LP. This stockholder owns 467,084 shares of common stock as well as warrants which are exercisable into 850,001
shares of common stock. 650,001 of the warrants may not be exercised to the extent that the holder or any of its affiliates would own
more than 4.99% of the outstanding common stock of the Company after such exercise. 200,000 of the warrants may not be exercised
to the extent that the holder or any of its affiliates would own more than 9.99% of the outstanding common stock of the Company
after such exercise. The number of shares deemed beneficially owned is limited accordingly.
(14) The address of this beneficial owner is 175 West Jackson Blvd., Suite 340, Chicago, Illinois 60604. Wolverine Asset Management,
LLC (“WAM”) is the investment manager of Wolverine Flagship Fund Trading Limited and has voting and dispositive power over
the securities described above. The sole member and manager of WAM is Wolverine Holdings, L.P. (“Wolverine Holdings”). Robert
R. Bellick and Christopher L. Gust may be deemed to control Wolverine Trading Partners, Inc. (“WTP”), the general partner of
Wolverine Holdings.
(15) Consists of 470,000 shares of common stock issuable upon conversion of Series A Convertible Preferred Stock. The stockholder
owns 1,410 shares of the Company’s Series A Convertible Preferred Stock which are convertible into 470,000 shares of common
stock. The Series A Convertible Preferred Stock may not be converted to the extent that the holder or any of its affiliates would own
more than 9.99% of the outstanding common stock of the Company after such conversion, and the Series A Convertible Preferred
Stock may not be voted to the extent that the holder or any of its affiliates would control more than 9.99% of the voting power of the
Issuer.
(16) The address of this beneficial owner is 205 East 42nd Street, 20th Floor, New York, New York 10017. Based on the Schedule 13G
jointly filed with the SEC by Iroquois Capital Management L.L.C. (“Iroquois”), Richard Abbe and Kimberly Page on February 14,
2018, (i) Iroquois Master Fund Ltd. (the “Fund”) held 135,290 shares of common stock, 80,000 shares of common stock underlying
the Series A Convertible Preferred Stock and reported warrants to purchase 371,858 shares of common stock, (ii) Iroquois Capital
Investment Group LLC (“ICIG”) held 35,550 shares of common stock and reported warrants to purchase 125,000 shares of common
stock, and (iii) Richard Abbe indirectly held 5,156 shares of common stock underlying the Series A Convertible Preferred Stock. Mr.
Abbe has the sole authority and responsibility for the investments made on behalf of ICIG as its managing member and shares
authority and responsibility for the investments made on behalf of the Fund with Ms. Page, each of whom is a director of the Fund. As
such, Mr. Abbe may be deemed to be the beneficial owner of all shares of common stock held by, and underlying the Series A
Convertible Preferred Stock and reported warrants (subject to the Blockers) held by, the Fund and ICIG. Iroquois is the investment
manager for the Fund and Mr. Abbe is the President of Iroquois. The securities held by American Capital Management, LLC
(“ACM”) were distributed to its members in connection with ACM’s dissolution as of December 31, 2017. The foregoing should not
be construed in and of itself as an admission by any Reporting Person as to beneficial ownership of shares of common stock owned by
another Reporting Person. Each of the Iroquois Funds and the Reporting Individuals hereby disclaims any beneficial ownership of any
such shares of common stock, except to the extent of their pecuniary interest therein.
(17) Consists of (i) 170,840 shares of common stock, (ii) 80,000 shares of common stock issuable upon conversion of Series A
Convertible Preferred Stock, and (iii) 496,858 shares of common stock issuable upon the exercise of certain warrants. The
stockholder owns 240 shares of the Company’s Series A Convertible Preferred Stock which are convertible into 80,000 shares of
common stock. The Series A Convertible Preferred Stock and 195,000 of the warrants may not be converted or exercised to the extent
that the holder or any of its affiliates would own more than 9.99% of the outstanding common stock of the Company after such
conversion or exercise. The Series A Convertible Preferred Stock may not be voted to the extent that the holder or any of its affiliates
would control more than 9.99% of the voting power of the Issuer. The number of shares deemed beneficially is limited accordingly.
301,858 warrants may not be exercised to the extent that the holder or any of its affiliates would own more than 4.99% of the
outstanding common stock of the Company after such exercise. The number of shares deemed beneficially owned is limited
accordingly.
31
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Party Transactions
Commission regulations define the related person transactions that require disclosure to include any transaction, arrangement or
relationship in which the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last
two completed fiscal years in which we were or are to be a participant and in which a related person had or will have a direct or indirect
material interest. A related person is: (i) an executive officer, director or director nominee of the Company, (ii) a beneficial owner of more
than 5% of our common stock, (iii) an immediate family member of an executive officer, director or director nominee or beneficial owner
of more than 5% of our common stock, or (iv) any entity that is owned or controlled by any of the foregoing persons or in which any of the
foregoing persons has a substantial ownership interest or control. Described below are certain transactions or relationships between us and
certain related persons.
Our Chief Executive Officer, Andy Heyward, is the spouse of our Director, Amy Moynihan Heyward.
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, Andy Heyward. As of December 31, 2015, these advances totaled $410,535. No interest is due
on these advances. These advances were interest free and had no stated maturity. The Company applied an imputed interest rate of 6% in
accordance with FASB ASC 835-30-45. During years ended December 31, 2016 and 2015, the Company recognized imputed interest
expense of $8,503 and $24,757 as a contribution to additional paid-in capital, respectively. On May 4, 2016, the Company issued to Mr.
Heyward 79,561 shares of common stock valued at $5.16 per share, the day’s closing stock price, in full payment and satisfaction of these
advances.
On July 25, 2016, the Company entered into a consulting agreement with Foothill Entertainment, Inc. (“Foothill”), an entity whose
Chairman is Gregory B. Payne, our Corporate Secretary. The Company has engaged Foothill Entertainment, Inc. for a term of six months to
assist in the distribution and commercial exploitation of its audiovisual content as well as for the preparation and attendance on behalf of
the Company at the MIPJR and MIPCOM markets in Cannes. Foothill receives $12,500 per month for these services. During 2016 and
2017, the Company paid $65,000 and $150,000, respectively, to Foothill pursuant to this agreement. Subsequent to the end of period, the
Company notified Foothill that the consulting agreement would not be extended beyond January 31, 2018.
On October 1, 2016, Llama Productions LLC entered into an animation production services agreement with Mr. Heyward for services as a
producer for which he is to receive $186,000 through the course of production of the Company’s animated series Llama Llama. During
2016 and 2017, the Company paid $46,000 and $140,000, respectively, to Mr. Heyward pursuant to this agreement.
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.
Independence of the Board of Directors
Our determination of the independence of our directors is made using the definition of “independent” contained in the listing standards of
the Nasdaq Capital Market. On the basis of information solicited from each director, the board has determined that each of each of Messrs.
Cahill, Davis, Hallren, and Thomopoulos as well as Ms. Segall and Ms. Loesch are independent directors within the meaning of such rules.
32
Item 14.
Principal Accounting Fees and Services
Principal Accountant Fees and Services
The following table sets forth fees billed to us by our independent registered public accounting firm for the years ended December 31, 2017
and 2016 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
Audit-Related Fees
Tax Fees
Other Fees
Total Fees
2017
2016
$
$
74,000 $
7,500
7,000
18,768
107,268 $
74,000
5,000
7,800
10,507
97,307
Our policy is to pre-approve all audit and permissible non-audit services performed by the independent registered public accounting firm.
These services may include audit services, audit-related services, tax services and other services, as follows:
·
·
·
Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the
independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and
consultation regarding financial accounting and/or reporting standards.
Audit-Related services are for assurance and related services that are traditionally performed by the independent auditor, including
due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain
regulatory requirements.
Tax services include all services performed by the independent auditor’s tax personnel except those services specifically related to
the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
· Other Fees are those associated with services not captured in the other categories. The Company generally does not request such
services from the independent auditor.
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 registered public accounting firm provided to us in the past two
fiscal years.
33
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Financial Statements
See Index to Consolidated Financial Statements at Item 8 herein.
Financial Statement Schedules have been omitted as they are either not required, not applicable, or the information is otherwise included.
2.1
3.1*
3.2*
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
EXHIBIT INDEX
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)
Articles of Incorporation of Genius Brands International Inc., as amended
Bylaws of Genius Brands International, Inc., as amended
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)
Form of Stock Certificate (Incorporated by reference from Registration Statement on Form 10 filed with the SEC on May 4,
2011)
Form of Warrant (Incorporated by reference from Registration Statement on Form 10 filed with the SEC on May 4, 2011)
Form of Placement Agent Warrant (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the
SEC on May 19, 2014)
Form of Warrant (November 2015) (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the
SEC on November 4, 2015)
Form of Subordinated Indenture (Incorporated by reference from Registration Statement on Form S-3 filed with the SEC on
November 25, 2016)
Form of Reload Warrant (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on
February 13, 2017)
Form of Market Price Warrant (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC
on February 13, 2017)
Form of Investor Warrant (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on
October 3, 2017)
Form of Investor Warrant (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on
January 8, 2018)
34
10.1†
10.2†
10.3†
10.4†
10.5†
10.6
10.7†
10.8†
10.10
10.11
10.12
10.13†
10.14
10.15
10.16
10.17†
10.18
10.19
10.20
10.21
10.22
21.1*
23.1*
31.1*
31.2*
32.1*
32.2*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
Employment Agreement between Genius Brands International, Inc. and Klaus Moeller dated October 29, 2013 (Incorporated
by reference from Registration Statement on Form 8-K filed with the SEC on October 31, 2013)
2008 Stock Option Plan (Incorporated by reference from Registration Statement on Form 10 filed with the SEC on May 4,
2011)
First Amendment to 2008 Stock Option Plan (Incorporated by reference from Registration Statement on Form 10 filed with
the SEC on May 4, 2011)
Second Amendment to 2008 Stock Option Plan (Incorporated by reference from Registration Statement on Form 10 filed with
the SEC on May 4, 2011)
Form of Stock Option Grant Notice (Incorporated by reference from Registration Statement on Form 10 filed with the SEC
on May 4, 2011)
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)
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)
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)
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)
Form of Securities Purchase Agreement (Incorporated by reference to the Company’s Current Report on Form 8-K filed with
the SEC on May 19, 2014)
Form of Registration Rights Agreement (Incorporated by reference to the Company’s Current Report on Form 8-K filed with
the SEC on May 19, 2014)
Genius Brands International, Inc. 2015 Incentive Plan, as amended (Incorporated by reference to the Company’s Quarterly
Report on Form 10-Q filed on November 14, 2017)
Memorandum Regarding Services dated November 1, 2015 between Genius Brands International, Inc. and Michael D.
Handelman (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 23,
2015)
Form of Securities Purchase Agreement (Incorporated by reference to the Company’s Current Report on Form 8-K filed with
the SEC on November 4, 2015)
Form of Registration Rights Agreement (Incorporated by reference to the Company’s Current Report on Form 8-K filed with
the SEC on November 4, 2015)
Employment Agreement dated April 18, 2016 between Genius Brands International, Inc. and Rebecca Hershinger
(Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2016)
Loan and Security Agreement dated August 5, 2016 between Genius Brands International, Inc. and Llama Productions LLC
(Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 12, 2016)
Subscription Agreement dated January 17, 2017 between Genius Brands International, Inc. and Sony DADC USA, Inc.
(Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 17, 2017)
Form of Warrant Exercise Agreement dated February 9, 2017 (Incorporated by reference to the Company’s Current Report
on Form 8-K filed with the SEC on February 10, 2017)
Securities Purchase Agreement dated October 3, 2017 (Incorporated by reference to the Company’s Current Report on Form
8-K filed with the SEC on October 3, 2017)
Securities Purchase Agreement dated January 8, 2018 (Incorporated by reference to the Company’s Current Report on Form
8-K filed with the SEC on January 8, 2018)
List of Subsidiaries
Consent of Squar Milner LLP
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
__________
* Filed herewith.
† Management contract or compensatory plan or arrangement.
35
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 2, 2018
April 2, 2018
Genius Brands International, Inc.
By: /s/ Andy Heyward
Andy Heyward
Chief Executive Officer (Principal Executive Officer)
/s/ Rebecca D. Hershinger
Rebecca D. Hershinger
Chief Financial Officer (Principal Financial and Accounting Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andy
Heyward and Rebecca D. Hershinger, jointly and severally, attorney-in-fact, with the power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or substitute
or substitutes, may do or cause to be done by virtue hereof.
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 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
By: /s/ Andy Heyward
Andy Heyward
Chief Executive Officer (Principal Executive Officer)
/s/ Rebecca D. Hershinger
Rebecca D. Hershinger
Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Amy Moynihan Heyward
Amy Moynihan Heyward
Director
Bernard Cahill
Director
Joseph “Gray” Davis
Director
/s/ P. Clark Hallren
P. Clark Hallren
Director
/s/ Lynne Segall
Lynne Segall
Director
/s/ Anthony Thomopoulos
Anthony Thomopoulos
Director
/s/ Margaret Loesch
Margaret Loesch
Director
36
GENIUS BRANDS INTERNATIONAL, INC.
TABLE OF CONTENTS
Audited Financial Statements for the Year Ended December 31, 2017 and 2016
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page No.
F-2
F-3
F-4
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Genius Brands International, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Genius Brands International, Inc. and its subsidiaries (the “Company”)
as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, stockholders' equity and cash
flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017
and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States of America) (“PCAOB”) and are required to be independent with respect to the Company in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Squar Milner LLP
We have served as the Company's auditor since 2016.
Los Angeles, California
April 2, 2018
F-2
Genius Brands International, Inc.
Consolidated Balance Sheets
As of December 31, 2017 and December 31, 2016
ASSETS
Current Assets:
Cash and Cash Equivalents
Restricted Cash
Accounts Receivable, net
Other Receivable
Inventory, net
Prepaid and Other Assets
Total Current Assets
Property and Equipment, net
Accounts Receivable
Other Receivable
Film and Television Costs, net
Intangible Assets, net
Goodwill
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable
Accrued Expenses
Deferred Revenue
Accrued Salaries and Wages
Disputed Trade Payable
Service Advance
Total Current Liabilities
Long Term Liabilities:
Deferred Revenue
Production Loan Facility, net
Total Liabilities
Commitments & Contingencies (Note 13)
Stockholders’ Equity
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, respectively; 3,530 and 4,895
shares issued and outstanding, respectively
Common Stock, $0.001 par value, 233,333,334 shares authorized, respectively; 7,610,794 and
4,010,649 shares issued and outstanding, respectively
Common Stock to Be Issued
Additional Paid in Capital
Accumulated Deficit
Accumulated Other Comprehensive Loss
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
December 31,
2017
December 31,
2016
$
$
6,929,399 $
568,673
2,893,902
160,545
17,589
264,818
10,834,926
94,666
1,687,500
96,327
2,777,088
1,856,280
10,365,805
27,712,592 $
$
453,201 $
1,717,970
453,927
168,549
925,000
–
3,718,647
4,631,456
4,322,643
12,672,746
1,887,921
1,000,000
122,910
–
6,562
359,395
3,376,788
90,461
–
–
2,260,964
1,845,650
10,365,805
17,939,668
648,638
249,482
410,662
132,827
925,000
1,489,583
3,856,192
2,695,946
1,332,004
7,884,142
4
5
7,611
24
56,588,822
(41,551,497)
(5,118)
15,039,846
27,712,592 $
4,011
24
46,697,005
(36,642,761)
(2,758)
10,055,526
17,939,668
$
The accompanying notes are an integral part of these audited financial statements.
F-3
Genius Brands International, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2017 and 2016
December 31,
2017
December 31,
2016
$
4,815,491 $
472,134
38,779
9,324
5,335,728
662,373
4,257,427
5,329,718
10,249,518
356,150
463,213
33,644
13,868
866,875
1,035,128
279,217
6,017,391
7,331,736
(4,913,790)
(6,464,861)
8,281
(3,227)
–
–
–
5,054
6,651
(2,675)
(8,503)
258,103
(1,850)
251,726
(4,908,736)
(6,213,135)
–
–
(4,908,736)
(6,213,135)
Revenues:
Television & Home Entertainment
Licensing & Merchandising
Genius Brands Network
Product Sales
Total Revenues
Operating Expenses:
Marketing and Sales
Direct Operating Costs
General and Administrative
Total Operating Expenses
Loss from Operations
Other Income (Expense):
Other Income
Interest Expense
Interest Expense - Related Parties
Gain on Distribution Contracts
Loss on Impairment of Assets
Net Other Income
Loss before Income Taxes
Income Tax Expense
Net Loss
Net Loss per Common Share (Basic And Diluted)
$
(0.81) $
(1.59)
Weighted Average Shares Outstanding (Basic and Diluted)
6,084,732
3,915,178
The accompanying notes are an integral part of these audited financial statements.
F-4
Genius Brands International, Inc.
Consolidated Statements of Comprehensive Loss
Years Ended December 31, 2017 and 2016
Net Loss Applicable to Common Shareholders
Other Comprehensive Income (Loss), Net of Tax:
Unrealized Loss on Foreign Currency Translation
Other Comprehensive Loss, Net of Tax:
Comprehensive Loss
December 31,
2017
(4,908,736) $
December 31,
2016
(6,213,135)
$
(2,360)
(2,360)
(4,911,096) $
(2,758)
(2,758)
(6,215,893)
$
The accompanying notes are an integral part of these audited financial statements.
F-5
Genius Brands International, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock
Preferred Stock
Common Stock
To Be Issued
Additional
Other
Paid In Accumulated
Comprehensive
Shares
Amount Shares Amount Shares Amount Capital
Deficit
Loss
Total
Balance, December
31, 2015
Exercise of Warrants
Conversion of
3,753,179 $
33,334
3,753
33
5,290 $
–
6
–
– $
–
24 $ 44,547,427 $ (30,429,626) $
–
–
109,967
– $ 14,121,584
110,000
–
131,667
132
(395)
(1)
–
–
(131)
–
–
–
Preferred Shares
Conversion of Short
Term Related Party
Advances
Issuance of Common
Stock for Services
Adjustment to
Reconcile Common
Shares Outstanding
Due to Reverse
Stock Split
Share Based
Compensation
Imputed Interest for
Member Advances
Net Loss
Comprehensive Loss
Balance, December
79,561
80
12,500
13
408
–
–
–
0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
410,455
–
38,987
–
–
– 1,581,797
–
–
–
–
–
–
8,503
–
–
(6,213,135)
–
410,535
–
39,000
–
–
– 1,581,797
–
8,503
(6,213,135)
(2,758)
(2,758)
31, 2016
4,010,649
4,011
4,895
5
–
24 46,697,005
(36,642,761)
(2,758) 10,055,526
Issuance of Common
Stock in Warrant
Exchange, net
1,171,689
1,172
–
–
–
– 3,400,752
–
– 3,401,924
Issuance of Common
Stock in Registered
Direct Offering, net 1,647,691
1,648
–
–
Conversion of
Preferred Shares
Issuance of Common
Stock for Services
Issuance of Common
Shares for Debt
Extinguishment
Share Based
Compensation
Net Loss
Comprehensive Loss
Balance, December
31, 2017
455,000
455
(1,365)
(1)
24,534
24
–
–
301,231
301
–
–
–
–
–
–
–
–
–
–
7,610,794 $
7,611
3,530 $
–
–
–
–
4
–
–
–
–
–
–
–
– 5,697,886
–
(454)
–
129,976
–
–
–
– 5,699,534
–
–
–
130,000
–
–
–
–
(301)
–
–
–
663,958
–
–
–
(4,908,736)
–
–
663,958
– (4,908,736)
(2,360)
(2,360)
– $
24 $ 56,588,822 $ (41,551,497) $
(5,118) $ 15,039,846
The accompanying notes are an integral part of these audited financial statements.
F-6
Genius Brands International, Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 2017 and 2016
Cash Flows from Operating Activities:
Net Loss
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Amortization of Film and Television Costs
Depreciation and Amortization Expense
Imputed Interest Expense
Bad Debt Expense
Stock Issued for Services
Stock Compensation Expense
Gain on Distribution Contracts
Loss on Impairment of Assets
Decrease (Increase) in Operating Assets:
Accounts Receivable, net
Other Receivables
Inventory
Prepaid Expenses & Other Assets
Film and Television Costs, net
Increase (Decrease) in Operating Liabilities:
Accounts Payable
Accrued Salaries
Deferred Revenue and Advances
Other Accrued Expenses
Net Cash Used in Operating Activities
Cash Flows from Investing Activities:
Investment in Intangible Assets
Investment in Fixed Assets
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Proceeds from Warrant Exchange, net
Proceeds from Sale of Common Stock, net
Proceeds from Production Loan Facility, net
Proceeds from Exercise of Warrants
Net Cash Provided by Financing Activities
December 31,
2017
December 31,
2016
$
(4,908,736) $
(6,213,135)
2,534,835
125,918
–
66,502
130,000
663,958
–
–
(4,527,354)
(256,872)
(11,027)
94,577
(2,825,426)
(266,645)
35,722
489,189
1,468,489
(7,186,870)
(44,793)
(62,400)
(107,193)
3,401,924
5,699,534
2,802,756
–
11,904,214
167,788
142,687
8,503
–
39,000
1,581,797
(258,103)
1,850
294,792
–
518
(314,754)
(1,390,450)
289,205
36,442
2,146,998
(249,415)
(3,716,277)
(5,650)
(5,844)
(11,494)
–
–
1,318,072
110,000
1,428,072
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
Beginning Cash, Cash Equivalents, and Restricted Cash
Ending Cash, Cash Equivalents, and Restricted Cash
4,610,151
2,887,921
7,498,072 $
(2,299,699)
5,187,620
2,887,921
$
Supplemental Disclosures of Cash Flow Information:
Cash Paid for Interest
Schedule of Non-Cash Financing and Investing Activities
Issuance of Common Stock in Relation to Sony Transaction
Issuance of Common Stock in Satisfaction of Short Term Advances
$
3,227 $
2,675
$
$
1,489,583 $
– $
–
410,535
The accompanying notes are an integral part of these audited financial statements.
F-7
Genius Brands International, Inc.
Notes to Financial Statements
December 31, 2017
Note 1: Organization and Business
Organization and Nature of Business
Genius Brands International, Inc. (“we”, “us”, “our”, or the “Company”) is a global content and brand management company that creates
and licenses multimedia content. Led by industry veterans, the Company distributes its content in all formats as well as a broad range of
consumer products based on its characters. In the children's media sector, the Company’s portfolio features “content with a purpose” for
toddlers to tweens, which provides enrichment as well as entertainment including the award-winning Baby Genius; new preschool property
Rainbow Rangers; preschool property Llama Llama that debuted on Netflix; tween music-driven brand SpacePop; adventure comedy
Thomas Edison's Secret Lab® available on public broadcast stations and the Company’s Genius Brands Network on Comcast's Xfinity on
Demand, Roku, AppleTV, and Amazon Prime; Warren Buffett's Secret Millionaires Club, created with and starring iconic investor Warren
Buffett. The Company is also developing an all-new adult-themed animated series, Stan Lee's Cosmic Crusaders, with Stan Lee's Pow!
