What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-04-09 compared with 2023-04-13 · 151 added, 159 removed, 221 unchanged (58% of the section changed)

6 unchanged sentences

Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Recent Developments

On February 6, 2023, our board of directors approved a 1-for-10 reverse stock split of our outstanding shares of common stock.

The reverse stock split was effected on February 10, 2023 at 5:00 p.m.

Eastern time.

At the effective time, every 10 issued and outstanding shares of the Company's common stock were converted into 1 share of common stock.

Any fractional shares of common stock resulting from the reverse stock split were rounded up to the nearest whole post-split share and no shareholders received cash in lieu of fractional shares.

The par value of each share of common stock remained unchanged.

The reverse stock split proportionately reduced the number of shares of authorized common stock from 400,000,000 to 40,000,000 shares.

The reverse stock split also applied to common stock issuable upon the exercise of our outstanding warrants and stock options.

The reverse stock split did not affect the authorized preferred stock of 10,000,001 shares.

Unless noted, all references to shares of common stock and per share amounts contained in this Annual Report on Form 10-K have been retroactively adjusted to reflect a 1-for-10 reverse stock split.

2022 Investments

On January 13, 2022, we acquired Ameba Inc.

("Ameba") and gained access to its kid-safe platform technology and 13,000 episodes of owned and licensed content.

Refer to Note 3 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

On April 6, 2022, we completed the acquisition of Wow.

On October 26, 2021, our wholly-owned subsidiary, 1326919 B.C.

LTD., a corporation existing under the laws of the Province of British Columbia and Wow, entered into an Arrangement Agreement to effect a plan of arrangement under the arrangement provisions of Part 9, Division 5 of the Business Corporations Act.

We purchased 100% of the issued and outstanding shares of Wow, including Wow's subsidiary Frederator, for $38.3 million in cash and 1,105,708 shares of our common stock.

The plan of arrangement and final agreement, together with the acquisition of Wow’s Mainframe Studios and its subsidiary Frederator, are referred to as the “Wow Acquisition.” Refer to Note 3 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

On December 1, 2021, we completed a $6.8 million investment in YFE.

In exchange for $3.4 million in cash and 228,127 shares of our common stock (valued at approximately $3.4 million), we received 3,000,500 shares of YFE’s common stock, a 28.7% ownership in YFE.

Following the initial equity investment in YFE, we participated in a mandatory tender offer for the remaining publicly traded shares held by YFE shareholders.

Upon the expiration of the offer on February 14, 2022, we purchased an additional 2,637,717 shares of YFE at 2.00 EUROS per share or $5.3 million EUROS ($6.0 million USD) in the aggregate.

On March 9, 2022, bonds held by YFE shareholders were converted into $2.6 million shares of YFE common stock, 304,431 of which were purchased by us, at 2.00 EUROS per share or $0.6 million EUROS ($0.7 million USD).

On April 5, 2022, we exercised our subscription rights to purchase an additional 914,284 shares of YFE’s common stock at 3.00 EUROS per share, or $2.7 million EUROS ($2.9 million USD), increasing the number of YFE’s outstanding shares to 6,857,132.

During the fourth quarter of 2022, we did not take part in a round of financing raised by YFE which increased YFE's outstanding shares and therefore decreased our ownership in YFE from 48.03% to 44.8% as of December 31, 2022.

Our content distribution business is focused on achieving scale across our networks, including Kartoon Channel!

, Frederator, Ameba, and Kartoon Channel!

Revenue growth will be driven by the continued focus on licensed content and exploitation of our current content such as Stan Lee, Shaq's Garage , Rainbow Rangers and many more.

Continued profit growth will be realized the more we can scale the business across our platforms.

In addition, we are looking at artificial intelligence (“AI”) tools to reduce the cost of operating distribution expenses such as dubbing expenses, video resolution upscaling and converting between 2D and 3D.

Our production services business is focused on creating high-quality original and for hire content in the most efficient way possible.

To achieve this, our Mainframe Studios division, the main driver of this business, is exploring more ways to improve operations by adopting a more flexible and efficient approach.

This includes collaborating with outsource partners and utilizing AI technology to streamline processes and drive efficiencies within the organization.