Entertainment and The Hollywood Reporter.
In addition, the Company acts as licensing agent for Llama Llama, leveraging its existing licensing infrastructure to expand these brands
into new product categories, new retailers, and new territories.
The Company commenced operations in January 2006, assuming all the rights and obligations of its then Chief Executive Officer, under an
Asset Purchase Agreement between the Company and Genius Products, Inc., in which the Company obtained all rights, copyrights, and
trademarks to the brands “Baby Genius,” “Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions under
those titles. In October 2011, the Company (i) changed its domicile to Nevada from California, and (ii) changed its name to Genius Brands
International, Inc. from Pacific Entertainment Corporation (the “Reincorporation”). In connection with the Reincorporation, the Company
changed its trading symbol from “PENT” to “GNUS”.
On November 15, 2013, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with A Squared
Entertainment LLC, a Delaware limited liability company (“A Squared”), A Squared Holdings LLC, a California limited liability company
and sole member of A Squared (the “Parent Member”) and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary
(“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurred
concurrently with entering into the Merger Agreement, the Acquisition Sub merged with and into A Squared, and A Squared, as the
surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and
operations of A Squared.
On November 4, 2016, the Company filed a certificate to change its Articles of Incorporation to effect a reverse split on a one-for-three
basis (the “2016 Reverse Split”). The 2016 Reverse Split became effective on November 9, 2016. All common stock (“Common Stock”)
share and per share information in this Annual Report on Form 10-K (“Form 10-K”), including the accompanying consolidated financial
statements and notes thereto, have been adjusted to reflect retrospective application of the 2016 Reverse Split, unless otherwise indicated.
Liquidity
Historically, the Company has incurred net losses. For the years ended December 31, 2017 and 2016, the Company reported net losses of
$4,908,736 and $6,213,135, respectively. The Company reported net cash used in operating activities of $7,186,870 and $3,716,277 for the
years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, the Company had an accumulated deficit of
$41,551,497 and total stockholders’ equity of $15,039,846. As of December 31, 2017, the Company had current assets of $10,834,926,
including cash, cash equivalents, and restricted cash of $7,498,072 and current liabilities of $3,718,647, including certain trade payables of
$925,000 to which the Company disputes the claim. The Company had working capital of $7,116,279 as of December 31, 2017, compared
to a working capital deficit of $479,404 as of December 31, 2016.
F-8
During 2017, the Company completed three transactions that enhanced cash and working capital balances:
·
·
·
On January 10, 2017, the Company entered into an amendment of its home entertainment distribution agreement with Sony
Pictures Home Entertainment Inc. (“SPHE”) pursuant to which, among other things, SPHE paid $1,489,583 which was owed and
payable by the Company to SPHE’s sister company Sony DADC US Inc. (“DADC”) for certain disk manufacturing and
replication services. In connection with such transaction, the Company issued SPHE 301,231 shares of its common stock at
$4.945 per share, SPHE’s exclusive territory for exercising its home entertainment distribution rights under the Distribution
Agreement was extended from the United States and Canada to worldwide, and the amount of advances subject to recoupment by
SPHE out of royalty payments that would otherwise be due to the Company under the Distribution Agreement was increased by
the amount of the payment to DADC. In connection with the above issuance of our shares, the Company entered into a
subscription agreement with SPHE, effective as of January 17, 2017. Collectively, these transactions are referred to as the
“January 2017 Sony Transactions.”
On February 9, 2017, the Company entered into a private transaction (the “Private Transaction”) pursuant to a Warrant Exercise
Agreement (the “Agreement”) with certain holders of the Company’s existing warrants (the “Original Warrants”) for which it
received gross proceeds of $3,866,573 from the exercise of the Original Warrants and issued additional warrants to these holders
(see Notes 9 and 11 for additional information about the Private Transaction).
On October 3, 2017, the Company sold, in a registered direct offering, 1,647,691 shares of common stock at an offering price of
$3.90 per share and, in a concurrent private placement, warrants to purchase an aggregate of 1,647,691 shares of common stock for
gross proceeds of approximately $6,425,995 before deducting the placement agent fee and related offering expenses.
Subsequent to the end of the year, on January 8, 2018, the Company entered into a Securities Purchase Agreement with certain accredited
investors pursuant to which the Company sold approximately $1,800,000 of common stock and warrants to such investors (the “January
2018 Private Placement”). The Company issued and sold warrants to purchase 592,000 shares of common stock at an exercise price of
$3.00 per share.
While the Company believes that its anticipated cash balances, working capital, and deal pipeline will be sufficient to fund operations for
the next twelve months, there can be no assurance that cash flows from operations will continue to improve in the near future or will not
deteriorate during that period. If the Company is unable to attain profitable operations and attain positive operating cash flows, it may need
to (i) seek additional funding, (ii) scale back its development or production plans, or (iii) reduce certain operations.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 2017 and 2016 consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Genius Brands International, Inc., its wholly-owned
subsidiaries A Squared and Llama Productions as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”). All significant inter-
company balances and transactions have been eliminated in consolidation.
Business Combination
On November 15, 2013, the Company entered into a Merger Agreement with A Squared, the Parent Member, and the Acquisition Sub.
Upon closing of the Merger, which occurred concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and
into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the
Company acquired the business and operations of A Squared.
The financial statements have been prepared using the acquisition method of accounting in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 Business Combinations.
F-9
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the 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 to conform to current period
classifications.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid debt instruments with initial maturities of three months or less to be cash equivalents. As of
December 31, 2017 and 2016, restricted cash totaled $568,673 and $1,000,000 which represented funds held in a cash account to be used
solely for the production of Llama Llama as a condition of its loan agreement with Bank Leumi USA.
Allowance for Doubtful Accounts
Accounts receivable are presented on the balance sheets net of estimated uncollectible amounts. The Company assesses its accounts
receivable balances on a quarterly basis to determine collectability and records an allowance for estimated uncollectible accounts in an
amount approximating anticipated losses based on historical experience and future expectations. Individual uncollectible accounts are
written off against the allowance when collection of the individual accounts appears doubtful. The Company had an allowance for doubtful
accounts of $110,658 as of December 31, 2017 and December 31, 2016.
Inventories
Inventories are stated at the lower of average cost or net realizable value 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 $26,097 as of
December 31, 2017 and December 31, 2016.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on property and equipment is computed using the straight-line method over the
estimated useful lives of the assets, which range from two to seven years. Maintenance, repairs, and renewals, which neither materially add
to the value of the assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of
property and equipment are reflected in the statement of operations.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted
for by the purchase method. In accordance with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are
presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if
indicators of impairment arise. The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the
end of each fiscal year. To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of
which we have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted
cash flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment
regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of the fair
market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible assets in future periods.
Other intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured
based on fair value. Annual amortization of these intangible assets is computed based on the straight-line method over the remaining
economic life of the asset.
F-10
Film and Television Costs
The Company capitalizes production costs for episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other
Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue based on the initial
market revenue evidenced by a firm commitment over the period of commitment. 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 FASB ASC 926-20 Entertainment-Films - Other Assets -
Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production
based on the relative fair value of the film(s) delivered and recognized as revenue. The Company evaluates its capitalized production costs
annually and limits recorded amounts by their ability to recover such costs through expected future sales.
Additionally, for both episodic series and films, from time to time, the Company develops additional content, improved animation and
bonus songs/features for its existing content. After the initial release of the film or episodic series, the costs of significant improvement to
existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
The Company recognizes revenue in accordance with FASB ASC 926-605 Entertainment-Films - Revenue Recognition. Accordingly, the
Company recognizes revenue when (i) persuasive evidence of a sale with a 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.
The Company’s licensing and royalty revenue represents revenue generated from license agreements that 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. Licensing income the Company recognizes as an
agent is in accordance with FASB 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.
The Company sells advertising on its Genius Brands Network in the form of either flat rate promotions or impressions served. For flat rate
promotions with a fixed term, the Company recognizes revenue when all five revenue recognition criteria under FASB ASC 605 are met.
For impressions served, the Company delivers a certain minimum number of impressions on the channel to the advertiser for which the
advertiser pays a contractual CPM per impression. Impressions served are reported to the Company on a monthly basis, and revenue is
reported in the month the impressions are served.
The Company recognizes 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 FASB ASC 605
Revenue Recognition.
Direct Operating Costs
Direct operating costs include costs of our product sales, non-capitalizable film costs, film and television cost amortization expense, and
participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other
creative talent with which we are obligated to share net profits of the properties on which they have rendered services.
Share-Based Compensation
As required by FASB ASC 718 - Stock Compensation, the Company recognizes an expense related to the fair value of our share-based
compensation awards, including stock options, using the Black-Scholes calculation as of the date of grant. The Company has elected to use
the graded attribution method for awards which are in-substance, multiple awards based on the vesting schedule.
F-11
Earnings Per Share
Basic earnings (loss) per common share (“EPS”) is calculated by dividing net income (loss) applicable to common shareholders by the
weighted average number of shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss)
applicable to common shareholders by the weighted average number of shares of common stock outstanding, plus the assumed exercise of
all dilutive securities using the treasury stock or “as converted” method, as appropriate. During periods of net loss, all common stock
equivalents are excluded from the diluted EPS calculation because they are antidilutive.
Income Taxes
Deferred income tax assets and liabilities are recognized based on differences between the financial statement and tax basis of assets and
liabilities using presently enacted tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable
income and other possible sources of realization of deferred tax assets, and records a valuation allowance that reduces the deferred tax
assets to an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be
realized.
Concentration of Risk
The Company’s cash is maintained at two financial institutions and from time to time the balances for this account exceed the Federal
Deposit Insurance Corporation’s (“FDIC”) 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, 2017, the Company had four accounts with a combined uninsured balance of
$6,471,928. As of December 31, 2016, the Company had three accounts with a combined uninsured balance of $1,136,683.
For fiscal year 2017, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. This customer
accounted for 84% of total revenue and represented 98% of accounts receivable. For fiscal year 2016, the Company had one customer
whose total revenue exceeded 10% of the total consolidated revenue. That customer accounted for 19% of total revenue but represented 0%
accounts receivable.
The major customer for the year ended December 31, 2017 is not necessarily the same as the major customer at December 31, 2016. 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, 2017 and 2016, no
allowance for bad debt has been established for the major customers as these amounts are expected to be fully collectible.
Fair value of financial instruments
The carrying amounts of cash, receivables, accounts payable, and accrued liabilities approximate fair value due to the short-term maturity
of the instruments. The carrying amount of long term receivables approximate fair value due to the contractual nature of the obligation,
payment schedule, and the current interest and inflation rate environments. The carrying amount of the Production Loan Facility
approximates fair value since the debt carries a variable interest rate that is tied to either the current Prime or LIBOR rates plus an
applicable spread.
We previously adopted FASB ASC 820 for financial instruments measured at fair value on a recurring basis. FASB ASC 820 defines fair
value, establishes a framework for measuring fair value in accordance with U.S. GAAP 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. FASB 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.
F-12
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU
2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the
transfer of non-financial assets unless those contracts are within the scope of other standards (e.g. insurance contracts). This ASU will
supersede all revenue recognition requirements in Topic 605, Revenue Recognition, and industry-specific guidance throughout the industry
topics of the codification. The guidance's core principle is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. In applying the revenue principles, an entity will identify the contract(s) with a customer, identify the performance obligations,
determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance
obligation is satisfied (either over time or at a point in time). The ASU further states that an entity should disclose sufficient information to
enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral
of the Effective Date”, which approved a one-year deferral of the effective date of the ASU from the original effective date of annual
reporting periods beginning after December 15, 2016, to annual reporting periods (including interim reporting periods) beginning after
December 15, 2017, with an option for early adoption of the standard on the original effective date. Additionally, in March 2016, the FASB
issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)”, which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued
ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, that amended
the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB
issued ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 805): Rescission of SEC Guidance Because
of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016, EITF Meeting”, which
rescinded from the FASB Accounting Standards Codification certain SEC paragraphs as a result of two SEC Staff Announcements. The
FASB also issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients”, which clarified guidance on assessment of collectability, presentation of sale taxes, measurement of noncash consideration,
and certain transition matters.
During 2017, the Company initiated and executed a project to evaluate the impact of these changes, which included a review of existing
contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a
comparison of that new treatment to the Company’s existing accounting policies, to identify differences. The standard will be applied using
the modified retrospective approach where the Company will record a cumulative effect adjustment as of the date of adoption, January 1,
2018.
The Company performed its analysis of its existing revenue contracts and has substantially completed its new revenue accounting policy
documentation under the new standard. The Company has identified the following six material and distinct performance obligations:
·
·
License rights to exploit Functional Intellectual Property (Functional Intellectual Property or “functional IP” is defined as intellectual
property that has significant standalone functionality for example ability be played or aired. Functional intellectual property derives
a substantial portion of its utility from its significant standalone functionality.)
License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or “symbolic IP” is intellectual property that
is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its
association with the entity’s past or ongoing activities, including its ordinary business activities for example the Company’s
licensing and merchandising programs associated with its animated content.)
· Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for the Company’s
current contracts, it could become significant in the future.)
· Options on future seasons of content at fixed terms. (While this performance obligation is not significant for the Company’s current
contracts, it could become significant in the future.)
·
Fixed fee advertising revenue generated from the Genius Brands Network
· Variable fee advertising revenue generated from the Genius Brands Network
As a result of the change, beginning January 1, 2018, the Company will begin recognizing revenue related to licensed rights to exploit
functional IP in two ways. For minimum guarantees, the Company will recognize fixed revenue upon delivery of content and the start of
the license period. For functional IP contracts with a variable component, the Company will estimate revenue such that it is probable there
will not be a material reversal of revenue in future periods. Revenue under these types of contracts was previously recognized when royalty
statements were received. The Company will begin recognizing revenue related to licensed rights to exploit symbolic IP substantially
similarly to functional IP. Although it has a different recognition pattern from functional IP, the valuation method is substantially the same,
depending on the nature of the license.
The Company is in the process of preparing the transition adjustment that will be reflected in its March 31, 2018 quarterly financial
statements. The Company expects that disclosure contained in the notes to the consolidated financial statements relating to revenue
recognition will expand under the new standard. The Company is evaluating the new disclosure requirements, including any necessary
changes to business processes, systems, and controls to support the additional required disclosures.
F-13
The Company is also currently evaluating the potential impact on the Company’s internal control over financial reporting to identify any
necessary changes.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets
and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make
lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new
guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at
the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning
of an interim or annual reporting period. We are currently evaluating the potential impact of adopting this guidance on our consolidated
financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of
the FASB Emerging Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash
equivalents on the statement of cash flows under a retrospective transition approach. The guidance will become effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We have prospectively
adopted ASU 2016-18 in our 2017 financial statements. Our 2016 financial statements have been reclassified to reflect the current year
adoption.
In January 2017, the FASB issued Accounting Standards Update 2017-04, “Simplifying the Test for Goodwill Impairment”, which requires
an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a
reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of
the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of
a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of
January 1, 2017 permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial
statements.
In May 2017, the FASB issued Accounting Standard Update 2017-09, “Compensation-Stock Compensation: Scope of Modification
Accounting”, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification
(equity or liability) of the new award are different from the original award immediately before the original award is modified. The standard
is effective beginning January 1, 2018, with early adoption permitted. We are currently evaluating the potential impact of adopting this
guidance on our consolidated financial statements.
Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting
literature or were applicable to specific industries/transactions or special circumstances, and are not expected to have a material effect on
our financial position, results of operations, or cash flows.
Note 3: Property and Equipment, Net
The Company has property and equipment as follows as of December 31, 2017 and 2016:
Furniture and Equipment
Computer Equipment
Leasehold Improvements
Software
Property and Equipment, Gross
Less Accumulated Depreciation
Property and Equipment, Net
December 31,
2017
December 31,
2016
$
$
12,385 $
117,256
176,903
15,737
322,281
(227,615)
94,666 $
12,385
42,654
176,903
15,737
247,679
(157,218)
90,461
During the years ended December 31, 2017 and 2016, the Company recorded depreciation expense of $70,397 and $66,331, respectively.
Note 4: Film and Television Costs, Net
As of December 31, 2017, the Company had net Film and Television Costs of $2,777,088 compared to $2,260,964 at December 31, 2016.
The increase relates primarily to the production and development of SpacePop, Llama Llama, and Rainbow Rangers offset by the
amortization of film costs associated with the revenue recognized for Llama Llama, Thomas Edison’s Secret Lab and SpacePop.
F-14
During the years ended December 31, 2017 and 2016, the Company recorded Film and Television Cost amortization expense of
$2,534,835 and $167,788, respectively.
The following table highlights the activity in Film and Television Costs as of December 31, 2017 and 2016:
Film and Television Costs, Net as of December 31, 2015
Additions to Film and Television Costs
Capitalized Interest
Film Amortization Expense
Film and Television Costs, Net as of December 31, 2016
Additions to Film and Television Costs
Capitalized Interest
Film Amortization Expense
Film and Television Costs, Net as of December 31, 2017
Note 5: Goodwill and Intangible Assets, Net
Goodwill
Total
1,003,546
1,390,450
34,756
(167,788)
2,260,964
2,863,076
187,883
(2,534,835)
2,777,088
$
$
In connection with the Merger in 2013, 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. Pursuant to FASB ASC 350-20, Goodwill is not subject to amortization
but is subject to annual review to determine if certain events warrant impairment to the Goodwill asset. Through December 31, 2017, the
Company has not recognized any impairment to Goodwill.
Intangible Assets, Net
The Company had the following intangible assets as of December 31, 2017 and 2016:
Identifiable Artistic-Related Assets (a)
Trademarks (b)
Product Masters (b)
Other Intangible Assets (b)
Intangible Assets, Gross
Less Accumulated Amortization (c)
Intangible Assets, Net
December 31,
2017
1,740,000 $
129,831
64,676
251,171
2,185,678
(329,398)
1,856,280 $
December 31,
2016
1,740,000
129,831
64,676
185,020
2,119,527
(273,877)
1,845,650
$
$
(a) In connection with the Merger in 2013, the Company acquired $1,740,000 of 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. Based on certain legal, regulatory, contractual, and economic factors, the Company has deemed these assets to be
indefinite-lived. Hence, pursuant to FASB ASC 350-30, these assets are not subject to amortization and are tested annually
for impairment. Through December 31, 2017, the Company has not recognized any impairment expense related to these
assets.
(b) Pursuant to FASB 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. Through December 31, 2017, the Company has not recognized any impairment
expense related to these assets.
(c) During the years ended December 31, 2017 and 2016, the Company recognized $55,521 and $76,356, respectively, in
amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets.
Expected future intangible asset amortization as of December 31, 2017 is as follows:
Fiscal Year:
2018
2019
2020
2021
2022
Remaining
Total
$
$
42,137
30,593
30,013
7,399
1,861
4,277
116,280
F-15
Note 6: Deferred Revenue
As of December 31, 2017 and 2016, the Company had total short term and long term deferred revenue of $5,085,383 and $3,106,608,
respectively. Deferred revenue includes both (i) variable fee contracts with licensees and customers in which the Company had collected
advances and minimum guarantees against future royalties and (ii) fixed fee contracts. The Company recognizes revenue related to these
contracts when all revenue recognition criteria have been met. Included in the deferred revenue balance as of December 31, 2016 is the
$2,000,000 advance against future royalty that Sony paid to the Company in the first quarter of 2016. Included in the deferred revenue
balance as of December 31, 2017 is the $2,000,000 advance against future royalties that Sony paid to the Company in the first quarter of
2016 as well as $1,489,583 attributable to the expansion of distribution rights acquired by Sony through the January 2017 Sony
Transactions.
Note 7: Accrued Liabilities - Current
As of December 31, 2017 and 2016, the Company had the following current accrued liabilities:
Accrued Salaries and Wages (a)
Disputed Trade Payables (b)
Services Advance - Current Portion (c)
Other Accrued Expenses (d)
Total Accrued Liabilities - Current
December 31,
2017
December 31,
2016
$
$
168,549 $
925,000
–
1,717,970
2,811,519 $
132,827
925,000
1,489,583
249,482
2,796,892
(a) Accrued Salaries and Wages represent accrued vacation payable to employees.
(b) As part of the Merger in 2013, the Company assumed certain liabilities from a previous member of A Squared which has claimed
certain liabilities totaling $925,000. The Company disputes the basis for this liability. As of December 31, 2017, the Company
believes that the statute of limitations applicable to the assertion of any legal claim relating to the collection of these liabilities has
expired and therefore believes this liability is uncollectible.
(c) During the first quarter of 2014, the Company entered into an exclusive three-year agreement with DADC to provide all CD, DVD
and Blu-ray replication, packaging and distribution to the Company’s direct customers. Under the terms of the long-term, exclusive
supply chain services agreement, the Company will order a minimum level of disk replication, packaging and distribution services
for its content across all physical media, including DVD, CD, and Blu-ray from DADC. As consideration for these minimum order
levels, the Company received a total of $1,500,000, $750,000 during the first quarter of 2014 and $750,000 during the first quarter
of 2015. At the end of the term, the Company is obligated to repay a pro-rata portion of the advance if it has not ordered a
minimum number of DVD/CD units during the term. On January 10, 2017, the Company entered into an amendment of our home
entertainment Distribution Agreement with Sony pursuant to which, among other things, Sony paid DADC $1,489,583, which was
the total sum owed and payable by us to DADC for the disk replication, packaging and distribution services. In connection with
such transaction, we issued Sony 301,231 shares of our common stock at $4.945 per share, Sony’s exclusive territory for exercising
its home entertainment distribution rights under the Distribution Agreement was extended from the United States and Canada to
worldwide, and the amount of advances subject to recoupment by Sony out of royalty payments that would otherwise be due to us
under the Distribution Agreement was increased by the amount of the payment to DADC.
(d) Other Accrued Expenses include estimates of expenses incurred but not yet recorded. The increase in Other Accrued Expenses
from the year ended December 31, 2016 to December 31, 2017 relates to estimates of final dubbing costs and participation expense
related to our Llama Llama property.
F-16
Note 8: Production Loan Facility
On August 8, 2016, Llama Productions closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the
“Facility”) with Bank Leumi USA to produce its animated series Llama Llama, (the “Series”) which is configured as fifteen half-hour
episodes comprised of thirty 11-minute programs which were delivered to Netflix in the fourth quarter of 2017. The Facility is secured by
the license fees the Company will receive from Netflix for the delivery of the Series as well as the Company’s copyright in the Series. The
Facility has a term of 40 months through December 2019 and has an interest rate of either Prime plus 1% or one, three, or six-month
LIBOR plus 3.25%. As a condition of the loan agreement with Bank Leumi, the Company deposited $1,000,000 into a cash account to be
used solely to produce the Series. During the fourth quarter of 2017, the Facility was reduced from $5,275,000 to $4,843,416 and a portion
of the collateral was released to the Company leaving $568,673 in restricted cash as of December 31, 2017. Additionally, the Facility
contains certain standard affirmative and negative non-financial covenants such as maintaining certain levels of production insurance and
providing standard financial reports. As of December 31, 2017, the Company was in compliance with these covenants.