Our licensing and royalties business has the most upside and potential for the Company.

We are looking to take advantage of our incredible set of Stan Lee assets to drive consumer products - both digitally and physically.

We will be focused on utilizing all of our IP assets further in 2024 and beyond.

Our media advisory and advertising services business is focused on driving deal flow opportunities and winning annuity business through retainers and projects.

The team continues to focus on the toy business, but also expansion into tangential industries such as family and travel.

The team has expanded their reach over the past 12-18 months by leveraging their relationships with influencers to promote products and provide bespoke marketing initiatives for the clients.

Results of Operations

Our summary results for the years ended December 31, 2022 and 2021 are below:

Our summary results for the year ended December 31, 2023 and 2022 are below:

Year Ended December 31,

6 unchanged sentences

Total Revenue $ 44,085 $ 62,299 $ (18,214) (29) %

Production Services revenue is generated specifically by Wow providing animation production services for the year ended December 31, 2022.

Content Distribution revenue is generated from the distribution of our properties for broadcast on television, video-on-demand (“VOD”) or subscription video-on-demand (“SVOD”) in domestic and international markets and the sale of DVDs for home entertainment through our partners.

Content Distribution also includes our advertising sales generated on our digital network, the Kartoon Channel!

in the form of either flat rate promotions or advertising impressions served, SVOD revenues generated by Ameba and revenue generated by Frederator on its multi-channel network.

Fluctuations in Content Distribution revenue are based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content or advertisement to the customer.

Revenue related to our AVOD and SVOD, including advertising sales for the year ended December 31, 2022, increased 2,146% as compared to the year ended December 31, 2021 primarily due to the acquisition of Ameba, Wow and Frederator, increasing Content Distribution revenue by $23.9 million.

Licensing & Royalties revenues are generated by the items in 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.

Revenue related to our licensing and royalties for the year ended December 31, 2022 increased 77% as compared to the year ended December 31, 2021 primarily due to entering an agreement for the licensing of certain Stan Lee Assets.

Media Advisory & Advertising Services revenue is a combination of client retainer fee-based services and media commissions generated by our wholly-owned subsidiary, Beacon Media Group ("Beacon"), which we acquired on February 1, 2021.

(1) Wow and Frederator were acquired on April 1, 2022, resulting in the inclusion of their financials for only the nine months ended December 31, 2022 in the consolidated financials for the previous year.

If the variation in results is partly attributable to the difference in time periods, we annualize 2022 financials for comparison purposes.

Production services revenue was generated specifically by Wow providing animation production services.

Revenue for production services is recognized over time on a percentage of completion basis, therefore, as the projects are still in progress, we recognize revenue based upon the proportion of costs incurred cumulatively to total expected costs.

Consequently, less revenue is recognized during the periods in which the projects are near completion or completed.

Revenue for the year ended December 31, 2023 was lower than the Wow production services revenue recognized during the nine months ended December 31, 2022.

The decrease was primarily due to a lower volume of service production projects and a decrease in the percentage of projects completed during the current year as compared to the prior year period.

Revenue related to content distribution on AVOD and SVOD, including advertising sales for the year ended December 31, 2023, decreased by 52% as compared to the year ended December 31, 2022.

This was primarily due to a decrease in Wow’s IP production revenue of $6.9 million and Frederator’s IP production revenue of $2.5 million, as there were no IP projects delivered during the current year as compared to the prior year period.

In addition, content revenue from Frederator’s multi-channel network on YouTube for the year ended December 31, 2023 was $3.9 million lower as compared to the nine months ended December 31, 2022.

The decrease in Frederator’s multi-channel network revenue from YouTube decreased due to less viewership and a decline in RPM advertising rates.

The decrease was offset by an increase of $0.2 million in Wow’s distribution revenue.

Revenue related to our licensing and royalties for the year ended December 31, 2023 decreased by 83% as compared to the year ended December 31, 2022 primarily due to our license deals related to our Stan Lee Assets generating increased revenue of $2.5 million during the prior year period.

Revenue generated by media advisory and advertising services for the year ended December 31, 2023 decreased by 3% as compared to the year ended December 31, 2022 primarily due to lower revenue generated by Beacon Communications during the year ended December 31, 2023, resulting in a decrease of $0.8 million.