As of December 31, 2017, the Company had gross outstanding borrowing under the facility of $4,436,528 against which financing costs of
$113,885 were applied resulting in net borrowings of $4,322,643. As of December 31, 2016, the Company had gross outstanding borrowing
under the facility of $1,505,307 against which financing costs of $173,303 were applied resulting in net borrowings of $1,332,004.
Note 9: Stockholders’ Equity
Common Stock
As of December 31, 2017, the total number of authorized shares of common stock was 233,333,334.
On October 29, 2015, the Company entered into securities purchase agreements with certain accredited investors pursuant to which the
Company sold an aggregate of 1,443,362 shares of its common stock, par value $0.001 per share, and warrants to purchase up to an
aggregate of 1,443,362 shares of common stock (the “Original Warrants”) for a purchase price of $3.00 per share and the associated
warrants for gross proceeds to the Company of $4,330,000 (“2015 Private Placement”). The closing of the 2015 Private Placement
occurred on November 3, 2015. Stock offering costs were $502,218. (See Note 11 for additional information about these warrants.)
On October 6, 2016, the Board of Directors of the Company authorized a reverse stock split in preparation for the Company’s anticipated
uplisting on the NASDAQ Capital Market.
On November 4, 2016, the Company filed a certificate of change to the Company’s Articles of Incorporation with the Secretary of State of
the State of Nevada to effect a one-for-three reverse stock split of the Company’s issued and outstanding common stock. As a result of the
2016 Reverse Split, every three shares of the Company’s issued and outstanding common stock were automatically combined and
reclassified into one share of the Company’s common stock. The 2016 Reverse Split affected all issued and outstanding shares of common
stock, as well as common stock underlying stock options and warrants outstanding. No fractional shares were issued in connection with the
2016 Reverse Split. Stockholders who would otherwise have held a fractional share of common stock received an increase to their common
stock as the common stock was rounded up to a full share. The total number of authorized shares of common stock was reduced from
700,000,000 to 233,333,334 in conjunction with the 2016 Reverse Split. The 2016 Reverse Split became effective on November 9, 2016.
All disclosures of shares and per share data in these consolidated financial statements and related notes have been retroactively adjusted to
reflect the reverse stock split for all periods presented.
On February 9, 2017, the Company entered into the Private Transaction pursuant to the Agreement with certain holders of the Original
Warrants. Pursuant to the Agreement, the holders of the Original Warrants and the Company agreed that such Original Warrant holders
would exercise their Original Warrants in full, and the Company would issue to each such holder new warrants. (See Note 11 for additional
information about these warrants.) In association with the Private Transaction, the Company issued 1,171,689 shares of common stock
upon exercise of a portion of the Original Warrants for which it received gross proceeds of $3,866,573 and recording offering costs of
$464,649 for net proceeds of $3,401,924.
F-17
As of December 31, 2017 and 2016, there were 7,610,794 and 4,010,649 shares of common stock outstanding, respectively. Below are the
changes to the Company’s common stock during the year ended December 31, 2017:
·
In connection with the January 2017 Sony Transactions, we issued Sony 301,231 shares of our common stock at $4.945 per share.
· On January 17, 2017, we issued to a consultant 10,112 shares of our common stock at $4.945 per share in connection with the
January 2017 Sony Transactions.
· On February 9, 2017, the Company issued 1,171,689 shares of common stock in connection with the Private Transaction.
· On March 14, 2017, the Company issued 8,410 shares of common stock valued at $5.95 per share to a consultant for services
rendered.
· On August 1, 2017, the Company issued 6,012 shares of common stock valued at $4.99 per share to a consultant for services
rendered.
· On October 3, 2017, the Company sold, in a registered direct offering, 1,647,691 shares of common stock at an offering price of
$3.90 per share and, in a concurrent private placement, warrants to purchase an aggregate of 1,647,691 shares of common stock for
gross proceeds of approximately $6,425,995 before deducting the placement agent fee and related offering expenses.
· On various dates during the year ended December 31, 2017, the Company issued 455,000 shares of the Company’s common stock
pursuant to the conversion of 1,365 shares of Series A Convertible Preferred Stock at a conversion price of $3.00.
Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001 per share. The Board of Directors is
authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares
of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting
powers, qualifications and special or relative rights or privileges as shall be determined by our Board of Directors, which may include,
among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
As of December 31, 2017 and 2016, there were 3,530 and 4,895 shares of Series A Convertible Preferred Stock outstanding, respectively.
On May 12, 2014, the Board of Directors authorized the designation of a class of preferred stock as “Series A Convertible Preferred
Stock”. On May 14, 2014, the Company filed the Certificate of Designation, Preferences and Rights of the 0% Series A Convertible
Preferred Stock with the Secretary of State of the State of Nevada.
Each share of the Series A Convertible Preferred Stock is convertible into shares of the Company’s common stock, par value $0.001 per
share, based on a conversion calculation equal to the Base Amount divided by the conversion price. The Base Amount is defined as the sum
of (i) the aggregate stated value of the Series A Convertible Preferred Stock to be converted and (ii) all unpaid dividends thereon. The
stated value of each share of the Series A Convertible Preferred Stock is $1,000 and the initial conversion price is $6.00 per share, subject
to adjustment in the event of stock splits, dividends and recapitalizations. Additionally, in the event the Company issues shares of its
common stock or common stock equivalents at a per share price that is lower than the conversion price then in effect, the conversion price
shall be adjusted to such lower price, subject to certain exceptions. The Company is prohibited from effecting a conversion of the Series A
Convertible Preferred Stock to the extent that as a result of such conversion, the investor would beneficially own more than 9.99% in the
aggregate of the issued and outstanding shares of the Company’s common stock, calculated immediately after giving effect to the issuance
of shares of common stock upon conversion of the Series A Convertible Preferred Stock. The shares of Series A Convertible Preferred
Stock possess no voting rights.
On May 14, 2014, we entered into securities purchase agreements with certain accredited investors pursuant to which we sold an aggregate
of 6,000 shares of our then newly designated Series A Convertible Preferred Stock at a price of $1,000 per share for gross proceeds to us of
$6,000,000. Related to the sale, we incurred offering costs of $620,085 resulting in net proceeds of $5,379,915. The transaction closed on
May 15, 2014.
As the conversion price of the Series A Convertible Preferred Stock on a converted basis was below the market price of the common stock
on the closing date, this resulted in a beneficial conversion feature recorded as an “imputed” dividend of $2,010,000. In addition, during the
fourth quarter of 2015, in connection with the 2015 Private Placement in which the Company’s common stock was sold at $3.00 per share,
the conversion price of the Series A Convertible Preferred Stock decreased to $3.00. This decrease resulted in an additional beneficial
conversion feature of $3,383,850 recognized as of the time of the 2015 Private Placement. In the future, issuance of common stock or the
grant of any rights to purchase our common stock or other securities convertible into our common stock for a per share price less than the
then existing conversion price of the Series A Convertible Preferred Stock would result in an adjustment to the then current conversion
price of the Series A Convertible Preferred Stock. This reduction would give rise to a beneficial conversion feature recorded as an
“imputed” dividend.
F-18
Note 10: Stock Options
On September 18, 2015, the Company adopted the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The 2015 Plan
was approved by our stockholders in September 2015. The 2015 Plan as approved by the stockholders authorized the issuance up to an
aggregate of 150,000 shares of common stock. On December 14, 2015, the Board of Directors voted to amend the 2015 Plan to increase the
total number of shares that can be issued under the 2015 Plan by 1,293,334 from 150,000 shares to 1,443,334 shares. The increase in shares
available for issuance under the 2015 Plan was approved by stockholders on February 3, 2016. On May 18, 2017, the Board of Directors
voted to amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 223,333 shares from
1,443,334 shares to an aggregate of 1,666,667 shares. The increase in shares available for issuance under the 2015 Plan was approved by
the stockholders on July 25, 2017.
The following table summarizes the changes in the Company’s stock option plan during the year ended December 31, 2017:
Options
Outstanding
Number of
Shares
Weighted
Average
Remaining
Contractual
Life
3.99 years $
Aggregate
Intrinsic
Value
Weighted
Average
Exercise
Price
per Share
280,642 $
8.14
Exercise Price
per Share
2.82 - 12.00
Balance at December 31, 2016
Options Granted
Options Exercised
Options Cancelled
Options Expired
Balance at December 31, 2017
Exercisable December 31, 2016
Exercisable December 31, 2017
1,373,554 $
-
-
79,509
-
1,294,045 $
2.82 - 12.00
2.99 years $
- $
452,535 $
1,070,869 $
2.82 - 6.00
2.82 - 9.00
3.95 years $
2.96 years $
263,375 $
- $
8.14
5.29
7.44
During the year ended December 31, 2015, the Company granted options to purchase 1,407,775 shares of common stock to officers,
directors, employees, and consultants. These stock options generally vest between one and three years, while a portion vested upon grant.
The fair value of these options was determined to be $2,402,460 using the Black-Scholes option pricing model based on the following
assumptions:
Exercise Price
Dividend Yield
Volatility
Risk-free interest rate
Expected life of options
$2.82 - $12.00
0%
100% - 137%
0.89% - 1.25%
2.5 - 3.5 years
During the first quarter of 2016, the Company recognized $220,564 of true-up expenses from prior periods which reflected certain revisions
meant to (i) align with the graded vesting of the majority of the options granted in 2015, (ii) make adjustments in certain accounting
estimates utilized in the Black-Scholes model, and (iii) reflect the accurate number of options granted in 2015. The Company assessed
these adjustments individually and in aggregate and considers them immaterial to the prior periods.
During the years ended December 31, 2017 and 2016, the Company recognized $663,958 and $1,581,797 in share-based compensation
expense, respectively. The unvested share-based compensation as of December 31, 2017 was $128,269 which will be recognized through
the second quarter of 2019 assuming the underlying grants are not cancelled or forfeited.
Note 11: Warrants
The Company has warrants outstanding to purchase up to 3,414,389 and 1,651,698 at December 31, 2017 and 2016, respectively.
In connection with the sale of the Company’s Series A Convertible Preferred Stock in May 2014, Chardan Capital Markets LLC
(“Chardan”) acted as sole placement agent in consideration for which it received a cash fee of $535,000 and a warrant to purchase up to
100,002 shares of the Company’s common stock. These warrants are exercisable immediately, have an exercise price of $6.00 per share,
and have a five-year term.
F-19
In connection with the 2015 Private Placement, the Company issued to accredited investors the Original Warrants to purchase up to an
aggregate of 1,443,362 shares of common stock for a purchase price of $3.00 per share. The Original Warrants are exercisable into shares
of common stock for a period of five (5) years from issuance at an initial exercise price of $3.30 per share, subject to adjustment in the
event of stock splits, dividends and recapitalizations. The Original Warrants are exercisable immediately. The Company is prohibited from
effecting an exercise of the warrants to the extent that as a result of such exercise, the holder would beneficially own more than 4.99%
(subject to increase up to 9.99% upon 61 days’ notice) in the aggregate of the issued and outstanding shares of common stock, calculated
immediately after giving effect to the issuance of shares of common stock upon exercise of the warrant.
In connection with the 2015 Private Placement, Chardan acted as sole placement agent in consideration for which it received a cash fee of
$300,000 and a warrant to purchase up to 141,668 shares of the Company’s common stock. These warrants are exercisable immediately,
have an exercise price of $3.60 per share, and have a five-year term.
On February 9, 2017, the Company entered into the Private Transaction pursuant to the Agreement with certain holders of the Original
Warrants. Pursuant to the Agreement, the holders of the Original Warrants and the Company agreed that such Original Warrant holders
would exercise their Original Warrants in full, and the Company would issue to each such holder new warrants, with the new warrants
being identical to the Original Warrants except that the termination date of such new warrants is February 10, 2022 (the “Reload
Warrants”). In addition, depending on the number of Original Warrants exercised by all holders of the Original Warrants, the Company
also agreed to issue to the holders another new warrant, identical to the Original Warrant except that the exercise price of such warrant is
$5.30 and such warrant is not exercisable until August 10, 2017 (the “Market Price Warrants” and together with the Reload Warrants, the
“New Warrants”).
The Company received gross proceeds of $3,866,573 from the exercise of the Original Warrants and issued Reload Warrants to purchase
an aggregate of 799,991 shares of the Company’s common stock and Market Price Warrants to purchase an aggregate of 371,699 shares of
the Company’s common stock. In association with the Private Transaction, the Company recorded $1,402,174, representing the difference
in the fair market value of the Original Warrants and the New Warrants, as an adjustment to additional paid-in capital.
Chardan acted as financial advisor on the Private Transaction in consideration for which Chardan received $363,617, Chardan and its
designees were issued New Warrants for 115,000 shares of the Company’s common stock.
On October 3, 2017, the Company sold, in a registered direct offering, 1,647,691 shares of common stock at an offering price of $3.90 per
share and, in a concurrent private placement, warrants to purchase an aggregate of 1,647,691 shares of common stock for gross proceeds of
approximately $6,425,995 before deducting the placement agent fee and related offering expenses.
The following table summarizes the changes in the Company’s outstanding warrants during the year ended December 31, 2017:
Balance at December 31, 2016
Warrants Granted
Warrants Exercised
Warrants Expired
Balance at December 31, 2017
Exercisable December 31, 2016
Exercisable December 31, 2017
Warrants
Outstanding
Number of
Shares
1,651,698 $
2,934,381
1,171,690
-
3,414,389 $
Weighted
Average
Remaining
Contractual
Life
3.75 years $
Weighted
Average
Exercise Price
per Share
-
-
Aggregate
Intrinsic
Value
3,301,913
-
-
3.49 $
-
-
Exercise
Price per
Share
3.30 - 6.00
3.30 - 5.30
3.30
3.30 - 6.00
4.21 years $
3.92 $
-
1,651,698 $
3,414,389 $
3.30 - 6.00
3.30 - 6.00
3.75 years $
4.21 years $
3.49 $
3.92 $
3,301,913
-
F-20
Note 12: Income Taxes
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, 2017 and 2016:
Deferred tax assets:
NOL Carryover
Bad Debt Reserve
Inventory Reserve
Amortization
Accrued Compensated Absences
Charitable Contributions
Subtotal
Valuation Allowance
Deferred tax liabilities:
Depreciation
Prepaid Expenses
Net Deferred Tax Asset
2017
2016
$
6,406,000 $
31,000
7,300
(20,200)
46,100
3,500
6,473,700
(6,458,800)
3,700
(18,600)
$
– $
7,544,300
44,100
10,400
61,500
52,900
5,000
7,718,200
(7,647,300)
(42,700)
(28,200)
–
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, 2017 and 2016 due to the following:
Book Loss
Meals and Entertainment
Stock Options
Tax Rate Change
Other
Valuation Allowance
2017
(1,669,000) $
10,600
225,700
2,809,700
1,600
(1,378,600)
– $
2016
(2,113,000)
10,300
537,800
–
4,700
1,560,200
–
$
$
At December 31, 2017, the Company had net operating loss carry forwards of approximately $23,363,000 that may be offset against future
taxable income from the year 2018 through 2037. No tax benefit has been reported in the December 31, 2017 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.
F-21
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.
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, 2017, the Company had no accrued interest or penalties related to uncertain tax positions.
On December 22, 2017, the United States federal government enacted the Tax Cuts and Jobs Act (the “2017 Act”). The 2017 Act will have
pervasive financial reporting implications for all companies with U.S. operations, including reduction of the U.S. federal corporate tax rate
from 35 percent to 21 percent. We reviewed and incorporated the new tax bill implications through 2017 financial statements. We
remeasured the deferred taxes at new corporation rate of 21%, which reduced the net deferred tax assets, before valuation allowance, by
approximately $2,809,700. Due to full valuation allowance, the change in deferred taxes was fully offset by the change in valuation
allowance. The 2017 Act has no significant impact on the 2017 financial statements.
Due to the complexities of the 2017 Act, the SEC issued Staff Accounting Bulletin No. 118 to address the application of GAAP in
situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. During the measurement period, impacts of the
law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts
can be recognized and adjusted as information becomes available, prepared, or analyzed. Any subsequent adjustment to these amounts will
be recorded to current tax expense in 2018 when the analysis is complete.
The Company files income tax returns in the U.S. federal jurisdiction and in the state of California. The Company is currently subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
Note 13: Commitments and Contingencies
The Company has various contractual obligations, which are recorded as liabilities in our consolidated financial statements. Other items,
such as certain purchase commitments and other executory contracts are not recognized as liabilities in our consolidated financial
statements but are required to be disclosed in the footnotes to the financial statements. For example, the Company is contractually
committed to make certain minimum lease payments for the use of property under its operating lease. In addition, the Company has
contractual commitments for employment agreements of certain employees.
During the first quarter of 2015, the Company entered into an agreement for new office space to which it relocated its operations upon the
expiration of its prior lease. Effective May 1, 2015, the Company began leasing approximately 3,251 square feet of general office space at
301 North Canon Drive, Suite 305, Beverly Hills, California 90210 pursuant to a 35-month sub-lease that commenced on May 1, 2015. The
Company will pay $136,542 annually, subject to annual escalations of 3%.
Rental expenses incurred for operating leases during the years ended December 31, 2017 and 2016 were $143,451 and $140,144,
respectively.
The following is a schedule of future minimum contractual obligations as of December 31, 2017, under the Company’s operating leases and
employment agreements:
Operating Leases
Employment Contracts
Total
2018
36,214
580,413
616,627
$
$
F-22
In addition to employment agreements and operating leases, in the normal course of its business, the Company enters into various
agreements associated with its individual properties. Some of these agreements call for the potential future payment of royalties or “profit”
participations for either (i) the use of third party intellectual property, such as the case with Stan Lee and the Mighty 7 and Llama Llama
among others, in which the Company is obligated to share net profits with the underlying rights holders on a certain basis as defined in the
respective agreements or (ii) services rendered by animation studios, post-production studios, writers, directors, musicians or other creative
talent for which the Company is obligated to share with these service providers a portion of the net profits of the properties on which they
have rendered services, as defined in each respective agreement.
Additionally, other agreements contain options to acquire rights to intellectual property and would require payment to the rights holders
contingent upon the Company securing minimum production, broadcast, or other financing commitments from third parties.
Lastly, for its Genius Brands Network, the Company licenses content for exhibition for which the Company is obligated to pay between
35% and 100% of revenues from the channel allocated to the aforementioned content after the deduction of certain direct operating
expenses.
Note 14: Related Party Transactions
On April 21, 2016, the Company entered into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”),
whose principal is Andy Heyward, the Company’s Chief Executive Officer. The Company entered into a customary merchandise license
agreement with AHAA for the use of characters and logos related to Warren Buffett’s Secret Millionaires Club and Stan Lee’s Mighty 7 in
connection with certain products to be sold by AHAA. The terms and conditions of such license are customary within the industry, and the
Company earns an arm-length industry standard royalty on all sales made by AHAA utilizing the licensed content. During the years ended
December 31, 2017 and 2016, the Company earned $96 and $247 in royalties from this agreement, respectively.
On October 1, 2016, Llama Productions LLC entered into an animation production services agreement with Mr. Heyward for services as a
producer for which he is to receive $186,000 through the course of production of the Company’s animated series Llama Llama. From
October 1, 2016 through December 31, 2017, Mr. Heyward has been paid $186,000.
As of December 31, 2017, Mr. Heyward owed the Company a total of $1,504 which was comprised of $2,136 owed to Mr. Heyward for the
sales of certain AHAA products facilitated by the Company offset by $3,640 owed to the Company by Mr. Heyward for personal expenses
paid by the Company requiring reimbursement. Mr. Heyward reimbursed the Company $1,504 subsequent to the end of the period. As of
December 31, 2016, Mr. Heyward owed the Company a total of $1,248 for personal expenses paid by the Company requiring
reimbursement. Mr. Heyward reimbursed the Company $1,248 during the first quarter of 2017.
On July 25, 2016, the Company entered into a consulting agreement with Foothill Entertainment, Inc. (“Foothill”), an entity whose
Chairman is Gregory Payne, our corporate secretary. The Company has engaged Foothill Entertainment, Inc. for a term of six months to
assist in the distribution and commercial exploitation of its audiovisual content as well as for the preparation and attendance on behalf of
the Company at the MIPJR and MIPCOM markets in Cannes. The agreement continues on a month-to-month basis following the initial
term. Foothill receives $12,500 per month for these services. Subsequent to the end of the period, the consulting agreement with Foothill
was terminated effective January 31, 2018.
As of December 31, 2017, Gregory B. Payne, individually and via his ownership position in Foothill, owed to the Company $5,558 for
expenditures made during the fourth quarter of 2017 related to the Brand Licensing Europe (“BLE”) and MIPCOM tradeshows. In addition,
during the fourth quarter of 2017, Foothill acted as an agent on the Company’s behalf in licensing certain of our animated programs to
certain broadcast networks for which Foothill owed to the Company $7,517 in license fees to be paid by the broadcaster to Foothill.
Subsequent to the end of the period, the Company received a payment of $7,517 from Foothill as satisfaction of the open licensing invoice.
Additionally, on February 28, 2018, Mr. Payne and the Company entered into an agreement whereby, among other things, Mr. Payne was
entitled to be reimbursed for 100% of his expenses incurred at the BLE and MIPCOM tradeshows resulting in the Company owning to Mr.
Payne $827.
F-23
Note 15: Subsequent Events
Pursuant to FASB ASC 855, Management has evaluated all events and transactions that occurred from December 31, 2017 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 8, 2018, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain
accredited investors (the “Investors”) pursuant to which the Company sold approximately $1.8 million of its common stock, par
value $0.001 per share (the “Common Stock”) and warrants (the “Warrants” and, together with the common stock, the
“Securities”) to the Investors (the “Offering”). Pursuant to the Purchase Agreement, the Company issued to the Investors
approximately 592,000 shares of common stock at a per share price of $3.00 and Warrants to purchase approximately 592,000
shares of common stock. The Warrants were immediately exercisable, will be exercisable for a period of five years from the
closing date and have an exercise price of $3.00 per share. The closing of the sale of these securities under the Purchase
Agreement occurred on January 10, 2018.
On January 6, 2018, the Company entered into an Engagement Letter (the “Engagement Letter”) with Chardan Capital Markets,
LLC (“Chardan” or the “Placement Agent”) pursuant to which the Company engaged Chardan as its placement agent in
connection with the Offering. The Placement Agent agreed to use its reasonable best efforts to arrange for the sale of the
Securities. The Company agreed to pay the Placement Agent a placement agent fee in cash equal to $100,000 and Warrants to
purchase 93,000 shares of common stock. The Engagement Letter also contains representations, warranties, indemnification and
other provisions customary for transactions of this nature.