The decrease is offset by an increase in revenue generated by Beacon Media of $0.7 million primarily due to new customers acquired for digital media services.

Year Ended December 31,

4 unchanged sentences

General and Administrative 35,324 45,851 (10,527) (23) %

Impairment of Property and Equipment 134 – 134 100 %

Impairment of Intangible Assets 4,413 4,117 296 7 %

1 unchanged sentence

Total Expenses $ 116,455 $ 106,019 $ 10,436 10 %

Marketing and Sales expenses consist primarily of advertising expenses and certain payments made to our marketing partners.

Advertising expenses include promotional activities such as digital and television advertising.

Marketing expenses also include payroll and related expenses for personnel that support marketing activities.

The decrease in marketing and sales expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to a

decrease in marketing and advertising expenses incurred to promote the Kartoon Channel!

as well as the launch of Superhero Kindergarten.

Direct Operating Costs during the year ended December 31, 2022 consist primarily of salaries and related expenses for the animation production services employees of Mainframe and Frederator.

Channel expenses, licensing and production of content costs, such as participation expenses related to profit sharing obligations with various animation studios, post-production studios, writers, directors, musicians or other creative talent that have rendered services and amortization, including any write-downs of film and television costs, make up the remainder of Direct Operating Costs.

The acquisition of Ameba, Wow and Frederator increased Direct Operating Costs for the year ended December 31, 2022 by $41.9 million as compared to the year ended December 31, 2021.

The increase is partially offset by a decrease in the write-downs of film and television costs of $11.4 million recorded during the year ended December 31, 2022 as compared to the write-downs recorded during the year ended December 31, 2021.

General and Administrative expenses primarily consist of payroll and related expenses, share-based compensation related to our equity compensation plan, rent, depreciation of our property and equipment and amortization of our intangible assets, as well as professional fees and other general corporate expenses.

The $9.9 million increase in general and administrative expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to the consolidation of Ameba, Wow and Frederator general and administration expenses of $9.8 million.

The expenses during the year ended December 31, 2022 primarily consisted of $10.8 million in salary and wage expenses, $10.9 million in stock based compensation expense, $4.5 million in costs associated with the acquisition of Wow and Frederator and $4.7 million of depreciation and amortization expense related to depreciation of our property and equipment and amortization of our intangible assets and our right of use lease assets.

During the year ended December 31, 2022, as a result of our annual impairment testing, we recorded a non-cash intangible impairment charge of $4.1 million for a determined decrease in value of Beacon's Customer Relationships and Non-Compete Agreements and a non-cash goodwill impairment charge of $4.9 million indicating that the carrying value of the Media Advisory & Advertising Services reporting unit exceeded the estimated fair value.

Refer to Note 10 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

During the year ended December 31, 2021, we recorded a non-cash intangible impairment charge of $3.5 million for the discontinued use of the ChizComm tradename and we recorded a non-cash goodwill impairment charge of $4.8 million due to our annual impairment test indicating that the carrying value of the Media Advisory & Advertising Services reporting unit exceeded the estimated fair value.

If the variation in results is partly attributable to the difference in time periods, we annualize 2022 financials for comparison purposes.

The increase in marketing and sales expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to recognition of marketing expenses related to Shaq’s Garage of $1.2 million, offset by a decrease due to cost saving efforts during the year ended December 31, 2023.

Direct Operating Costs during the year ended December 31, 2023 consisted primarily of salaries and related expenses for the animation production services employees of Wow and Frederator.

Channel expenses, licensing and production of content costs, such as participation expenses related to profit sharing obligations with various animation studios, post-production studios, writers, directors, musicians or other creative talent that had rendered services and amortization, including any write-downs of film and television costs, make up the remainder of Direct Operating Costs.

The decrease was primarily due to a reduction in film amortization expense recognized during the year ended December 31, 2023 of $5.6 million as compared to the year ended December 31, 2022 as a result of less film and television production during the current year.

In addition, Frederator channel costs of its multi-channel network for the year ended

December 31, 2023 decreased by $3.7 million compared to the prior year period.

The decrease was due to a reduction in payments to our multi-channel network members and aligned with the decline in multi-channel network revenue.