The Offering is exempt from registration pursuant to the exemption for transactions by an issuer not involving any public offering
under Section 4(a)(2) the Securities Act of 1933, as amended (the “Securities Act”) and Regulation D under the Securities Act.
The Securities sold and issued in connection with the Purchase Agreement are not registered under the Securities Act or any state
securities laws and may not be offered or sold in the United States absent registration with the SEC or an applicable exemption
from the registration requirements.
On February 6, 2018, the Company entered into lease for approximately 6,969 square feet of general office space at 131 South
Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to a 91-month leave that commences on May 25, 2018. The Company
will pay rent of approximately $364,130 annually, subject to annual escalations of 3.5%.
On February 28, 2018, the Company entered into an agreement (the “Agreement”) with Gregory B. Payne, the Company’s Chief
Operating Officer, Executive Vice President - Legal/ Business Affairs and Corporate Secretary, pursuant to which Mr. Payne and
the Company agreed to the cessation of Mr. Payne’s employment with the Company upon the earlier to occur of the following: (1)
once Mr. Payne’s replacement has been found, after a two week transition period (the “Transition Period”) or (2) May 31, 2018
(the “End Date”). The Agreement provides that until the end of the Transition Period, Mr. Payne shall receive his full salary and
benefits and that upon the End Date, Mr. Payne shall be entitled to receive a payment equal to the greater of (1) 50% of his
remaining current salary or (2) three months of his current salary, plus, in either case, payment of accrued vacation and California
employee entitlements.
On March 26, 2018, the Company entered into an agreement with Michael Jaffa in which Mr. Jaffa will assume the role of General
Counsel and Senior Vice President of Business Affairs commencing on April 16, 2018. Mr. Jaffa will be entitled to be paid a
salary at the annual rate of $225,000 per year. The term of the agreement is one year with a mutual option for two additional one-
year periods. In addition, Mr. Jaffa will be entitled to receive a grant of stock options and an annual discretionary bonus based on
his performance.
On March 30, 2018, the Company entered into an agreement with Robert Denton in which Mr. Denton will assume the role of
Chief Financial Officer commencing on April 18, 2018. Mr. Denton will be entitled to be paid a salary at the annual rate of
$225,000 per year. The term of the agreement is two years with a mutual option for an additional one-year period. Mr. Denton
will be entitled to the reimbursement of relocation expenses to the Los Angeles area from Salt Lake City, UT up to $15,000 plus
the reimbursement of travel and other pre-relocation expenses up to $5,000 and up to a maximum of $5,000 per month of
reasonable living expenses incurred once relocated to Los Angeles and prior to moving into permanent accommodations. In
addition, Mr. Denton will be entitled to receive a grant of stock options and an annual discretionary bonus based on his
performance.
F-24
Exhibit 3.1
ARTICLES OF INCORPORATION
ONE: The name of this corporation is PACIFIC ENTERTAINMENT CORPORATION
TWO: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be
incorporated by the California Corporations Code.
THREE: The name and address in the State of California of this corporation’s initial agent for service of process is George L. de la Flor,
APC, 8355 La Mesa Blvd., La Mesa, CA 91941.
FOUR: This corporation is authorized to issue only one class of shares of stock, which shall be designated common stock. The total number
of shares which this corporation is authorized to issue is ONE HUNDRED MILLION (100,000,000) shares.
FIVE: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under
California law.
SIX: The corporation is authorized to indemnify the directors and officers of the corporation to the fullest extent permissible under
California law.
IN WITNESS WHEREOF, the undersigned, being all the persons named above as the initial directors, have executed these Articles of
Incorporation.
ARTICLES OF INCORPORATION
OF
GENIUS BRANDS INTERNATIONAL, INC.,
A Nevada Corporation
ARTICLE I
NAME
The name of the corporation is Genius Brands International, Inc. (the "Corporation").
ARTICLE II
RESIDENT AGENT AND REGISTERED OFFICE
The name and address of the Corporation's resident agent for service of process is The Corporation Trust Company of Nevada, 311
South Division Street, Carson City, Nevada 89703 (County of Carson City).
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Nevada
Revised Statutes (“NRS”).
ARTICLE IV
CAPITAL STOCK
4.01 Authorized Capital Stock. The total number of shares of stock this Corporation is authorized to issue shall be two hundred sixty
million (260,000,000) shares. This stock shall be divided into two classes to be designated as "Common Stock" and "Preferred Stock."
4.02 Common Stock. The total number of authorized shares of Common Stock shall be two hundred fifty million (250,000,000) shares
with par value of $0.001 per share. Each share of Common Stock when issued, shall have one (1) vote on all matters presented to the
stockholders.
4.03 Preferred Stock. The total number of authorized shares of Preferred Stock shall be ten million (10,000,000) shares with par value
of $0.001 per share. The board of directors shall have the authority to authorize the issuance of the Preferred Stock from time to time in one
or more classes or series, and to state in the resolution or resolutions from time to time adopted providing for the issuance thereof the
following:
(a) Whether or not the class or series shall have voting rights, full or limited, the nature and qualifications, limitations and
restrictions on those rights, or whether the class or series will be without voting rights;
(b) The number of shares to constitute the class or series and the designation thereof;
(c) The preferences and relative, participating, optional or other special rights, if any, and the qualifications, limitations, or
restrictions thereof, if any, with respect to any class or series;
(d) Whether or not the shares of any class or series shall be redeemable and if redeemable, the redemption price or prices, and
the time or times at which, and the terms and conditions upon which, such shares shall be redeemable and the manner of
redemption;
(e) Whether or not the shares of a class or series shall be subject to the operation of retirement or sinking funds to be
applied to the purchase or redemption of such shares for retirement, and if such retirement or sinking funds be established, the
amount and the terms and provisions thereof;
1
(f) The dividend rate, whether dividends are payable in cash, stock of the Corporation, or other property, the conditions
upon which and the times when such dividends are payable, the preference to or the relation to the payment of dividends payable on
any other class or classes or series of stock, whether or not such dividend shall be cumulative or noncumulative, and if cumulative,
the date or dates from which such dividends shall accumulate;
(g) The preferences, if any, and the amounts thereof which the holders of any class or series thereof are entitled to receive
upon the voluntary or involuntary dissolution of, or upon any distribution of assets of, the Corporation;
(h) Whether or not the shares of any class or series are convertible into, or exchangeable for, the shares of any other class or
classes or of any other series of the same or any other class or classes of stock of the Corporation and the conversion price or prices
or ratio or ratios or the rate or rates at which such exchange may be made, with such adjustments, if any, as shall be stated and
expressed or provided for in such resolution or resolutions; and
(i) Such other rights and provisions with respect to any class or series as may to the board of directors seem advisable.
The shares of each class or series of the Preferred Stock may vary from the shares of any other class or series thereof in any respect.
The Board of Directors may increase the number of shares of the Preferred Stock designated for any existing class or series by a resolution
adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any existing class or series of the
Preferred Stock and the shares so subtracted shall become authorized, unissued and undesignated shares of the Preferred Stock.
ARTICLE V
DIRECTORS
The Board of Directors shall be divided into two classes, each such class as nearly equal in number as the then-authorized number of
Directors constituting the Board of Directors permits, with the term of office of one class expiring each year. Following approval of this
Articles of Incorporation, the stockholders shall elect one class of Directors until the first annual meeting of stockholders (the “Class B
Directors”) and another class of Directors for a term expiring at the following annual meeting of stockholders (the “Class A Directors”).
Thereafter, each Director shall serve for a term ending at the second annual meeting of stockholders of the Corporation following the
annual meeting at which such Director was elected. Members of each class shall hold office until their successors are elected and qualified.
At each succeeding annual meeting of the stockholders of the Corporation, the successors of the class of Directors whose term expires at
that meeting shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of
stockholders held in the second year following the year of their election.
Subject to the foregoing, the number of directors comprising the board of directors shall be fixed and may be increased or decreased from
time to time in the manner provided in the bylaws of the Corporation, except that at no time shall there be less than one director.
The names and addresses of the original Directors are as follows:
Class A:
Klaus Moeller
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
Howard Balaban
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
Saul Hyatt
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
2
Class B:
Michael Meader
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
Larry Balaban
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
ARTICLE VI
DIRECTORS' AND OFFICERS' LIABILITY
The individual liability of the directors and officers of the Corporation is hereby eliminated to the fullest extent permitted by the NRS,
as the same may be amended and supplemented. Any repeal or modification of this Article by the stockholders of the Corporation shall be
prospective only, and shall not adversely affect any limitation on the personal liability of a director or officer of the Corporation for acts or
omissions prior to such repeal or modification.
ARTICLE VII
INDEMNITY
Every person who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he, or a person of whom he is the legal representative, is or was a
director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, or
as its representative in a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless to the fullest extent
legally permissible under the laws of the State of Nevada from time to time against all expenses, liability and loss (including attorneys' fees,
judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him in connection therewith. Such right
of indemnification shall be a contract right which may be enforced in any manner desired by such person. The expenses of officers and
directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the Corporation as they are incurred and in
advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to
repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the
Corporation. Such right of indemnification shall not be exclusive of any other right which such directors, officers or representatives may
have or hereafter acquire, and, without limiting the generality of such statement, they shall be entitled to their respective rights of
indemnification under any bylaw, agreement, vote of stockholders, provision of law, or otherwise, as well as their rights under this Article.
Without limiting the application of the foregoing, the board of directors may adopt bylaws from time to time with respect to
indemnification, to provide at all times the fullest indemnification permitted by the laws of the State of Nevada, and may cause the
Corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as director or officer of another corporation, or as its representative in a partnership, joint venture,
trust or other enterprises against any liability asserted against such person and incurred in any such capacity or arising out of such status,
whether or not the Corporation would have the power to indemnify such person.
The indemnification provided in this Article shall continue as to a person who has ceased to be a director, officer, employee or agent,
and shall inure to the benefit of the heirs, executors and administrators of such person.
Dated: September 16, 2011
/s/ Michael Meader
Michael Meader, Incorporator
3
Addendum to
Articles of Incorporation
(PURSUANT TO NRS CHAPTER 78)
OF
GENIUS BRANDS INTERNATIONAL, INC.,
A Nevada Corporation
ARTICLE I
NAME
The name of the corporation is Genius Brands International, Inc. (the "Corporation").
ARTICLE II
RESIDENT AGENT AND REGISTERED OFFICE
The name and address of the Corporation's resident agent for service of process is The Corporation Trust Company of Nevada, 311
South Division Street, Carson City, Nevada 89703 (County of Carson City).
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Nevada
Revised Statutes ("NRS").
ARTICLE IV
CAPITAL STOCK
4.01 Authorized Capital Stock The total number of shares of stock this Corporation is authorized to issue shall be two hundred sixty
million (260,000,000) shares. This stock shall be divided into two classes to be designated as "Common Stock" and "Preferred Stock."
4.02 Common Stock The total number of authorized shares of Common Stock shall be two hundred fifty million (250,000,000) shares
with par value of $0.001 per share. Each share of Common Stock when issued, shall have one (1) vote on all matters presented to the
stockholders.
1
4.03 Preferred Stock The total number of authorized shares of Preferred Stock shall be ten million (10,000,000) shares with par value
of $0.001 per share. The board of directors shall have the authority to authorize the issuance of the Preferred Stock from time to time in one
or more classes or series, and to state in the resolution or resolutions from time to time adopted providing for the issuance thereof the
following:
(a) Whether or not the class or series shall have voting rights, full or limited, the nature and qualifications,
limitations and restrictions on those rights, or whether the class or series will be without voting rights;
(b) The number of shares to constitute the class or series and the designation thereof;
(c) The preferences and relative, participating, optional or other special rights, if any, and the qualifications,
limitations, or restrictions thereof, if any, with respect to any class or series;
(d) Whether or not the shares of any class or series shall be redeemable and if redeemable, the redemption price or
prices, and the time or times at which, and the terms and conditions upon which, such shares shall be redeemable and the manner of
redemption;
(e) Whether or not the shares of a class or series shall be subject to the operation of retirement or sinking funds to be
applied to the purchase or redemption of such shares for retirement, and if such retirement or sinking funds be established, the amount
and the terms and provisions thereof;
(f) The dividend rate, whether dividends are payable in cash, stock of the Corporation, or other property, the
conditions upon which and the times when such dividends are payable, the preference to or the relation to the payment of dividends
payable on any other class or classes or series of stock, whether or not such dividend shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate;
(g) The preferences, if any, and the amounts thereof which the holders of any class or series thereof are entitled to
receive upon the voluntary or involuntary dissolution of, or upon any distribution of assets of, the Corporation;
(h) Whether or not the shares of any class or series are convertible into, or exchangeable for, the shares of any other
class or classes or of any other series of the same or any other class or classes of stock of the Corporation and the conversion price or
prices or ratio or ratios or the rate or rates at which such exchange may be made, with such adjustments, if any, as shall be stated and
expressed or provided for in such resolution or resolutions; and
2
(i) Such other rights and provisions with respect to any class or series as may to the board of directors seem advisable.
The shares of each class or series of the Preferred Stock may vary from the shares of any other class or series thereof in any respect.
The Board of Directors may increase the number of shares of the Preferred Stock designated for any existing class or series by a resolution
adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any existing class or series of the
Preferred Stock and the shares so subtracted shall become authorized, unissued and undesignated shares of the Preferred Stock.
ARTICLE V
DIRECTORS
The Board of Directors shall be divided into two classes, each such class as nearly equal in number as the then-authorized
number of Directors constituting the Board of Directors permits, with the term of office of one class expiring each year. Following
approval of this Articles of Incorporation, the stockholders shall elect one class of Directors until the first annual meeting of stockholders
(the "Class B Directors") and another class of Directors for a term expiring at the following annual meeting of stockholders (the "Class A
Directors"). Thereafter, each Director shall serve for a term ending at the second annual meeting of stockholders of the Corporation
following the annual meeting at which such Director was elected. Members of each class shall hold office until their successors are elected
and qualified. At each succeeding annual meeting of the stockholders of the Corporation, the successors of the class of Directors whose
term expires at that meeting shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the
annual meeting of stockholders held in the second year following the year of their election.
Subject to the foregoing, the number of directors comprising the board of directors shall be fixed and may be increased or
decreased from time to time in the manner provided in the bylaws of the Corporation, except that at no time shall there be less than one
director.
The names and addresses of the original Directors are as follows:
Class A:
Klaus Moeller
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
3
Howard Balaban
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
Saul Hyatt
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
Class B:
Michael G. Meader
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
Larry Balaban
5820 Oberlin Drive, Suite 203, San Diego, CA 92121
ARTICLE VI
DIRECTORS' AND OFFICERS' LIABILITY
The individual liability of the directors and officers of the Corporation is hereby eliminated to the fullest extent permitted by the NRS,
as the same may be amended and supplemented. Any repeal or modification of this Article by the stockholders of the Corporation shall be
prospective only, and shall not adversely affect any limitation on the personal liability of a director or officer of the Corporation for acts or
omissions prior to such repeal or modification.
ARTICLE VII
INDEMNITY
Every person who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he, or a person of whom he is the legal representative, is or was a
director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, or
as its representative in a partnership, joint venture, trust or other enterprise shall be indemnified and held harmless to the fullest extent
legally permissible under the laws of the State of Nevada from time to time against all expenses, liability and loss (including attorneys' fees,
judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him in connection therewith. Such right
of indemnification shall be a contract right which may be enforced in any manner desired by such person. The expenses of officers and
directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the Corporation as they are incurred and in
advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to
repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the
Corporation. Such right of indemnification shall not be exclusive of any other right which such directors, officers or representatives may
have or hereafter acquire, and, without limiting the generality of such statement, they shall be entitled to their respective rights of
indemnification under any bylaw, agreement, vote of stockholders, provision of law, or otherwise, as well as their rights under this Article.
4
Without limiting the application of the foregoing, the board of directors may adopt bylaws from time to time with respect to
indemnification, to provide at all times the fullest indemnification permitted by the laws of the State of Nevada, and may cause the
Corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as director or officer of another corporation, or as its representative in a partnership, joint venture,
trust or other enterprises against any liability asserted against such person and incurred in any such capacity or arising out of such status,
whether or not the Corporation would have the power to indemnify such person.
The indemnification provided in this Article shall continue as to a person who has ceased to be a director, officer, employee or agent,
and shall inure to the benefit of the heirs, executors and administrators of such person.
Dated: September 16, 2011
/s/ Michael G. Meader
Michael G. Meader, Incorporator
5
6
AGREEMENT AND PLAN OF MERGER
OF
PACIFIC ENTERTAINMENT CORPORATION, A CALIFORNIA CORPORATION
GENIUS BRANDS INTERNATIONAL, INC., A NEVADA CORPORATION
AND
THIS AGREEMENT AND PLAN OF MERGER (the “Agreement”) dated as of October 14, 2011, made and entered into by and
between Pacific Entertainment Corporation, A California corporation (“Pacific”), and Genius Brands International, Inc., a Nevada
corporation (“Genius”), which corporations are sometimes referred to herein as the “Constituent Corporations.”
WITNESSETH
WHEREAS, Pacific is a corporation organized and existing under the laws of the State of California, having been incorporated on
January 3, 2006, under the laws of the State of California under the California Corporations Code; and
WHEREAS, Genius is a wholly-owned .subsidiary corporation of Pacific organized and existing under the laws of the State of
Nevada, having been incorporated on September 16, 2011, under the Nevada Revised Statutes; and
WHEREAS, the respective Boards of Directors of Pacific and Genius have determined that it is desirable to merge Pacific with
and into Genius and that Genius shall be the surviving corporation (the "Merger"); and
WHEREAS, the parties intend by this Agreement to effect a reorganization under Section 368 of the Internal Revenue Code of
1986, as amended.
NOW, THEREFORE, in consideration of the mutual covenants and promises contained in this Agreement, and for other valuable
consideration, the receipt:and adequacy of which are hereby acknowledged, and intending to be legally:bound, Pacific and Genius hereto
agree as follows:
ARTICLE I
MERGER
1.1 On the effective date of the Merger (the “Effective Date”), as provided herein, Pacific shall be merged with and into Genius,
the separate existence of Pacific shall cease and Genius (hereinafter sometimes referred tows the “Surviving Corporation”) shall continue
to exist under the name of Genius Brands International, Inc. by virtue of, and shall be governed by, the laws of the State of Nevada. The
address of the registered office of the Surviving Corporation in the State of Nevada will be The Corporation Trust Company of Nevada,
311 South Division Street, Carson City; Nevada 89703 (County of Carson City).
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ARTICLE II
ARTICLES OF INCORPORATION OF SURVIVING CORPORATION
2.1 The name of the Surviving Corporation shall be “Genius Brands International, Inc.” The Articles of Incorporation of the
Surviving Corporation, attached hereto as Exhibit A, as in effect on the date hereof, shall be the Articles of Incorporation of Genius without
change, unless and until amended in accordance with this Agreement or otherwise amended in accordance with applicable law.
ARTICLE III
BY LAWS OF THE SURVIVING CORPORATION
3.1 The Bylaws of the Surviving Corporation, as in effect on the date hereof shall be the Bylaws of Genius without change, unless
and until amended in accordance with Article VIII of this Agreement or otherwise amended in accordance with applicable law.
ARTICLE IV
EFFECT OF MERGER ON STOCK OF CONSTITUENT CORPORATIONS
4.1 On the Effective. Date, the holders of the common stock of Pacific shall receive one share of common stock of Genius (“Genius
Common Stock”) as consideration and in exchange for each one share of common stock of Pacific and shall have no further claims of any
kind or nature; and all of the common stock of Genius held by Pacific shall be surrendered and canceled. Each holder of record of any
outstanding certificate or certificates theretofore representing stock of Pacific may surrender the same to the Surviving Corporation at its
offices, and such holder shall be entitled upon such surrender to receive in exchange therefor a certificate or certificates representing the
number of shares of common stock of the Surviving Corporation equal to the number of shares of common stock of the Corporation
represented by such surrendered certificates (the “Conversion Amount”), provided however, that each certificate or certificates of the
Corporation bearing a restrictive legend shall 'bear the same restrictive legend on the certificate or certificates of the Surviving
Corporation. Until so surrendered, each outstanding certificate which prior to the effective time of the Merger represented one or more
shares of stock of the Corporation shall be deemed for all corporate purposes to evidence ownership of shares of stock of the Surviving
Corporation .equal to the Conversion Amount.
4.2 On the Effective Date, the holders of any options, warrants, or other securities of Pacific shall be enforced against Genius to the
same extent as if such options, warrants, or other securities had been issued by Genius.
ARTICLE V
CORPORATE EXISTENCE, POWERS AND LIABILITIES OF THE SURVIVING
CORPORATION
5.1 On the Effective Date, the separate existence of Pacific shall cease. Pacific shall be merged with and into Genius, the Surviving
Corporation, in accordance with the provisions of this Agreement. Thereafter, Genius shall possess all the rights, privilege, powers and
franchises of a public as well as of a private nature, and shall be subject to all the restriction; disabilities and duties of each of the parties to
this Agreement; all singular rights, privileges, powers and franchises of Pacific and Genius, and all property, real, personal and mixed and
all debts due to each of them on whatever account, shall be vested in Genius; and all property, rights, privileges, powers and franchises, and
all and every other interest shall be thereafter the property of Genius, the Surviving Corporation, as they were of the respective constituent
entities, and the title to any real estate, whether by deed or otherwise, vested in Pacific and Genius, or either of them, shall not revert or be
in any way impaired by reason .of the Merger, but all rights of creditors and all liens upon the property of the parties hereto, shall be
preserved unimpaired, and all debts, liabilities and duties of Pacific shall thenceforth attach to Genius, and may be enforced against it to the
same extent as if said debts, liabilities and duties had been incurred or contracted by it.
5.2. Pacific agrees that it will execute and deliver, or cause to be executed and delivered, all such deeds and other instruments and
will take or cause to be taken such further or other action as the Surviving Corporation may deem necessary in order to vest in and confirm
to the Surviving Corporation title to and possession of all the property, rights, privileges, immunities, powers, purposes and franchises, and
all and every other interest of Pacific and otherwise to carry out the intent and purposes of this Agreement.
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ARTICLE VI
OFFICERS AND DIRECTORS OF SURVIVING CORPORATION
6.1. Upon the Effective Date, the officers and directors of Genius shall be the officers and directors of the Surviving Corporation
6.2 If upon the Effective Date, a vacancy shall exist in the Board of Directors of the Surviving Corporation, such vacancy shall be
filled in the manner provided by the Genius Bylaws.
ARTICLE VII.
DISSENTING SHARES
7.1 Holders of shares of Pacific common stock who have complied with all requirements for perfecting their right of appraisal as
required in the California Corporations Code shall be entitled to their rights under California law with payments to be made by the
Surviving Corporation.
ARTICLE VIII
APPROVAL BY SHAREHOLDERS, EFFECTIVE DATE, CONDUCT OF BUSINESS
PRIOR TO EFFECTIVE DATE
8.1 Promptly after the approval of this Agreement by the, requisite number of shareholders of Pacific, the respective Boards of
Directors of Pacific and Genius will cause their duly authorized officers to make and execute Articles of Merger or other applicable
certificates or documentation effecting this Agreement and shall cause the same to be filed with the Secretaries of Stare of California and
Nevada, respectively; in accordance with the California Corporations Code and the Nevada Revised Statutes. The Effective Date shall be
the date on which the Articles of Merger is filed with the Secretary of State of California and the Secretary of State of Nevada.
8.2 The. Boards of Directors of Pacific and Genius may amend, this Agreement and the Genius Articles of IncorPoration or Genius
Bylaws at any time prior to the Effective Date, provided that an amendment made subsequent to the approval of the Merger by the
shareholders of Pacific may not (i) change the amount or kind of shares to be received in exchange for the. Pacific common stock; or (ii)
alter or change any of the terms and conditions of this Agreement or the Genius Articles of Incorporation or Genius Bylaws if such change
would adversely affect the holders of the Genius Common Stock.
9.1 This Agreement may be terminated and the Merger abandoned at any time prior to the Effective Date, whether before or after
shareholder approval of this Agreement, by the consent of the Board of Directors of Pacific; and Genius.
ARTICLE IX
TERMINATION OF MERGER
ARTICLE X
MISCELLANEOUS
10.1 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada
without reference to its principles of conflicts of law.
10.2 EXPENSES. If the Merger becomes effective, the Surviving Corporation shall assume and pay all expenses, in
connection:therewith not theretofore paid by the respective parties. If for any reason the Merger shall not become effective; Pacific shall
pay all expenses incurred in connection with all the proceedings taken in respect of this Merger Agreement or relating thereto.
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10.3 AGREEMENT. An executed copy of this Agreement will be on file at the principal place of business of the Surviving
Corporation at 5820 Oberlin Drive, Suite 203, San Diego, California 92121, and, upon request and without cost, a copy thereof will be
furnished to any shareholder.
10.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an
original and all of which together shall constitute one and the same instrument.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and`year first above
[Signature Page to Agreement and Plan of Merger]
written.
GENIUS BRANDS INTERNATIONAL, INC.,
a Nevada corporation
By: /s/ Michael Meader
Michael Meader, President
PACIFIC ENTERTAINMENT CORPORATION,
a California corporation
By: /s/ Michael Meader
Michael Meader, President
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4.02 Common Stock. The total number of authorized shares of Common Stock shall be seven hundred million (700,000,000) shares
with par value of $0.001 per share. Each share of Common Stock when issued, shall have one (1) vote on all matters presented to the
stockholders.
ANNEX A
Certificate of Amendment
of
Articles of Incorporation
of Genius Brands International, Inc.
Article IV of the Company's Articles of Incorporation shall be amended by adding, the following section to the end of Article IV,
Subsection 4.02 of the Articles of Incorporation, that reads as follows, subject to compliance with applicable law:
Upon the filing and effectiveness (the "Effective Time") pursuant to the Nevada Revised Statutes of this amendment to the
Corporation's Articles of Incorporation, each 100 shares of Common Stock issued and outstanding immediately prior to the Effective
Time either issued and outstanding or held by the Corporation as treasury stock shall be combined into one (l) validly issued, fully
paid and non-assessable share of Common Stock without any further action by the Corporation or the holder thereof (the "Reverse
Stock Split"); provided that no fractional shares shall be issued to any holder and that instead of issuing such fractional shares, the
Corporation shall round shares up to the nearest whole number. Each certificate that immediately prior to the Effective Time
represented shares of Common Stock (''Old Certificates"), shall thereafter represent that number of shares of Common Stock into
which the shares of Common Stock represented by the Old Certificate shall have been combined, subject to the treatment of
fractional shares as described above.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF THE
0% SERIES A CONVERTIBLE PREFERRED STOCK OF
GENIUS BRANDS INTERNATIONAL, INC.
I, Andrew Heyward, hereby certify that I am the Chief Executive Officer of Genius Brands International, Inc. (the "Company"), a
corporation organized and existing under the Chapter 78 of the Nevada Revised Statues (the "Nevada General Company Law" or the
"NGCL"), and further do hereby certify:
That pursuant to the authority expressly conferred upon the Board of Directors of the Company (the "Board") by the Company's
Articles of Incorporation, as amended (the "Articles of Incorporation"), the Board on May 14, 2014 adopted the following resolutions
creating a series of shares of Preferred Stock designated as 0% Series A Convertible Preferred Stock, none of which shares have been
issued:
RESOLVED, that the Board designates the 0% Series A Convertible Preferred Stock and the number of shares constituting such
series, and fixes the rights, powers, preferences, privileges and restrictions relating to such series in addition to any set forth in the Articles
of Incorporation as follows:
TERMS OF SERIES A CONVERTIBLE PREFERRED STOCK
1. Designation and Number of Shares. There shall hereby be created and established a series of preferred stock of the
Company designated as "0% Series A Convertible Preferred Stock" (the "Preferred Shares"). The authorized number of Preferred Shares
shall be 6,000 shares. Each Preferred Share shall have $0.001 par value. Capitalized terms not defined herein shall have the meaning as set
forth in Section 23 below.
2. Ranking. Except to the extent that the holders of at least a majority of the outstanding Preferred Shares (the "Required
Holders") expressly consent to the creation of Parity Stock (as defined below) or Senior Preferred Stock (as defined below) in accordance
with Section 12, all shares of capital stock of the Company shall be junior in rank to all Preferred Shares with respect to the preferences as
to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company (such junior stock is referred to
herein collectively as "Junior Stock"). The rights of all such shares of capital stock of the Company shall be subject to the rights, powers,
preferences and privileges of the Preferred Shares. Without limiting any other provision of this Certificate of Designations, without the
prior express consent of the Required Holders, voting separate as a single class, the Company shall not hereafter authorize or issue any
additional or other shares of capital stock that is (i) of senior rank to the Preferred Shares in respect of the preferences as to dividends,
distributions and payments upon the liquidation, dissolution and winding up of the Company (collectively, the "Senior Preferred Stock"),
(ii) of pari passu rank to the Preferred Shares in respect of the preferences as to dividends, distributions and payments upon the liquidation,
dissolution and winding up of the Company (collectively, the "Parity Stock") or (iii) any Junior Stock having a maturity date (or any other
date requiring redemption or repayment of such shares of Junior Stock) that is prior to the date no Preferred Shares remain outstanding. In
the event of the merger or consolidation of the Company with or into another corporation, the Preferred Shares shall maintain their relative
rights, powers, designations, privileges and preferences provided for herein and no such merger or consolidation shall result inconsistent
therewith.
3. Dividends. In addition to Sections 5(a) and 11 below, from and after the first date of issuance of any Preferred Shares (the
"Initial Issuance Date"), each holder of a Preferred Share (each, a "Holder" and collectively, the "Holders") shall be entitled to receive
dividends ("Dividends") when and as declared by the Board, from time to time, in its sole discretion, which Dividends shall be paid by the
Company out of funds legally available therefor, payable, subject to the conditions and other terms hereof, in cash on the Stated Value of
such Preferred Share.
4.
Conversion. Each Preferred Share shall be convertible into validly issued, fully paid and non-assessable shares of
Common Stock (as defined below) on the terms and conditions set forth in this Section 4.
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(a) Holder's Conversion Right. Subject to the provisions of Section 4(e), at any time or times on or after the Initial
Issuance Date, each Holder shall be entitled to convert any whole number of Preferred Shares into validly issued, fully paid and
non-assessable shares of Common Stock in accordance with Section 4(c) at the Conversion Rate (as defined below).
(b) Conversion Rate. The number of validly issued, fully paid and non- assessable shares of Common Stock issuable
upon conversion of each Preferred Share pursuant to Section 4(a) shall be determined according to the following formula (the
"Conversion Rate"):
Base Amount
Conversion Price
No fractional shares of Common Stock are to be issued upon the conversion of any Preferred Shares. If the issuance would result
in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the
nearest whole share.
(c) Mechanics of Conversion. The conversion of each Preferred Share shall be conducted in the following manner:
( i ) Holder's Conversion. To convert a Preferred Share into validly issued, fully paid and non-assessable
shares of Common Stock on any date (a "Conversion Date"), a Holder shall deliver (whether via facsimile or otherwise),
for receipt on or prior to 11:59 p.m., New York time, on such date, a copy of an executed notice of conversion of the
share(s) of Preferred Shares subject to such conversion in the form attached hereto as Exhibit I (the "Conversion
Notice") to the Company. If required by Section 4(c)(vi), within five (5) Trading Days following a conversion of any
such Preferred Shares as aforesaid, such Holder shall surrender to a nationally recognized overnight delivery service for
delivery to the Company the original certificates representing the share(s) of Preferred Shares (the "Preferred Share
Certificates") so converted as aforesaid.
( i i ) Company's Response. On or before the first (1st) Trading Day following the date of receipt of a
Conversion Notice, the Company shall transmit by facsimile an acknowledgment of confirmation, in the form attached
hereto as Exhibit II, of receipt of such Conversion Notice to such Holder and the Transfer Agent, which confirmation
shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms
herein. On or before the second (2nd) Trading Day following the date of receipt by the Company of such Conversion
Notice, the Company shall (1) provided that the Transfer Agent is participating in DTC Fast Automated Securities
Transfer Program, credit such aggregate number of shares of Common Stock to which such Holder shall be entitled to
such Holder's or its designee's balance account with DTC through its Deposit/Withdrawal at Custodian system, or (2) if
the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver (via
reputable overnight courier) to the address as specified in such Conversion Notice, a certificate, registered in the name of
such Holder or its designee, for the number of shares of Common Stock to which such Holder shall be entitled. If the
number of Preferred Shares represented by the Preferred Share Certificate(s) submitted for conversion pursuant to Section
4(c)(vi) is greater than the number of Preferred Shares being converted, then the Company shall if requested by such
Holder, as soon as practicable and in no event later than three (3) Trading Days after receipt of the Preferred Share
Certificate(s) and at its own expense, issue and deliver to such Holder (or its designee) a new Preferred Share Certificate
representing the number of Preferred Shares not converted.
(iii) Record Holder. The Person or Persons entitled to receive the shares of Common Stock issuable upon a
conversion of Preferred Shares shall be treated for all purposes as the record holder or holders of such shares of Common
Stock on the Conversion Date.
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(iv) Company's Failure to Timely Convert. If the Company shall fail, for any reason or for no reason, to
issue to a Holder within three (3) Trading Days after the Company's receipt of a Conversion Notice (whether via facsimile
or otherwise) (the "Share Delivery Deadline"), a certificate for the number of shares of Common Stock to which such
Holder is entitled and register such shares of Common Stock on the Company's share register or to credit such Holder's or
its designee's balance account with DTC for such number of shares of Common Stock to which such Holder is entitled
upon such Holder's conversion of any Preferred Shares (as the case may be) (a "Conversion Failure"), then, in addition
to all other remedies available to such Holder, such Holder, upon written notice to the Company, (x) may void its
Conversion Notice with respect to, and retain or have returned (as the case may be) any Preferred Shares that have not
been converted pursuant to such Holder's Conversion Notice, provided that the voiding of a Conversion Notice shall not
affect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to the
terms of this Certificate of Designations or otherwise and (y) the Company shall pay in cash to such Holder on each day
after such third (3rd) Trading Day that the issuance of such shares of Common Stock is not timely effected an amount
equal to 1.5% of the product of (A) the aggregate number of shares of Common Stock not issued to such Holder on a
timely basis and to which the Holder is entitled and (B) the Closing Sale Price of the Common Stock on the Trading Day
immediately preceding the last possible date on which the Company could have issued such shares of Common Stock to
the Holder without violating Section 4(c). In addition to the foregoing, if within three (3) Trading Days after the
Company's receipt of a Conversion Notice (whether via facsimile or otherwise), the Company shall fail to issue and
deliver a certificate to such Holder and register such shares of Common Stock on the Company's share register or credit
such Holder's or its designee's balance account with DTC for the number of shares of Common Stock to which such
Holder is entitled upon such Holder's conversion hereunder (as the case may be), and if on or after such third (3rd)
Trading Day such Holder (or any other Person in respect, or on behalf, of such Holder) purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of all or any portion
of the number of shares of Common Stock, or a sale of a number of shares of Common Stock equal to all or any portion of
the number of shares of Common Stock, issuable upon such conversion that such Holder so anticipated receiving from the
Company, then, in addition to all other remedies available to such Holder, the Company shall, within three (3) Business
Days after such Holder's request and in such Holder's discretion, either (i) pay cash to such Holder in an amount equal to
such Holder's total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the
shares of Common Stock so purchased (including, without limitation, by any other Person in respect, or on behalf, of such
Holder) (the "Buy-In Price"), at which point the Company's obligation to so issue and deliver such certificate or credit
such Holder's balance account with DTC for the number of shares of Common Stock to which such Holder is entitled
upon such Holder's conversion hereunder (as the case may be) (and to issue such shares of Common Stock) shall
terminate, or (ii) promptly honor its obligation to so issue and deliver to such Holder a certificate or certificates
representing such shares of Common Stock or credit such Holder's balance account with DTC for the number of shares of
Common Stock to which such Holder is entitled upon such Holder's conversion hereunder (as the case may be) and pay
cash to such Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock multiplied by (B) the lowest Closing Sale Price of the Common Stock on any Trading Day
during the period commencing on the date of the applicable Conversion Notice and ending on the date of such issuance
and payment under this clause (ii).
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( v ) Pro Rata Conversion; Disputes. In the event the Company receives a Conversion Notice from more
than one Holder for the same Conversion Date and the Company can convert some, but not all, of such Preferred Shares
submitted for conversion, the Company shall convert from each Holder electing to have Preferred Shares converted on
such date a pro rata amount of such Holder's Preferred Shares submitted for conversion on such date based on the number
of Preferred Shares submitted for conversion on such date by such Holder relative to the aggregate number of Preferred
Shares submitted for conversion on such date.
In the event of a dispute as to the number of shares of Common Stock issuable to a Holder in connection with a conversion of Preferred
Shares, the Company shall issue to such Holder the number of shares of Common Stock not in dispute and resolve such dispute in
accordance with Section 22.
( v i ) Book-Entry. Notwithstanding anything to the contrary set forth in this Section 4, upon conversion of
any Preferred Shares in accordance with the terms hereof, no Holder thereof shall be required to physically surrender the
certificate representing the Preferred Shares to the Company following conversion thereof unless (A) the full or remaining
number of Preferred Shares represented by the certificate are being converted (in which event such certificate(s) shall be
delivered to the Company as contemplated by this Section 4(c)(vi)) or (B) such Holder has provided the Company with
prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of Preferred Shares upon
physical surrender of any Preferred Shares. Each Holder and the Company shall maintain records showing the number of
Preferred Shares so converted by such Holder and the dates of such conversions or shall use such other method, reasonably
satisfactory to such Holder and the Company, so as not to require physical surrender of the certificate representing the
Preferred Shares upon each such conversion. In the event of any dispute or discrepancy, such records of such Holder
establishing the number of Preferred Shares to which the record holder is entitled shall be controlling and determinative in
the absence of manifest error. A Holder and any transferee or assignee, by acceptance of a certificate, acknowledge and
agree that, by reason of the provisions of this paragraph, following conversion of any Preferred Shares, the number of
Preferred Shares represented by such certificate may be less than the number of Preferred Shares stated on the face thereof.
Each certificate for Preferred Shares shall bear the following legend:
ANY TRANSFEREE OR ASSIGNEE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE
TERMS OF THE CORPORATION'S CERTIFICATE OF DESIGNATIONS RELATING TO THE
SHARES OF SERIES A PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE,
INCLUDING SECTION 4(c)(vi) THEREOF. THE NUMBER OF SHARES OF SERIES A PREFERRED
STOCK REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF
SHARES OF SERIES A PREFERRED STOCK STATED ON THE FACE HEREOF PURSUANT TO
SECTION 4(c)(vi) OF THE CERTIFICATE OF DESIGNATIONS RELATING TO THE SHARES OF
SERIES A PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE.
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(d) Taxes. The Company shall pay any and all documentary, stamp, transfer (but only in respect of the registered
holder thereof), issuance and other similar taxes that may be payable with respect to the issuance and delivery of shares of Common
Stock upon the conversion of Preferred Shares.
(e) Limitation on Beneficial Ownership. Notwithstanding anything to the contrary contained in this Certificate of
Designations, the Preferred Shares held by a Holder shall not be convertible by such Holder, and the Company shall not effect any
conversion of any Preferred Shares held by such Holder, to the extent (but only to the extent) that such Holder or any of its affiliates
would beneficially own in excess of 9.99% (the "Maximum Percentage") of the Common Stock. To the extent the above
limitation applies, the determination of whether the Preferred Shares held by such Holder shall be convertible (vis-à-vis other
convertible, exercisable or exchangeable securities owned by ;such Holder or any of its affiliates) and of which such securities shall
be convertible, exercisable or exchangeable (as among all such securities owned by such Holder and its affiliates) shall, subject to
such Maximum Percentage limitation, be determined on the basis of the first submission to the Company for conversion, exercise or
exchange (as the case may be). No prior inability of a Holder to convert Preferred Shares, or of the Company to issue shares of
Common Stock to such Holder, pursuant to this Section 4(e) shall have any effect on the applicability of the provisions of this
Section 4(e) with respect to any subsequent determination of convertibility or issuance (as the case may be). For purposes of this
Section 4(e), beneficial ownership and all determinations and calculations (including, without limitation, with respect to calculations
of percentage ownership) shall be determined in accordance with Section 13(d) of the 1934 Act and the rules and regulations
promulgated thereunder. The provisions of this Section 4(e) shall be implemented in a manner otherwise than in strict conformity
with the terms of this Section 4(e) to correct this Section 4(e) (or any portion hereof) which may be defective or inconsistent with
the intended Maximum Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary
or desirable to properly give effect to such Maximum Percentage limitation. The limitations contained in this Section 4(e) shall
apply to a successor holder of Preferred Shares. The holders of Common Stock shall be third party beneficiaries of this Section 4(e)
and the Company may not waive this Section 4(e) without the consent of holders of a majority of its Common Stock. For any reason
at any time, upon the written or oral request of a Holder, the Company shall within one (1) Business Day confirm orally and in
writing to such Holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion or
exercise of convertible or exercisable securities into Common Stock, including, without limitation, pursuant to this Certificate of
Designations or securities issued pursuant to the Exchange Agreements. By written notice to the Company, any Holder may increase
or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such notice; provided that (i) any
such increase will not be effective until the 61st day after such notice is delivered to the Company, and (ii) any such increase or
decrease will apply only to such Holder sending such notice and not to any other Holder.
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5. Rights Upon Issuance of Purchase Rights and Other Corporate Events.
(a) Purchase Rights. In addition to any adjustments pursuant to Section 7 below, if at any time the Company grants,
issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the
record holders of any class of Common Stock (the "Purchase Rights"), then each Holder will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held
the number of shares of Common Stock acquirable upon complete conversion of all the Preferred Shares (without taking into
account any limitations or restrictions on the convertibility of the Preferred Shares) held by such Holder immediately before the
date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided,
however, to the extent that such Holder's right to participate in any such Purchase Right would result in such Holder exceeding the
Maximum Percentage, then such Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial
ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such
extent shall be held in abeyance for such Holder until such time, if ever, as its right thereto would not result in such Holder
exceeding the Maximum Percentage).
( b ) Other Corporate Events. In addition to and not in substitution for any other rights hereunder, prior to the
consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common Stock (a "Corporate Event"), the Company shall
make appropriate provision to insure that each Holder will thereafter have the right to receive upon a conversion of all the Preferred
Shares held by such Holder (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other
assets to which such Holder would have been entitled with respect to such shares of Common Stock had such shares of Common
Stock been held by such Holder upon the consummation of such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of the Preferred Shares contained in this Certificate of Designations) or (ii) in lieu of the shares of
Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of
Common Stock in connection with the consummation of such Corporate Event in such amounts as such Holder would have been
entitled to receive had the Preferred Shares held by such Holder initially been issued with conversion rights for the form of such
consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. The provisions of this Section 5(b) shall apply similarly and equally to successive Corporate Events and shall be
applied without regard to any limitations on the conversion of the Preferred Shares contained in this Certificate of Designations.
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6. Rights Upon Fundamental Transactions.
(a) Assumption. The Company shall not enter into or be party to a Fundamental Transaction unless (i) the Successor
Entity assumes in writing all of the obligations of the Company under this Certificate of Designations and the other Transaction
Documents in accordance with the provisions of this Section 6 pursuant to written agreements in form and substance satisfactory to
the Required Holders and approved by the Required Holders prior to such Fundamental Transaction, including agreements to
deliver to each holder of Preferred Shares in exchange for such Preferred Shares a security of the Successor Entity evidenced by a
written instrument substantially similar in form and substance to this Certificate of Designations, including, without limitation,
having a stated value and dividend rate equal to the stated value and dividend rate of the Preferred Shares held by the Holders and
having similar ranking to the Preferred Shares, and reasonably satisfactory to the Required Holders and (ii) the Successor Entity
(including its Parent Entity) is a publicly traded corporation whose shares of common stock are quoted on or listed for trading on an
Eligible Market. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for
(so that from and after the date of such Fundamental Transaction, the provisions of this Certificate of Designations and the other
Transaction Documents referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the Company under this Certificate of Designations and the other
Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein and therein. In
addition to the foregoing, upon consummation of a Fundamental Transaction, the Successor Entity shall deliver to each Holder
confirmation that there shall be issued upon conversion of the Preferred Shares at any time after the consummation of such
Fundamental Transaction, in lieu of the shares of Common Stock (or other securities, cash, assets or other property (except such
items still issuable under Sections 5 and 11, which shall continue to be receivable thereafter)) issuable upon the conversion of the
Preferred Shares prior to such Fundamental Transaction, such shares of publicly traded common stock (or their equivalent) of the
Successor Entity (including its Parent Entity) which each Holder would have been entitled to receive upon the happening of such
Fundamental Transaction had all the Preferred Shares held by each Holder been converted immediately prior to such Fundamental
Transaction (without regard to any limitations on the conversion of the Preferred Shares contained in this Certificate of
Designations), as adjusted in accordance with the provisions of this Certificate of Designations. The provisions of this Section 6
shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations on
the conversion of the Preferred Shares.
7
7. Rights Upon Issuance of Other Securities.
( a ) Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on or after the Subscription
Date the Company issues or sells, or in accordance with this Section 7(a) is deemed to have issued or sold, any shares of Common
Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but
excluding any Excluded Securities issued or sold or deemed to have been issued or sold) for a consideration per share (the "New
Issuance Price") less than a price equal to the Conversion Price in effect immediately prior to such issuance or sale or deemed
issuance or sale (such Conversion Price then in effect is referred to as the "Applicable Price") (the foregoing a "Dilutive
Issuance"), then, immediately after such Dilutive Issuance the Conversion Price then in effect shall be reduced to the New Issuance
Price. For all purposes of the foregoing (including, without limitation, determining the adjusted Conversion Price and the New
Issuance Price under this Section 7(a)), the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants or sells any Options and the lowest price per
share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exercise
or exchange of any Convertible Securities issuable upon exercise of any such Option is less than the Applicable Price,
then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at
the time of the granting or sale of such Option for such price per share. For purposes of this Section 7(a)(i), the "lowest
price per share for which one share of Common Stock is issuable upon the exercise of any such Options or upon
conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option" shall be equal
to (1) the lower of (x) the sum of the lowest amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the granting or sale of such Option, upon exercise of such Option and
upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option and (y) the
lowest exercise price set forth in such Option for which one share of Common Stock is issuable upon the exercise of any
such Options or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such
Option minus (2) the sum of all amounts paid or payable to the holder of such Option (or any other Person) upon the
granting or sale of such Option, upon exercise of such Option and upon conversion, exercise or exchange of any
Convertible Security issuable upon exercise of such Option plus the value of any other consideration received or
receivable by, or benefit conferred on, the holder of such Option (or any other Person). Except as contemplated below, no
further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the actual issuance of such share of Common Stock
upon conversion, exercise or exchange of such Convertible Securities.
8
(ii)
Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible
Securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise
or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding
and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for
such price per share. For purposes of this Section 7(a)(ii), the "lowest price per share for which one share of Common
Stock is issuable upon the conversion, exercise or exchange thereof' shall be equal to (1) the lower of (x) the sum of the
lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion, exercise or exchange of such
Convertible Security and (y) the lowest conversion price set forth in such Convertible Security for which one share of
Common Stock is issuable upon conversion, exercise or exchange thereof minus (2) the sum of all amounts paid or
payable to the holder of such Convertible Security (or any other Person) upon the issuance or sale of such Convertible
Security plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such
Convertible Security (or any other Person). Except as contemplated below, no further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock upon conversion, exercise or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options
for which adjustment of the Conversion Price has been or is to be made pursuant to other provisions of this Section 7(a),
except as contemplated below, no further adjustment of the Conversion Price Shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any
Options, the additional consideration, if any, payable upon the issue, conversion, exercise or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for shares of
Common Stock increases or decreases at any time, the Conversion Price in effect at the time of such increase or decrease
shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible
Securities provided for such increased or decreased purchase price, additional consideration or increased or decreased
conversion rate (as the case may be) at the time initially granted, issued or sold. For purposes of this Section 7(a)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the Subscription Date are increased or
decreased in the manner described in the immediately preceding sentence, then such Option or Convertible Security and
the shares of Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have
been issued as of the date of such increase or decrease. No adjustment pursuant to this Section 7(a) shall be made if such
adjustment would result in an increase of the Conversion Price then in effect.
9
( i v ) Calculation of Consideration Received. If any Option or Convertible Security is issued in connection
with the issuance or sale or deemed issuance or sale of any other securities of the Company (including, without limitation,
any other Option or Convertible Security), together comprising one integrated transaction, (x) such Option or Convertible
Security (as applicable) will be deemed to have been issued for consideration equal to the fair market value thereof as
determined in good faith by the Company's Board of Directors and (y) the other securities issued or sold or deemed to
have been issued or sold in such integrated transaction shall be deemed to have been issued for consideration equal to the
difference of (I) the aggregate consideration received by the Company minus (II) the aggregate fair market value of all
such Options and/or Convertible Securities (as applicable) so issued. If any shares of Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount of consideration received by the Company therefor. If any shares of
Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of
such consideration received by the Company will be the fair value of such consideration, except where such consideration
consists of publicly traded securities, in which case the amount of consideration received by the Company for such
securities will be the arithmetic average of the VWAPs of such security for each of the five (5) Trading Days immediately
preceding the date of receipt. If any shares of Common Stock, Options or Convertible Securities are issued to the owners
of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-
surviving entity as is attributable to such shares of Common Stock, Options or Convertible Securities, as the case may be.
The fair value of any consideration other than cash or publicly traded securities will be determined jointly by the
Company and the Required Holders. If such parties are unable to reach agreement within ten (10) days after the
occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be
determined within five (5) Trading Days after the tenth (10th) day following such Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required Holders. The determination of such appraiser shall
be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by
the Company.
(v) Record Date. If the Company takes a record of the holders of shares of Common Stock for the purpose
of entitling them (A) to receive a dividend or other distribution payable in shares of Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase shares of Common Stock, Options or Convertible Securities,
then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase (as the case may be).
( b ) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. Without limiting any
provision of Sections 5 and 11, if the Company at any time on or after the Subscription Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. Without limiting any
provision of Sections 5 and 11, if the Company at any time on or after the Subscription Date combines (by combination, reverse
stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be proportionately increased. Any adjustment pursuant to this
Section 7(b) shall become effective immediately after the effective date of such subdivision or combination. If any event requiring
an adjustment under this Section 7(b) occurs during the period that a Conversion Price is calculated hereunder, then the calculation
of such Conversion Price shall be adjusted appropriately to reflect such event.
10
( c ) Other Events. In the event that the Company (or any Subsidiary) shall take any action to which the provisions
hereof are not strictly applicable, or, if applicable, would not operate to protect any Holder from dilution or if any event occurs of the
type contemplated by the provisions of this Section 7 but not expressly provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Board shall
in good faith determine and implement an appropriate adjustment in the Conversion Price so as to protect the rights of such Holder,
provided that no such adjustment pursuant to this Section 7(c) will increase the Conversion Price as otherwise determined pursuant
to this Section 7, provided further that if such Holder does not accept such adjustments as appropriately protecting its interests
hereunder against such dilution, then the Board and such Holder shall agree, in good faith, upon an independent investment bank of
nationally recognized standing to make such appropriate adjustments, whose determination shall be final and binding and whose
fees and expenses shall be borne by the Company.
( d ) Calculations. All calculations under this Section 7 shall be made by rounding to the nearest one-hundred
thousandth of a cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall
be considered an issue or sale of Common Stock.
8. Authorized Shares.
(a) Reservation. The Company shall initially reserve out of its authorized and unissued Common Stock a number of
shares of Common Stock equal to 125% of the Conversion Rate with respect to the Base Amount of each Preferred Share as of the
Initial Issuance Date (assuming for purposes hereof, that all the Preferred Shares issuable pursuant to the Securities Purchase
Agreement have been issued, such Preferred Shares are convertible at the Conversion Price and without taking into account any
limitations on the conversion of such Preferred Shares set forth in herein) issuable pursuant to the terms of this Certificate of
Designations from the Initial Issuance Date through the second anniversary of the Initial Issuance Date assuming (assuming for
purposes hereof, that all the Preferred Shares issuable pursuant to the Securities Purchase Agreement have been issued and without
taking into account any limitations on the issuance of securities set forth herein). So long as any of the Preferred Shares are
outstanding, the Company shall take all action necessary to reserve and keep available out of its authorized and unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares, as of any given date, 125% of the
number of shares of Common Stock as shall from time to time be necessary to effect the conversion of all of the Preferred Shares
issued or issuable pursuant to the Securities Purchase Agreement assuming for purposes hereof, that all the Preferred Shares
issuable pursuant to the Securities Purchase Agreement have been issued and without taking into account any limitations on the
issuance of securities set forth herein), provided that at no time shall the number of shares of Common Stock so available be less
than the number of shares required to be reserved by the previous sentence (without regard to any limitations on conversions
contained in this Certificate of Designations) (the "Required Amount"). The initial number of shares of Common Stock reserved
for conversions of the Preferred Shares and each increase in the number of shares so reserved shall be allocated pro rata among the
Holders based on the number of Preferred Shares held by each Holder on the Initial Issuance Date or increase in the number of
reserved shares (as the case may be) (the "Authorized Share Allocation"). In the event a Holder shall sell or otherwise transfer
any of such Holder's Preferred Shares, each transferee shall be allocated a pro rata portion of such Holder's Authorized Share
Allocation. Any shares of Common Stock reserved and allocated to any Person which ceases to hold any Preferred Shares shall be
allocated to the remaining Holders of Preferred Shares, pro rata based on the number of Preferred Shares then held by such Holders.
11
( b ) Insufficient Authorized Shares. If, notwithstanding Section 8(a) and not in limitation thereof, at any time while
any of the Preferred Shares remain outstanding the Company does not have a sufficient number of authorized and unissued shares
of Common Stock to satisfy its obligation to have available for issuance upon conversion of the Preferred Shares at least a number
of shares of Common Stock equal to the Required Amount (an "Authorized Share Failure"), then the Company shall promptly
take all action necessary to increase the Company's authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve and have available the Required Amount for all of the Preferred Shares then outstanding. Without limiting the
generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no
event later than ninety (90) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its
stockholders or conduct a consent solicitation for the approval of an increase in the number of authorized shares of Common Stock.
In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts
to solicit its stockholders' approval of such increase in authorized shares of Common Stock and to cause its Board to recommend to
the stockholders that they approve such proposal. Nothing contained in this Section 8 shall limit any obligations of the Company
under any provision of the Securities Purchase Agreement. In the event that the Company is prohibited from issuing shares of
Common Stock upon a conversion of any Preferred Share due to the failure by the Company to have sufficient shares of Common
Stock available out of the authorized but unissued shares of Common Stock (such unavailable number of shares of Common Stock,
the "Authorization Failure Shares"), in lieu of delivering such Authorization Failure Shares to such Holder of such Preferred
Shares, the Company shall pay cash in exchange for the cancellation of such Preferred Shares convertible into such Authorized
Failure Shares at a price equal to the sum of (i) the product of (x) such number of Authorization Failure Shares and (y) the Closing
Sale Price on the Trading Day immediately preceding the date such Holder delivers the applicable Conversion Notice with respect
to such Authorization Failure Shares to the Company and (ii) to the extent such Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of Authorization Failure Shares, any
brokerage commissions and other out-of-pocket expenses, if any, of such Holder incurred in connection therewith.
9 . Voting Rights. Holders of Preferred Shares shall have no voting rights, except as required by law (including without
limitation, the NGCL) and as expressly provided in this Certificate of Designations. To the extent that under the NGCL the vote of the
holders of the Preferred Shares, voting separately as a class or Series As applicable, is required to authorize a given action of the Company,
the affirmative vote or consent of the holders of all of the shares of the Preferred Shares, voting together in the aggregate and not in
separate series unless required under the NGCL, represented at a duly held meeting at which a quorum is presented or by written consent of
all of the Preferred Shares (except as otherwise may be required under the NGCL), voting together in the aggregate and not in separate
series unless required under the NGCL, shall constitute the approval of such action by both the class or the series, as applicable. Subject to
Section 4(e), to the extent that under the NGCL holders of the Preferred Shares are entitled to vote on a matter with holders of shares of
Common Stock, voting together as one class, each Preferred Share shall entitle the holder thereof to cast that number of votes per share as
is equal to the number of shares of Common Stock into which it is then convertible (subject to the ownership limitations specified in
Section 4(e) hereof) using the record date for determining the stockholders of the Company eligible to vote on such matters as the date as
of which the Conversion Price is calculated. Holders of the Preferred Shares shall be entitled to written notice of all stockholder meetings
or written consents (and copies of proxy materials and other information sent to stockholders) with respect to which they would be entitled
by vote, which notice would be provided pursuant to the Company's bylaws and the NGCL).
12
1 0 . Liquidation, Dissolution. Winding-Up. In the event of a Liquidation Event, the Holders shall be entitled to receive in
cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders (the
"Liquidation Funds"), before any amount shall be paid to the holders of any of shares of Junior Stock, an amount per Preferred Share
equal to the greater of (A) the Base Amount thereof on the date of such payment and (B) the amount per share such Holder would receive if
such Holder converted such Preferred Shares into Common Stock immediately prior to the date of such payment, provided that if the
Liquidation Funds are insufficient to pay the full amount due to the Holders and holders of shares of Parity Stock, then each Holder and
each holder of Parity Stock shall receive a percentage of the Liquidation Funds equal to the full amount of Liquidation Funds payable to
such Holder and such holder of Parity Stock as a liquidation preference, in accordance with their respective certificate of designations (or
equivalent), as a percentage of the full amount of Liquidation Funds payable to all holders of Preferred Shares and all holders of shares of
Parity Stock. To the extent necessary, the Company shall cause such actions to be taken by each of its Subsidiaries so as to enable, to the
maximum extent permitted by law, the proceeds of a Liquidation Event to be distributed to the Holders in accordance with this Section 10.
All the preferential amounts to be paid to the Holders under this Section 10 shall be paid or set apart for payment before the payment or
setting apart for payment of any amount for, or the distribution of any Liquidation Funds of the Company to the holders of shares of Junior
Stock in connection with a Liquidation Event as to which this Section 10 applies.
11. Participation. In addition to any adjustments pursuant to Section 7(b), the Holders shall, as holders of Preferred Shares,
be entitled to receive such dividends paid and distributions made to the holders of shares of Common Stock to the same extent as if such
Holders had converted each Preferred Share held by each of them into shares of Common Stock (without regard to any limitations on
conversion herein or elsewhere) and had held such shares of Common Stock on the record date for such dividends and distributions.
Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of shares of Common
Stock (provided, however, to the extent that a Holder's right to participate in any such dividend or distribution would result in such Holder
exceeding the Maximum Percentage, then such Holder shall not be entitled to participate in such dividend or distribution to such extent (or
the beneficial ownership of any such shares of Common Stock as a result of such dividend or distribution to such extent) and such dividend
or distribution to such extent shall be held in abeyance for the benefit of such Holder until such time, if ever, as its right thereto would not
result in such Holder exceeding the Maximum Percentage).
13
1 2 . Vote to Change the Terms of or Issue Preferred Shares. In addition to any other rights provided by law, except where
the vote or written consent of the holders of a greater number of shares is required by law or by another provision of the Articles of
Incorporation, without first obtaining the affirmative vote at a meeting duly called for such purpose or the written consent without a
meeting of the Required Holders, voting together as a single class, the Company shall not: (a) amend or repeal any provision of, or add any
provision to, its Articles of Incorporation or bylaws, or file any certificate of designations or articles of amendment of any series of shares
of preferred stock, if such action would adversely alter or change in any respect the preferences, rights, privileges or powers, or restrictions
provided for the benefit, of the Preferred Shares, regardless of whether any such action shall be by means of amendment to the Articles of
Incorporation or by merger, consolidation or otherwise; (b) increase or decrease (other than by conversion) the authorized number of
Preferred Shares; (c) without limiting any provision of Section 2, create or authorize (by reclassification or otherwise) any new class or
series of shares that has a preference over or is on a parity with the Preferred Shares with respect to dividends or the distribution of assets
on the liquidation, dissolution or winding up of the Company; (d) purchase, repurchase or redeem any shares of capital stock of the
Company junior in rank to the Preferred Shares (other than pursuant to equity incentive agreements (that have in good faith been approved
by the Board) with employees giving the Company the right to repurchase shares upon the termination of services); (e) without limiting any
provision of Section 2, pay dividends or make any other distribution on any shares of any capital stock of the Company junior in rank to the
Preferred Shares; (f) issue any Preferred Shares other than pursuant to the Securities Purchase Agreement; or (g) without limiting any
provision of Section 16, whether or not prohibited by the terms of the Preferred Shares, circumvent a right of the Preferred Shares.
13. Covenants.
(a) Incurrence of Indebtedness. The Company shall not, and the Company shall cause each of its Subsidiaries to not,
directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness (other than Permitted Indebtedness).
(b) Existence of Liens. The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly
or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by the Company or any of its Subsidiaries (collectively, "Liens")
other than Permitted Liens.
14
14. Lost or Stolen Certificates. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of any certificates representing Preferred Shares (as to which a written certification and the
indemnification contemplated below shall suffice as such evidence), and, in the case of loss, theft or destruction, of an indemnification
undertaking by the applicable Holder to the Company in customary and reasonable form and, in the case of mutilation, upon surrender and
cancellation of the certificate(s), the Company shall execute and deliver new certificate(s) of like tenor and date.
1 5 . Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this
Certificate of Designations shall be cumulative and in addition to all other remedies available under this Certificate of Designations and any
of the other Transaction Documents, at law or in equity (including a decree of specific performance and/or other injunctive relief), and no
remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy. Nothing herein shall limit
any Holder's right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Certificate
of Designations. The Company covenants to each Holder that there shall be no characterization concerning this instrument other than as
expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation
thereof) shall be the amounts to be received by a Holder and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Holders and that the remedy at law for any such breach may be inadequate. The Company therefore agrees
that, in the event of any such breach or threatened breach, each Holder shall be entitled, in addition to all other available remedies, to an
injunction restraining any such breach or any such threatened breach, without the necessity of showing economic loss and without any
bond or other security being required. The Company shall provide all information and documentation to a Holder that is requested by such
Holder to enable such Holder to confirm the Company's compliance with the terms and conditions of this Certificate of Designations.
1 6 . Noncircumvention. The Company hereby covenants and agrees that the Company will not, by amendment of its
Articles of Incorporation, bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement,
dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the
terms of this Certificate of Designations, and will at all times in good faith carry out all the provisions of this Certificate of Designations
and take all action as may be required to protect the rights of the Holders. Without limiting the generality of the foregoing or any other
provision of this Certificate of Designations, the Company (i) shall not increase the par value of any shares of Common Stock receivable
upon the conversion of any Preferred Shares above the Conversion Price then in effect, (ii) shall take all such actions as may be necessary
or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon the
conversion of Preferred Shares and (iii) shall, so long as any Preferred Shares are outstanding, take all action necessary to reserve and keep
available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Preferred
Shares, the maximum number of shares of Common Stock as shall from time to time be necessary to effect the conversion of the Preferred
Shares then outstanding (without regard to any limitations on conversion contained herein).
15
1 7 . Failure or Indulgence Not Waiver. No failure or delay on the part of a Holder in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege. No waiver shall be effective unless it is in writing and signed by
an authorized representative of the waiving party. This Certificate of Designations shall be deemed to be jointly drafted by the Company
and all Holders and shall not be construed against any Person as the drafter hereof.
1 8 . Notices. The Company shall provide each Holder of Preferred Shares with prompt written notice of all actions taken
pursuant to the terms of this Certificate of Designations, including in reasonable detail a description of such action and the reason therefor.
Whenever notice is required to be given under this Certificate of Designations, unless otherwise provided herein, such notice must be in
writing and shall be given in accordance with Section 8(f) of the Securities Purchase Agreement. Without limiting the generality of the
foregoing, the Company shall give written notice to each Holder (i) promptly following any adjustment of the Conversion Price, setting
forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least fifteen (15) days prior to the date on which the
Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to
any grant, issuances, or sales of any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property to all
holders of shares of Common Stock as a class or (C) for determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided, in each case, that such information shall be made known to the public prior to, or simultaneously with,
such notice being provided to any Holder.
19. Transfer of Preferred Shares. Subject to the restrictions set forth in Section 2(g) of the Securities Purchase Agreement, a
Holder may transfer some or all of its Preferred Shares without the consent of the Company.
20. Preferred Shares Register. The Company shall maintain at its principal executive offices (or such other office or agency
of the Company as it may designate by notice to the Holders), a register for the Preferred Shares, in which the Company shall record the
name, address and facsimile number of the Persons in whose name the Preferred Shares have been issued, as well as the name and address
of each transferee. The Company may treat the Person in whose name any Preferred Shares is registered on the register as the owner and
holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any properly made transfers.
21. Stockholder Matters; Amendment.
( a ) Stockholder Matters. Any stockholder action, approval or consent required, desired or otherwise sought by the
Company pursuant to the NGCL, the Articles of Incorporation, this Certificate of Designations or otherwise with respect to the
issuance of Preferred Shares may be effected by written consent of the Company's stockholders or at a duly called meeting of the
Company's stockholders, all in accordance with the applicable rules and regulations of the NGCL. This provision is intended to
comply with the applicable sections of the NGCL permitting stockholder action, approval and consent affected by written consent
in lieu of a meeting.
16
( b ) Amendment. This Certificate of Designations or any provision hereof may be amended by obtaining the
affirmative vote at a meeting duly called for such purpose, or written consent without a meeting in accordance with the NGCL, of
the Required Holders, voting separate as a single class, and with such other stockholder approval, if any, as may then be required
pursuant to the NGCL and the Articles of Incorporation.
22. Dispute Resolution.
(a) Disputes Over Closing Bid Price, Closing Sale Price, Conversion Price, VWAP or Fair Market Value.
(i) In the case of a dispute relating to a Closing Bid Price, a Closing Sale Price, a Conversion Price, a VWAP
or fair market value (as the case may be) (including, without limitation, a dispute relating to the determination of any of
the foregoing), the Company or such applicable Holder (as the case may be) shall submit the dispute via facsimile (I)
within two (2) Business Days after delivery of the applicable notice giving rise to such dispute to the Company or such
Holder (as the case may be) or (II) if no notice gave rise to such dispute, at any time after such Holder learned of the
circumstances giving rise to such dispute. If such Holder and the Company are unable to resolve such dispute relating to
such Closing Bid Price, such Closing Sale Price, such Conversion Price, such VWAP or such fair market value (as the case
may be) by 5:00 p.m. (New York time) on the third (3rd) Business Day following such delivery by the Company or such
Holder (as the case may be) of such dispute to the Company or such Holder (as the case may be), then such Holder shall
select an independent, reputable investment bank to resolve such dispute.
(ii) Such Holder and the Company shall each deliver to such investment bank (x) a copy of the initial dispute
submission so delivered in accordance with the first sentence of this Section 22(a) and (y) written documentation
supporting its position with respect to such dispute, in each case, no later than 5:00 p.m. (New York time) by the fifth (5 th)
Business Day immediately following the date on which such Holder selected such investment bank (the "Dispute
Submission Deadline") (the documents referred to in the immediately preceding clauses (x) and (y) are collectively
referred to herein as the "Required Dispute Documentation") (it being understood and agreed that if either such Holder
or the Company fails to so deliver all of the Required Dispute Documentation by the Dispute Submission Deadline, then
the party who fails to so submit all of the Required Dispute Documentation shall no longer be entitled to (and hereby
waives its right to) deliver or submit any written documentation or other support to such investment bank with respect to
such dispute and such investment bank shall resolve such dispute based solely on the Required Dispute Documentation
that was delivered to such investment bank prior to the Dispute Submission Deadline). Unless otherwise agreed to in
writing by both the Company and such Holder or otherwise requested by such investment bank, neither the Company nor
such Holder shall be entitled to deliver or submit any written documentation or other support to such investment bank in
connection with such dispute (other than the Required Dispute Documentation).
17
(iii) The Company and such Holder shall cause such investment bank to determine the resolution of such
dispute and notify the Company and such Holder of such resolution no later than ten (10) Business Days immediately
following the Dispute Submission Deadline. The fees and expenses of such investment bank shall be borne solely by the
Company, and such investment bank's resolution of such 'dispute shall be final and binding upon all parties absent manifest
error.
(b) Disputes Over Arithmetic Calculation of the Conversion Rate.
(i) In the case of a dispute as to the arithmetic calculation of a Conversion Rate, the Company or such
Holder (as the case may be) shall submit the disputed arithmetic calculation via facsimile (i) within two (2) Business Days
after delivery of the applicable notice giving rise to such dispute to the Company or such Holder (as the case may be) or
(ii) if no notice gave rise to such dispute, at any time after such Holder learned of the circumstances giving rise to such
dispute. If such Holder and the Company are unable to resolve such disputed arithmetic calculation of such Conversion
Rate by 5:00 p.m. (New York time) on the third (31d) Business Day following such delivery by the Company or such
Holder (as the case may be) of such disputed arithmetic calculation, then such Holder shall select an independent,
reputable accountant or accounting firm to perform such disputed arithmetic calculation.
(ii) Such Holder and the Company shall each deliver to such accountant or accounting firm (as the case may
be) (x) a copy of the initial dispute submission so delivered in accordance with the first sentence of this Section 22(a) and
(y) written documentation supporting its position with respect to such disputed arithmetic calculation, in each case, no later
than 5:00 p.m. (New York time) by the fifth (5th) Business Day immediately following the date on which such Holder
selected such accountant or accounting firm (as the case may be) (the "Submission Deadline") (the documents referred to
in the immediately preceding clauses (x) and (y) are collectively referred to herein as the "Required Documentation") (it
being understood and agreed that if either such Holder or the Company fails to so deliver all of the Required
Documentation by the Submission Deadline, then the party who fails to so submit all of the Required Documentation shall
no longer be entitled to (and hereby waives its right to) deliver or submit any written documentation or other support to
such accountant or accounting firm (as the case may be) with respect to such disputed arithmetic calculation and such
accountant or accounting firm (as the case may be) shall perform such disputed arithmetic calculation based solely on the
Required Documentation that was delivered to such accountant or accounting firm (as the case may be) prior to the
Submission Deadline). Unless otherwise agreed to in writing by both the Company and such Holder or otherwise requested
by such accountant or accounting firm (as the case may be), neither the Company nor such Holder shall be entitled to
deliver or submit any written documentation or other support to such accountant or accounting firm (as the case may be) in
connection with such disputed arithmetic calculation of the Conversion Rate (other than the Required Documentation).
18
(iii) The Company and such Holder shall cause such accountant or accounting firm (as the case may be) to
perform such disputed arithmetic calculation and notify the Company and such Holder of the results no later than ten (10)
Business Days immediately following the Submission Deadline. The fees and expenses of such accountant or accounting
firm (as the case may be) shall be borne solely by the Company, and such accountant's or accounting firm's (as the case
may be) arithmetic calculation shall be final and binding upon all parties absent manifest error.
(
c
) Miscellaneous. The Company expressly acknowledges and agrees that (i) this Section 22 constitutes an
agreement to arbitrate between the Company and such Holder (and constitutes an arbitration agreement) under § 7501, et seq. of the
New York Civil Practice Law and Rules ("CPLR") and that each party shall be entitled to compel arbitration pursuant to CPLR §
7503(a) in order to compel compliance with this Section 22, (ii) a dispute relating to a Conversion Price includes, without limitation,
disputes as to (1) whether an issuance or sale or deemed issuance or sale of Common Stock occurred under Section 7(a), (2) the
consideration per share at which an issuance or deemed issuance of Common Stock occurred, (3) whether any issuance or sale or
deemed issuance or sale of Common Stock was an issuance or sale or deemed issuance or sale of Excluded Securities, (4) whether
an agreement, instrument, security or the like constitutes and Option or Convertible Security and (5) whether a Dilutive Issuance
occurred, (iii) the terms of this Certificate of Designations and each other applicable Transaction Document shall serve as the basis
for the selected investment bank's resolution of the applicable dispute, such investment bank shall be entitled (and is hereby
expressly authorized) to make all findings, determinations and the like that such investment bank determines are required to be
made by such investment bank in connection with its resolution of such dispute and in resolving such dispute such investment bank
shall apply such findings, determinations and the like to the terms of this Certificate of Designations and any other applicable
Transaction Documents, (iv) the terms of this Certificate of Designations and each other applicable Transaction Document shall
serve as the basis for the selected accountant's or accounting firm's performance of the applicable arithmetic calculation, (v) for
clarification purposes and without implication that the contrary would otherwise be true, disputes relating to matters described in
Section 22(a) shall be governed by Section 22(a) and not by Section 22(b), (vi) such Holder (and only such Holder), in its sole
discretion, shall have the right to submit any dispute described in this Section 22 to any state or federal court sitting in The City of
New York, Borough of Manhattan in lieu of utilizing the procedures set forth in this Section 22 and (vii) nothing in this Section 22
shall limit such Holder from obtaining any injunctive relief or other equitable remedies (including, without limitation, with respect
to any matters described in Section 22(a) or Section 22(b)).
19
23. Certain Defined Terms. For purposes of this Certificate of Designations, the following terms shall have the following
meanings:
(a) "1934 Act" means the Securities Exchange Act of 1934, as amended.
( b ) "Bank" means a commercial banking institution that is a member of the Federal Reserve System and has a
combined capital and surplus and undivided profits of not less than $500,000,000.
( c ) "Base Amount" means, with respect to each Preferred Share, as of the applicable date of determination, the
sum of (1) the Stated Value thereof, plus (2) the Unpaid Dividend Amount thereon as of such date of determination.
(d) "Bloomberg" means Bloomberg, L.P.
( e ) "Business Day" means any day other than Saturday, Sunday or other day on which commercial banks in The
City of New York are authorized or required by law to remain closed.
( f ) "Closing Bid Price" and "Closing Sale Price" means, for any security as of any date, the last closing bid price
and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal
Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price (as the
case may be) then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the
last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where
such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price or last trade
price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the
bid prices, or the ask prices, respectively, of any market makers for such security as reported in the "pink sheets" by OTC Markets
Group Inc. (formerly Pink Sheets LLC). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price (as the case may be) of such security
on such date shall be the fair market value as mutually determined by the Company and the applicable Holder. If the Company and
such Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with
the procedures in Section 22. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during such period.
20
( g ) "Common Stock" means (i) the Company's shares of common stock, $0.001 par value per share, and (ii) any
capital stock into which such common stock shall have been changed or any share capital resulting from a reclassification of such
common stock.
(h) "Conversion Price" means, with respect to each Preferred Share, as of any Conversion Date or other applicable
date of determination, $2.00, subject to adjustment as provided herein.
( i ) "Convertible Securities" means any stock or other security (other than Options) that is at any time and under
any circumstances, directly or indirectly, convertible into, exercisable or exchangeable for, or which otherwise entitles the holder
thereof to acquire, any shares of Common Stock.
( j ) "Eligible Market" means The New York Stock Exchange, the NYSE MKT, the Nasdaq Global Select Market,
the Nasdaq Global Market, the Nadsaq Capital Market or the Principal Market (or any successor thereto).
( k ) "Fundamental Transaction" " means that (i) the Company or any of its Subsidiaries shall, directly or
indirectly, in one or more related transactions, (I) consolidate or merge with or into (whether or not the Company or any of its
Subsidiaries is the surviving corporation) any other Person, or (2) sell, lease, license, assign, transfer, convey or otherwise dispose
of all or substantially all of its respective properties or assets to any other Person, or (3) allow any other Person to make a purchase,
tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of Voting Stock of the
Company (not including any shares of Voting Stock of the Company held by the Person or Persons making or party to, or associated
or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (4) consummate a stock or share
purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with any other Person whereby such other Person acquires more than 50% of the outstanding shares of
Voting Stock of the Company (not including any shares of Voting Stock of the Company held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or
other business combination), or (5) reorganize, recapitalize or reclassify the Common Stock, or (ii) any "person" or "group" (as
these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act and the rules and regulations promulgated thereunder)
is or shall become the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the
aggregate ordinary voting power represented by issued and outstanding Voting Stock of the Company.
21
( l ) "Holder Pro Rata Amount" means, with respect to any Holder, a fraction (i) the numerator of which is the
number of Preferred Shares issued to such Holder pursuant to the Securities Purchase Agreement on the Initial Issuance Date and
(ii) the denominator of which is the number of Preferred Shares issued to all Holders pursuant to the Securities Purchase Agreement
on the Initial Issuance Date.
( m ) "LIBOR" means, (i) the one-month London Interbank Offered Rate for deposits in U.S. dollars, as shown on
such date in The Wall Street Journal (Eastern Edition) under the caption "Money Rates - London interbank offered rate or Libor"; or
(ii) if The Wall Street Journal does not publish such rate, the offered one-month rate far deposits in U.S. dollars which appears on
the Reuters Screen LIBO Page as of 10:00 a.m., New York time, each day, provided that if at least two rates appear on the Reuters
Screen LIBO Page on any day, the "LIBOR" for such day shall be the arithmetic mean of such rates.
( n ) "Liquidation Event" means, whether in a single transaction or series of transactions, the voluntary or
involuntary liquidation, dissolution or winding up of the Company or such Subsidiaries the assets of which constitute all or
substantially all of the assets of the business of the Company and its Subsidiaries, taken as a whole.
( o ) "Options" means any rights, warrants or options to subscribe for or purchase shares of Common Stock or
Convertible Securities.
( p ) "Parent Entity" of a Person means an entity that, directly or indirectly, controls the applicable Person and
whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such
Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of
the Fundamental Transaction.
( q ) "Permitted Indebtedness" means (i) Indebtedness described in Schedule 3(s) of the Securities Purchase
Agreement as in effect as of the Initial Issuance Date; provided, that the principal amount of such Indebtedness is not increased, the
terms of such Indebtedness are not modified to impose more burdensome terms upon the Company or any of its Subsidiaries and
the terms of such Indebtedness are not materially changed in any manner that adversely affects any Holder, and (ii) any Permitted
Line of Credit.
( r ) "Permitted Liens" means (i) any Lien for taxes not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, (iii) any
Lien created by operation of law, such as materialmen's liens, mechanics' liens and other similar liens, arising in the ordinary course
of business with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate
proceedings, (iv) leases or subleases and licenses and sublicenses granted to others in the ordinary course of the Company's
business, not interfering in any material respect with the business of the Company and its Subsidiaries taken as a whole, (v) Liens in
favor of customs and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the
importation of goods, (vi) Liens arising from judgments, decrees or attachments, not in excess of $100,000 in the aggregate, (vii)
Liens with respect to any Permitted Line of Credit and (viii) the Liens described on Schedule 3(s) of the Securities Purchase
Agreement.
22
( s ) "Permitted Line of Credit" means the principal of (and premium, if any), interest on, and all fees and other
amounts (including, without limitation, any reasonable out-of-pocket costs, enforcement expenses (including reasonable out-of-
pocket legal fees and disbursements), collateral protection expenses and other reimbursement or indemnity obligations relating
thereto) payable by Company and/or its Subsidiaries under or in connection with any line of credit to be entered into by the
Company and/or its Subsidiaries with one or more Banks (and on terms and conditions), in form and substance reasonably
satisfactory to the Required Holders; provided, however, that such indebtedness (i) is not convertible or exchangeable into Common
Stock, Convertible Securities Options or any other securities of the Company or any of its Subsidiaries, (ii) is not being made in
connection with the issuance to any Person of Common Stock, Convertible Securities Options or any other securities of the
Company or any of its Subsidiaries, (iii) bears total interest and fees at a rate not in excess of 450 basis points over LIBOR per
annum, (iv) is consummated on market terms and (v) the aggregate outstanding principal amount of such Indebtedness does not at
any time exceed $3,000,000.
( t ) "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust,
an unincorporated organization, any other entity or a government or any department or agency thereof.
(u) "Principal Market" means the OTCQB.
(v) "SEC" means the Securities and Exchange Commission or the successor thereto.
(w)
"Securities" means, collectively, the Preferred Shares and the shares of Common Stock issuable upon
conversion of (or otherwise in accordance with) the Preferred Shares.
( x ) "Securities Purchase Agreement" means that certain securities purchase agreement by and among the
Company and the initial holders of Preferred Shares, dated as of the Subscription Date, as may be amended from time in accordance
with the terms thereof.
(
y
) "Stated Value" shall mean $1,000 per share, subject to adjustment for stock splits, stock dividends,
recapitalizations, reorganizations, reclassifications, combinations, subdivisions or other similar events occurring after the Initial
Issuance Date with respect to the Preferred Shares.
(z) "Subscription Date" means May 14, 2014.
23
(aa) "Subsidiaries" shall have the meaning as set forth in the Securities Purchase Agreement.
(bb) "Successor Entity" means the Person (or, if so elected by the Required Holders, the Parent Entity) formed by,
resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Required Holders, the Parent Entity)
with which such Fundamental Transaction shall have been entered into.
( c c ) "Trading Day" means, as applicable, (x) with respect to all price determinations relating to the Common
Stock, any day on which the Common Stock is traded on the Principal Market, or, if the Principal. Market is not the principal
trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is
then traded, provided that "Trading Day" shall not include any day on which the Common Stock is scheduled to trade on such
exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of
trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such
exchange or market, then during the hour ending at 4:00:00 p.m., New York time) unless such day is otherwise designated as a
Trading Day in writing by the Required Holders or (y) with respect to all determinations other than price determinations relating to
the Common Stock, any day on which The New York Stock Exchange (or any successor thereto) is open for trading of securities.
( d d ) "Transaction Documents" means the Securities Purchase Agreement, this Certificate of Designations, the
Registration Rights Agreement and each of the other agreements and instruments entered into or delivered by the Company or any
of the Holders in connection with the transactions contemplated by the Securities Purchase Agreement, all as may be amended from
time to time in accordance with the terms thereof.
(ee) "Unpaid Dividend Amount" means, as of the applicable date of determination, with respect to each Preferred
Share, all accrued and unpaid Dividends on such Preferred Share.
( f f ) "Voting Stock" of a Person means capital stock of such Person of the class or classes pursuant to which the
holders thereof have the general voting power to elect, or the general power to appoint, at least a majority of the board of directors,
managers, trustees or other similar governing body of such Person (irrespective of whether or not at the time capital stock of any
other class or classes shall have or might have voting power by reason of the happening of any contingency).
24
( g g ) "VWAP" means, for any security as of any date, the dollar volume-weighted average price for such security
on the Principal Market (or, if the Principal 25 Market is not the principal trading market for such security, then on the principal
securities exchange or securities market on which such security is then traded) during the period beginning at 9:30:01 a.m., New
York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its "HP" function set to "weighted
average" or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter
market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York time, and ending at
4:00:00 p.m., New York time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the
market makers for such security as reported in the "pink sheets" by OTC Markets Group Inc. (formerly Pink Sheets LLC). If the
VWAP cannot be calculated for such security on such date on any of the foregoing bases, the VWAP of such security on such date
shall be the fair market value as mutually determined by the Company and such Holder. If the Company and such Holder are unable
to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with the procedures in
Section 22. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other
similar transaction during such period.
2 4 . Disclosure. Upon receipt or delivery by the Company of any notice in accordance with the terms of this Certificate of
Designations, unless the Company has in good faith determined that the matters relating to such notice do not constitute material, non-
public information relating to the Company or any of its Subsidiaries, the Company shall simultaneously with any such receipt or delivery
publicly disclose such material, non-public information on a Current Report on Form 8-K or otherwise. In the event that the Company
believes that a notice contains material, non-public information relating to the Company or any of its Subsidiaries, the Company so shall
indicate to each Holder contemporaneously with delivery of such notice, and in the absence of any such indication, each Holder shall be
allowed to presume that all matters relating to such notice do not constitute material, non-public information relating to the Company or its
Subsidiaries. Nothing contained in this Section 24 shall limit any obligations of the Company, or any rights of any Holder, under the
Securities Purchase Agreement.
25
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designations of Series A Convertible Preferred Stock of
Genius Brands International, Inc. to be signed by its Chief Executive Officer on this 14th day of May, 2014.
GENIUS BRANDS INTERNATIONAL, INC.
By: /s/ Andy Heyward
Name: Andy Heyward
Title: CEO
26
GENIUS BRANDS INTERNATIONAL, INC.
CONVERSION NOTICE
EXHIBIT I
Reference is made to the Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock of Genius
Brands International, Inc. (the "Certificate of Designations"). In accordance with and pursuant to the Certificate of Designations, the
undersigned hereby elects to convert the number of shares of Series A Convertible Preferred Stock, $0.001 par value per share (the
"Preferred Shares"), of Genius Brands International, Inc., a Nevada corporation (the "Company"), indicated below into shares of
common stock, $0.001 par value per share (the "Common Stock"), of the Company, as of the date specified below.
Date of Conversion:________________________________________________________
Number of Preferred Shares to be converted:_____________________________________
Share certificate no(s). of Preferred Shares to be converted:__________________________
Tax ID Number (If applicable):________________________________________________
Conversion Price:_________________________________________________________
Number of shares of Common Stock to be issued:_________________________________
Please issue the shares of Common Stock into which the Preferred Shares are being converted in the following name and to the following
address:
Issue to:___________________________________________
____________________________________________
Address:________________________________________
Telephone Number:_______________________________
Facsimile Number:___________________________________
Holder:____________________________________________
By:____________________________________
Title:___________________________________
Dated:__________________________________
Account Number (if electronic book entry transfer):____________________________
Transaction Code Number (if electronic book entry transfer):______________________
27
ACKNOWLEDGMENT
EXHIBIT II
The Company hereby acknowledges this Conversion Notice and hereby directs __________________ to issue the above indicated
number of shares of Common Stock in accordance with the Irrevocable Transfer Agent Instructions dated _______, 2014 from the
Company and acknowledged and agreed to by____________.
GENIUS BRANDS INTERNATIONAL, INC.
By:_____________________
Name:
Title:
28
BARBARA K. CEGAVSKE
Secretary of State
204 North Carson Street, Suite 4
Carson City, Nevada 89701-4520
(775) 684-5706
Website: www.nvsos.gov
Certificate of Change Pursuant
to NRS 78.209
Filed in the office of
/s/ Barbara K. Cegavske
Barbara K. Cegavske
Secretary of State
State of Nevada
Document Number
20160486430-34
Filing Date and Time
11/04/2016 8:00 AM
Entity Number
E00515685011-9
Certificate of Change filed Pursuant to NRS 78.209
For Nevada Profit Corporations
1. Name of Corporation:
Genius Brands International, Inc.
2. The board of directors have adopted a resolution pursuant to NRS 78.209 and have obtained any required approval of the stockholders.
3. The current number of authorized shares and the par value, if any, of each class or series, if any, of shares before the change:
700,000,000 authorized shares of Common Stock, par value $0.001 per share.
10,000,000 authorized shares of Preferred Stock, par value $0.001 per share.
4. The number of authorized shares and the par value, if any, of each class or series, if any, of shares after the change:
233,333,334 authorized shares of Common Stock, par value $0.001 per share.
10,000,000 authorized shares of Preferred Stock, par value $0.001 per share.
5. The number of shares of each affected class or series, if any, to be issued after the change in exchange for each issued shares of the same
class or series:
One (1) share of Common Stock will be issued in exchange for every three (3) shares of issued and outstanding Common Stock.
6. The provisions, if any, for the issuance of fractional shares, or for the payment of money or the issuance of scrip to stockholders
otherwise entitled to a fraction of a share and the percentage of outstanding shares affected thereby:
All fractional shares of Common Stock will be rounded up to the nearest whole share.
7. Effective date and time of filing: (optional) Date: 11/07/16 Time: 5:00 PM
8. Signature:
/s/ Gregory B. Payne
Signature of Officer
Corporate Secretary
Title
Exhibit 3.2
BYLAWS
OF
PACIFIC ENTERTAINMENT CORPORATION
ARTICLE I
OFFICES
1. PRINCIPAL OFFICES. The Board of Directors of this corporation (the “Board”) shall fix the location of the principal
executive office of the corporation at any place within or outside California. If the principal executive office is located outside the state,
and the corporation has one or more business offices in this state, the Board shall designate a principal business office in California.
2. OTHER OFFICES. The Board may at any time establish branch or subordinate offices at any place or places where the
corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside California designated by
the Board. In the absence of any such designation, shareholders’ meetings shall be held at the principal executive office of the corporation.
2. ANNUAL MEETING. The annual meeting of shareholders shall be held each year on a date and at a time designated by
the Board. At each annual meeting, directors shall be elected, and any other proper business may be transacted.
3. SPECIAL MEETING. A special meeting of the shareholders may be called at any time by the Board, or by the Chairman
of the Board, or by the President, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the
votes at that meeting.
If a special meeting is called by any person or persons other than the Board, the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail
or by telegraphic or other facsimile transmission to the Chairman of the Board, the President, any Vice President, or the Secretary of the
corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person(s) calling the
meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty
(20) days after the receipt of the request, the person(s) requesting the meeting may give the notice. Nothing contained in this paragraph of
this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board may
be held.
4. NOTICE OF SHAREHOLDERS’ MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given
in accordance with Section 5 of Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice
shall specify the place, date, and hour of the meeting and (a) in the case of a special meeting, the general nature of the business to be
transacted, or (b) in the case of the annual meeting, those matters which the Board, at the time of giving the notice, intends to present for
action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominees whom, at
the time of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (a) a contract or transaction in which a director has a direct or
indirect financial interest, pursuant to California Corporations Code (the “Code”) §310, (b) an amendment of the Articles of Incorporation,
pursuant to Code §902, (c) a reorganization of the corporation, pursuant to Code §1201, (d) a voluntary dissolution of the corporation,
pursuant to Code §1900, or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant
of Code § 2007, the notice shall also state the general nature of that proposal.
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5. MANNER OF GIVING NOTICE: AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given
either personally or by the first-class mail of telegraphic or other written communication, charges prepaid, addressed to the shareholder at
the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation’s books or is given, notice shall be deemed to have been given if sent to that
shareholder by first-class mail or telegraphic or other written communication to the corporation’s principal executive office, or if published
at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at
the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is
returned to the corporation by the United States Postal Service marked to indicate that the U.S. Postal Service is unable to deliver the notice
to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall
be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one
year from the date of the giving of the notice.
6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of
shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than
a quorum, if any action is taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.
7. ADJOURNED MEETING: NOTICE. Any shareholder’s meeting, annual or special, whether a quorum is present, may be
adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the
absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article II.
When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date of the
adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in
which case the Board shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting,
the corporation may transact any business which might have been transacted at the original meeting.
8. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the
provisions of Section 11 of this Article II, subject to Code §§ 702 to 704, inclusive (relating to voting shares held by a fiduciary, in the
name of a corporation, or in joint ownership). The shareholders’ vote may be by voice vote or by ballot; provided, that an election for
directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors,
any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the
proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively
presumed that the shareholder’s approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is present,
the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of
directors) shall be the act of the shareholders, unless the vote of a greater number of voting by classes is required by these Bylaws, the
California Corporation Code or by the Articles of Incorporation.
At a shareholders’ meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e.,
cast for any one or more candidates a number of votes greater than the number of the shareholder’s shares) unless the candidates’ names
have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the
voting of the shareholder’s intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote
may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder’s shares are entitled, or distribute the shareholder’s votes on the same principle
among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of
directors to be elected, shall be elected.
9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any meeting of
shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held
after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an
approval of the minutes. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual
or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of the matters specified in the
second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of the proposal. All such
waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.
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Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person
objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and
except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the
meeting if that objection is expressly made at the meeting.
10. SHAREHOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken at any annual or special
meeting of shareholders may by taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is
signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a
consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, that a
director may be elected at any time to fill a vacancy of the Board that has not been filled by the directors, by the written consent of the
holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the
Secretary and shall be maintained in the corporate records. Any shareholder giving written consent, or the shareholder’s proxy holders, or a
transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a
writing received by the corporation prior to the time that the written consents of the number of shares required to authorize the proposed
action have been filed with the Secretary, but may not do so thereafter.
If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent
of all such shareholders shall not have been received, the Secretary shall give prompt notice of the corporate action approved by the
shareholders without a meeting. This notice shall be given in the manner specified in Section 5 of this Article II. In the case of approval of
(a) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Code §310, (b) indemnification of
agents of the corporation pursuant to Code §317, (c) a reorganization of the corporation pursuant to Code §1201, and (d) a distribution in
dissolution other than in accordance with the rights of outstanding preferred shares pursuant to Code §2007, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that approval.
11. RECORD DATE FOR NOTICE, VOTING, AND CONSENTS. For purposes of determining the shareholders entitled
to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the Board may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60)
days before any such action without a meeting, and in this event only shareholders of record on the date so fixed are entitled to notice and
to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books to the corporation after the record
date, except as otherwise provided in the California General Corporation Law. If the Board does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at
the close of business on the business day next preceding the date on which notice is given or, if notice is waived, at the close of business on
the business day next preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give consent to corporate action in writing without a
meeting, (1) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (2) when prior
action of the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating to that
action, or the sixtieth (60th) day before the date of such other action, whichever is later.
12. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person
or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary. A proxy shall be deemed signed if
the shareholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the
shareholder or the shareholder’s attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full
force and effect unless (a) revoked by the person executing it before the vote pursuant to that proxy, by a writing delivered to the
corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by,
the person executing the proxy; or (b) written notice of the death or incapacity of the maker of that proxy is received by the corporation
before the vote pursuant to that proxy is counted; provided, that no proxy shall be valid after the expiration of eleven (11) months from the
date of the proxy unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provision of Code §§705(e) and 705(f).
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13. INSPECTORS OF ELECTION. Before any meeting of shareholders, the Board may appoint any persons other than
nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the
chairman of the meeting may, and on the request of any shareholder or a shareholder’s proxy shall, appoint inspectors of election at the
meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or
more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or
three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the
meeting may, and upon the request of any shareholder or a shareholder’s proxy shall, appoint a person to fill that vacancy. These inspectors
shall: (a) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of
a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots, or consents; (c) hear and determine all challenges
and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the
polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all
shareholders.
ARTICLE III
DIRECTORS
1. RESPONSIBILITY OF BOARD. Subject to the provisions of the California General Corporation Law and any limitations
in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of
the Board. The Board may delegate the management of the day-to-day operation of the business of the corporation to another person,
including but not limited to the officers of the corporation, provided that the business and affairs of the corporation shall be managed and
all corporate powers shall be exercised under the ultimate direction of the Board.
2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors shall be not less than three (3);
provided, however, that (a) so long as the corporation has only one (1) shareholder, the number may be one or two, and (b) so long as the
corporation has only two (2) shareholders, the number may be two. The number of directors may be increased or decreased from time to
time by the Board; provided, however, after shares have been issued, any bylaw specifying or changing the minimum number of directors
may be adopted only by approval of the outstanding shares, as that term is defined in Section 152 of the California Corporations Code,
provided that a bylaw reducing the minimum number to a number less than five (5) cannot be adopted if the votes cast against its adoption
at a meeting of shareholders or the shares not consenting in the case of action by written consent are equal to more than 16 2/3 percent of
the outstanding shares entitled to vote.
3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the
shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy shall hold office until
the expiration of the term for which elected and until a successor has been elected and qualified.
4. VACANCIES. Vacancies in the Board may be filled by a majority of the remaining directors, though less than a quorum, or
by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or
by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a
quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected
shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the Board shall be deemed to exist in the event of the death, resignation, or removal of any
director, or if the Board by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court
or convicted of a felony, or if the authorized or required number of directors is increased, or if the shareholders fail, at any meeting of
shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting.
but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote.
The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors,
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Any director may resign effective on giving written notice to the Chairman of the Board, the President, the Secretary, or
the Board, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a
future time, the Board may elect a successor to take office when the resignation becomes effective.
term of office expires.
No reduction of the authorized number of directors shall have the effect of removing any director before that director’s
5. PLACE OF MEETING AND MEETINGS BY TELEPHONE. Regular meetings of the Board may be held at any place
within or outside California that has been designated from time to time by Board resolution. In the absence of such a designation, regular
meetings shall be held at the principal executive office. Special meetings of the Board shall be held at any place within or outside
California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive
office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so
long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the
meeting.
6. ANNUAL MEETING. Immediately following each annual meeting of shareholders, the Board shall hold a regular meeting
for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be
required.
7. OTHER REGULAR MEETINGS. Other regular meetings of the Board shall be without call at such time as shall from time
to time be fixed by the Board. Such regular meetings may be held without notice.
8. SPECIAL MEETINGS. S pecial meetings of the Board for any purpose or purposes may be called at any time by the
Chairman of the Board or the President or any Vice President or the Secretary or any two directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by
first-class mail or telegram, charges prepaid, addressed to each director at that director’s address as it is shown on the records of the
corporation. In case the notice is mailed, it shall be deposited in the U.S. mail at least four (4) days before the time of the holding of the
meeting. In case the notice is delivered personally, it shall be delivered personally or by telephone, including a voice messaging system or
other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means
or at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally may be communicated
either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
9. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business,
except to adjourn as provided in Section 11 of this Article III. Every act or decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present shall be regarded as the act of the Board, subject to Code §310 (as to approval of contracts
or transactions in which a director has a direct or indirect material of financial interest), §311 (as to appointment of committees), and
§317(e) (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.
10. WAIVER OF NOTICE. The transactions of any meeting of the Board, however called and noticed or wherever held,
shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the
meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes.
The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with
the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting before or at its commencement the lack of notice to that director.
11. ADJOURNMENT. A majority of the directors present, whether constituting a quorum, may adjourn any meeting to
another time and place.
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12. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given unless
the meeting is adjourned for more than twenty-four hours, in which case notice of the time and place shall be given before the time of the
adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the
adjournment.
13. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board may be taken without a
meeting if all members of the Board shall individually or collectively consent in writing to that action. Such action by written consent shall
have the same force and effect as a unanimous vote of the Board. Such written consent or consents shall be filed with the minutes of the
proceedings of the Board.
14. FEES AND COMPENSATION OF DIRECTORS. Directors and committee members may receive such compensation,
if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board. This Section 14
shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or
otherwise, and receiving compensation for those services.
ARTICLE IV
COMMITTEES
1. COMMITTEES OF DIRECTORS. The Board may, by resolution adopted by a majority of the authorized number of
directors, designate one or more committees, each consisting of two or more directors, to serve at the Board’s pleasure. The Board may
designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the
committee. Any committee, to the extent provided in the resolution of the Board, shall have all the authority of the Board, except with
respect to: (a) the approval of any action which, under the General Corporation Law of California, also requires shareholders’ approval or
approval of the outstanding shares; (b) the filling of vacancies on the Board or in any committee; (c) the fixing of compensation of the
directors for serving on the Board or on any committee; (d) the amendment or repeal of bylaws or the adoption of new bylaws; (e) the
amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) a distribution to the
shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board; or (g) the
appointment of any other committees of the Board or the members of such committees.
2. MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held
and taken in accordance with, Article III, Section 5 (place of meetings), 7 (regular meetings), 8 (special meetings and notice), 9 (quorum),
10 (waiver of notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for the Board and its members, except that the time of regular
meetings of committees may be determined either by Board resolution or by committee resolution; special meetings of committees may also
be called by Board resolution; and notice of special meetings of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The Board may adopt rules for the government of any committee not inconsistent with these
Bylaws.
ARTICLE V
OFFICERS
1. OFFICERS. The officers of the corporation will be a Chairman of the Board, a Chief Executive Officer, a President, a Chief
Operating Officer, a Secretary, a Chief Financial Officer or a Treasurer. The corporation may also have, at the discretion of the Board, one
or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be elected or
appointed in accordance with the provisions of this Article. Any number of offices may be held by the same person.
2. ELECTION OF OFFICERS. The officers, except such officers as may be appointed in accordance with Sections 3 or 5 of this
Article V, shall be chosen by a majority vote of the Board, and each shall serve at the Board’s pleasure, subject to the rights, if any, of an
officer under any employment contract.
3. SUBORDINATE OFFICERS. The Board may appoint, and may empower the Chief Executive Officer to appoint, such other
officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform
such duties as are provided in these Bylaws or as the Board may from time to time determine.
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4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any employment contract, any
officer may be removed, either with or without cause, by the Board at any regular or special Board meeting, or except in case of an officer
chosen by the Board by any officer upon whom such power of removal may be conferred by the Board.
Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation is
without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.
5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause
shall be filled in the manner prescribed in these Bylaws for regular appointments to that office.
6. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the shareholders and at all meetings of
the Board and exercise and perform such other powers and duties as may be from time to time assigned to him or her by the Board or
prescribed by the Bylaws.
7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the corporation shall be the chief executive officer of the
corporation, unless otherwise determined by the Board, and shall have, subject to the control of the Board, general and active supervision
and management over the business of the corporation and over its several subordinate officers, assistants, agents and employees.
8. PRESIDENT. The President shall have, subject to the control of the Board and/or the Chief Executive Officer, general and active
supervision and management over the business of the corporation and over its several subordinate officers, assistants, agents and
employees. The President shall have such other powers and duties as may from time to time be assigned to him by the Chief Executive
Officer, the Board or as prescribed by the Bylaws. At the request of the Chief Executive Officer, or in the case of the absence or inability
to act of the Chief Executive Officer upon the request of the Board, the President shall perform the duties of the Chief Executive Officer
and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Chief Executive Officer.
9. VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the
Board or, if not ranked, a Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them respectively by the Board or these Bylaws, and the Chief
Executive Officer, or the President.
10. SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive office or such other place as the Board may
direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of
holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors’ meetings or
committee meetings, the number of shares present or represented at shareholders’ meetings, and the proceedings.
The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation’s transfer
agent or registrar, as determined by resolution of the Board, a share register, or a duplicate share register, showing the names of all
shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same,
and the number and date of cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board required by
these Bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such
other powers and perform such other duties as may be prescribed by the Board or by these Bylaws.
11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its
assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and share value. The books of account shall at all
reasonable times be open to inspection by any director.
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The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board. He or she shall disburse the funds of the corporation as may be ordered by the Board, shall
render to the President and directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the
financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board or
these Bylaws.
ARTICLE VI
IDEMNIFICATION
1. RIGHT OF INDEMNIFICATION. The corporation shall indemnify any person who was or is a party to any threatened,
pending or completed civil lawsuit or proceeding, whether administrative or investigative, including all appeals (other than an action
brought by or on behalf of the corporation) by reason of the fact that that person is or was acting as a director, officer or employee of the
corporation. Indemnification shall be against all expenses, including without limitation, attorneys’ fees, court costs, expert witness fees,
judgments, decrees, and fines actually paid by the person in settlement of any action, suit or proceedings provided that the Board shall first
have determined, in its sole judgment, that the person acted in good faith and in a manner that he or she reasonably believed to be in the best
interests of the corporation. The termination of any action, suit or proceeding by judgment, order or settlement shall not of itself create a
presumption that the person did not act in good faith.
2. GROSS NEGLIGENCE OR MISCONDUCT. No indemnification shall be made for any claim, issue or matter as to
which the person is finally adjudged to be liable for gross negligence or intentional misconduct in the performance of his or her duties as
director, officer, trustee, fiduciary or employee.
3. INDEMNITY FOR SUCCESSFUL DEFENSE. In spite of any limitations set forth in Sections 1 and 2 of this Article VI,
to the extent that any person has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in those
Sections, that person shall be indemnified against all expenses actually and reasonably paid by him or her, including, without limitation,
attorneys’ fees, court costs and expert witness fees.
4. ADVANCEMENT OF EXPENSES. Expenses incurred in defending a civil action, suit or proceeding may be paid by the
corporation in advance of the final disposition of the action, suit or proceeding as authorized by the Board, on receipt by the Board of an
undertaking by or on behalf of the director, officer or employee involved to repay the expenses if it is ultimately determined that the person
is not entitled to be indemnified by the corporation as authorized in this Article VI.
5. INDEMNIFICATION NOT EXCLUSIVE. The indemnification provided under this Article VI shall not be deemed to be
exclusive of any other rights to which any person indemnified may be entitled under any regulation, agreement, vote of the shareholders or
disinterested directors or otherwise. The indemnification provided under this Article VI shall be deemed exclusive of any other power to
indemnify or right to indemnification that the corporation or any person referred to in this Article VI may have to acquire. Indemnification
shall continue and inure to the benefit of the heirs, executors and administrators of any person entitled to indemnification under this Article
VI.
ARTICLE VII
RECORDS AND REPORTS
1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal executive office, or
at the office of its transfer agent or registrar if either be appointed and as determined by resolution of the Board, a record of its shareholders,
giving the names and addresses of all shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (a) inspect and copy the records of shareholders’ names and addresses and shareholdings during usual business hours on
five (5) days prior written demand on the corporation, and (b) obtain from the transfer agent of the corporation, on written demand and on
the tender of such transfer agent’s usual charges for such a list, a list of the shareholders’ names and addresses, who are entitled to vote for
the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date
specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or
before the later of five (5) days after the demand is received or the date specified in the demand as the date as of which the list is to be
compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust
certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the shareholder or holder
of a voting trust certificate making the demand and at their expense.
8
2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its
principal executive office is not in California, at its principal business office in this state, the original or a copy of the Bylaws as amended to
date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of
the corporation is outside California and the corporation has no principal business office in this state, the Secretary shall, upon the written
request of any shareholder, furnish to that shareholder a copy of the Bylaws, as amended to date.
3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and minutes
of proceedings of the shareholders and the Board and any committee or committees of the Board shall be kept at such place or places
designated by the Board, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be
kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being
converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any
shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the
holder’s interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or
attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary
corporation of the corporation.
4. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records,
and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a
director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of
documents.
5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in Code §1501 is expressly dispensed
with, but nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to the shareholders of the
corporation as they consider appropriate.
6. ANNUAL STATEMENT. The corporation shall file with the California Secretary of State, on the prescribed form, a statement
setting forth the authorized number of directors, the names and complete business or residence addresses of all incumbent directors, the
names and complete business or residence addresses of the President, Secretary, and CFO, the street address of its principal executive
office or principal business office in this state, and the general type of business constituting the principal business activity of the
corporation, together with a designation of the agent of the corporation for the purpose of service of process, all in compliance with Code
§1502.
ARTICLE VIII
GENERAL CORPORATE MATTERS
1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders
entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any
other lawful action (other than action by shareholders by written consent without a meeting), the Board may fix, in advance, a record date,
which shall not be more than sixty (60) days before any such action, and in that case only shareholders of record on the date so fixed are
entitled to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General
Corporation Law.
If the board does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business
on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later.
2. CHECKS, DRAFTS, EVIDENCES OF IDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes, or other
evidences of indebtedness, issued in the name of or payable to the corporation shall be signed or endorsed by such person or persons and in
such manner as, from time to time, shall be determined by resolution of the Board.
3. CORPORATE CONTRACTS AND INSTRUMENTS. The Board, except as otherwise provided in these Bylaws, may authorize
any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation,
and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board or within the agency
power of an officer, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement
or to pledge its credit or to render it liable for any purpose or for any amount.
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4. SHARE CERTIFICATES. A certificate(s) for shares of the corporate capital stock shall be issued to each shareholder when any of
these shares are fully paid, and the Board may authorize the issuance of certificates for shares as partly paid provided these certificates
state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation
by the Chief Executive Officer or the President or a Vice-President and by the Chief Financial Officer or an assistant treasurer or the
Secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all
of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it
may be issued by the corporation with the same effect as if that person were an officer, transfer agent, or registrar at the date of issue.
5. LOST CERTIFICATES. Except as provided in this Section 5, no new certificates for shares shall be issued to replace an old
certificate unless the latter is surrendered to the corporation and canceled at the same time. The Board may, in case any share certificate or
certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate for any other conditions as
the Board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to
protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss,
theft, or destruction of the certificate or the issuance of the replacement certificate.
6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chief Executive Officer, the President, or any Vice-
President, or any other person authorized by Board resolution or by any of the foregoing designated officers, is authorized to vote on behalf
of the corporation any shares of any other corporation, foreign or domestic, standing in the corporation’s name. This authority may be
exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers.
7. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and
definitions in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a
corporation and a natural person.
ARTICLE IX
AMENDMENTS
1. AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these Bylaws may be amended or repealed by approval
of the outstanding shares of the corporation, as that term is defined in Section 152 of the California Corporations Code; provided, however,
that if the Articles of Incorporation of the corporation set forth the number of authorized Directors of the corporation, the authorized
number of Directors may be changed only by an amendment of the Articles of Incorporation.
2. AMENDMENT BY DIRECTORS. Subject to the rights of shareholders as provided in Section 1 of this Article IX, these Bylaws,
other than a bylaw or an amendment of a bylaw changing the authorized number of directors, may be adopted, amended, or repealed by the
Board.
10
CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BYLAWS
CERTIFICATE BY SECRETARY:
I HEREBY CERTIFY that I am the duly elected, qualified and acting Secretary of this corporation, that these Bylaws were adopted as the
Bylaws of this corporation on_________________, 2006 by the Board of Directors and the Shareholders of this corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal as of______________________________, 2006.
/s/ Michael G. Meader
Mike Meader, Secretary
11
AMENDMENT TO BYLAWS
OF
GENIUS BRANDS INTERNATIONAL, INC.
a Nevada corporation
The Bylaws of GENIUS BRANDS INTERNATIONAL, INC.., a Nevada corporation, as certified by the secretary of the Corporation on
November 15, 2013 are hereby amended as follows:
A new Article VIII is added to the Bylaws as follows:
“ARTICLE VIII - INAPPLICABILITY OF NEVADA REVISED STATUTES 78.378 TO 78.3793, INCLUSIVE.
SECTION 12-1 The provisions of Nevada Revised Statutes 78.378 to 78.3793, inclusive (entitled “Acquisition of a Controlling Interest”),
shall not apply to the Corporation or to any “acquisition” of a “controlling interest” (as each term is defined therein) in the Corporation by
any existing or future stockholder or stockholders.”
CERTIFICATION
I hereby certify that I am the duly appointed and acting Secretary of GENIUS BRANDS INTERNATIONAL, INC. and that the foregoing
amendment to the Bylaws of GENIUS BRANDS INTERNATIONAL, INC. was duly adopted and approved by unanimous written consent
of the Board of Directors held on the date set forth above.
Dated this 15th day of November, 2013.
/s/ Larry Balaban
Secretary
12
AMENDMENT TO BYLAWS
OF
GENIUS BRANDS INTERNATIONAL, INC.
a Nevada corporation
The Bylaws of GENIUS BRANDS INTERNATIONAL, INC., a Nevada corporation, as certified by the secretary of the Corporation on
November 15, 2016 are hereby amended as follows:
1. Pursuant to Article IX, Section 2 of the Corporation’s Bylaws (as amended, the “ Bylaws”), Article VIII, Section 4 of the Bylaws is
hereby deleted in its entirety and replaced by the following:
“4. SHARE CERTIFICATES; UNCERTIFICATED SHARES. Every holder of stock in the corporation shall be entitled
to have a certificate, signed by, or in the name of the corporation by, the Chief Executive Officer or the President or a Vice-
President and by the Chief Financial Officer or an assistant treasurer or the Secretary or any assistant secretary, certifying the
number of shares owned by such holder in the corporation, provided that the Board may provide by resolution or resolutions that
some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the corporation. Any or all of the signatures on a certificate may
be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Each certificate for shares
of stock which are subject to any restriction on transfer pursuant to the certificate of incorporation, these Bylaws, applicable
securities laws or any agreement among any number of shareholders or among any such holders and the corporation shall have
conspicuously noted on the face or back of such certificate either the full text of such restriction or a statement of the existence of
such restriction.”
2. Article VIII, Section 5 of the Bylaws is hereby deleted in its entirety and replaced by the following:
“5. LOST CERTIFICATES. The corporation may issue a new certificate or uncertificated shares in place of any
certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed. The Board may, in
case any share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement
certificate or uncertificated shares for any other conditions as the Board may require, including provision for indemnification of the
corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made
against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of
the replacement certificate.”
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CERTIFICATION
I hereby certify that I am the duly appointed and acting Secretary of GENIUS BRANDS INTERNATIONAL, INC. and that the foregoing
amendment to the Bylaws of GENIUS BRANDS INTERNATIONAL, INC. was duly adopted and approved by unanimous written consent
of the Board of Directors held on the date set forth above.
Dated this 15th day of November, 2016.
/s/ Gregory B. Payne
Secretary
14
List of Subsidiaries
Exhibit 21.1
A Squared Entertainment LLC (Delaware)
Llama Productions, LLC (California)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (No. 333-214805) on Form S-3 and on Form S-1 on Form S-3
(No. 333-221683) of Genius Brands International, Inc. of our report dated April 2, 2018, relating to our audit of the consolidated financial
statements, which appear in the Annual Report on Form 10-K of Genius Brands International, Inc. for the year ended December 31, 2017
and 2016.
Exhibit 23.1
/s/ SQUAR MILNER LLP
Los Angeles, California
April 2, 2018
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Andy Heyward certify that:
1. I have reviewed this Annual Report on Form 10-K of Genius Brands 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 2, 2018
By:
/s/ Andy Heyward
Andy 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, Rebecca D. Hershinger, certify that:
1. I have reviewed this Annual Report on Form 10-K of Genius Brands 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 2, 2018
By:
/s/ Rebecca D. Hershinger
Rebecca D. Hershinger
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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
Exhibit 32.1
In connection with the Annual Report of Genius Brands International, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andy 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 2, 2018
By:
/s/ Andy Heyward
Andy Heyward
Chief Executive Officer
(Principal Executive Officer)
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
Exhibit 32.2
In connection with the Annual Report of Genius Brands International, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rebecca D. Hershinger,
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 2, 2018
By:
/s/ Rebecca D. Hershinger
Rebecca D. Hershinger
Chief Financial Officer
(Principal Accounting Officer)