The $10.5 million decrease in general and administrative expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to a decrease of $8.2 million in stock-based compensation expense and acquisition related costs of $4.5 million incurred during the year ended December 31, 2022.

The decrease is offset by the recognition of a full year of costs incurred by Wow and Fred versus nine months of costs incurred during the year ended December 31, 2022 after the acquisition in the second quarter of 2022.

During the year ended December 31, 2023, we reassessed our nonfinancial assets, including our definite-lived intangible assets, our indefinite-lived intangible assets and our remaining goodwill for impairment.

As a result, we recorded an impairment charge to our property and equipment of $0.1 million, our definite-lived intangible assets of $2.8 million, our indefinite-lived intangible assets of $1.7 million and our goodwill recorded within the Content Production and Distribution reporting unit of $33.5 million in our consolidated statement of operations.

Other Income (Expense), net

1 unchanged sentence

Year Ended December 31,

2022 2021 Change % Change

(in thousands, except percentages)

Interest Expense (a) $ (3,126) $ (2,329)

Gain on Warrant Revaluation (b) 557 342 215 63 %

Loss on Foreign Exchange (c) (2,161) (26) (2,135) 8,212 %

Loss on Marketable Securities Investments (d) (413) (70) (343) 490 %

Gain (Loss) on Revaluation of Equity Investment in YFE (e) 1,392 (106) 1,498 (1,413) %

Interest Income (f) 1,015 559 456 82 %

Finance Lease Interest Expense (g) (116) – (116) – %

Warrant Incentive Expense (h) – (69,139) 69,139 (100) %

Gain on Contingent Consideration Revaluation (i) 1,345 5,846 (4,501) (77) %

Other 6 – 6 – %

Other Income (Expense) $ 1,625 $ (62,594) $ 64,219 (103) %

(a) Interest expense during the year ended December 31, 2022 primarily consisted of $1.3 million of interest incurred on the margin loan collateralized by the marketable security investments and $0.9 million of interest incurred on production facilities loans and bank indebtedness assumed as part of the Wow Acquisition.

(b) The gain on warrant revaluation is related to the change in fair value of outstanding warrants that were determined to be derivative liabilities attached to previously issued and converted convertible notes.

(c) The loss on foreign currency exchange during the year ended December 31, 2022 primarily relates to the EURO strengthening against the USD compared to the year ended December 31, 2021.

The remeasurement of the investment in YFE’s equity securities resulted in a foreign exchange loss of $1.4 million and the remeasurement of cash held in a German bank account resulted in a foreign exchange loss of $0.5 million.

For the year ended December 31, 2021 the loss on foreign currency exchange is related to foreign currency denominated monetary transactions.

(d) The net realized loss on marketable securities reflects the loss that will not be recovered from the investments due to selling securities and issuers' prepayments of principals on certain mortgage-backed securities.

(e) The fair value revaluation of the investment in YFE, accounted for using the fair value option, as of December 31, 2022, resulted in a $1.4 million gain.

The gain is a result of the increase in YFE’s stock price as of December 31, 2022, as compared to December 31, 2021.

(f) Interest Income during the year ended December 31, 2022, primarily consisted of cash interest received of $2.0 million from the investments in marketable securities, net of premium amortization expense of $1.1 million.

(g) The finance lease interest expense represents the interest portion of the finance lease obligations assumed as part of the Wow Acquisition for equipment purchased under an equipment lease line.

Prior to the acquisition of Wow, we did not have any finance leases.

(h) The Warrant Incentive Expense was related to the fair value of new warrants issued in 2021 to certain existing warrant holders in exchange for previously issued outstanding warrants.

(i) The gain on contingent consideration revaluation is related to the change in fair value of the liability recorded for the earn-out arrangement with the sellers of the ChizComm entity acquired during 2021.

The favorable decrease in the liability was based on updated assumptions utilized to value the contingency as of each period presented.

Warrant Expense (b) (12,664) –

Gain on Revaluation of Warrants (c) 10,373 557

Gain on Revaluation of Equity Investment in YFE (d) 2,314 1,392

Realized Loss on Marketable Securities Investments (e) (4,496) (413)

Gain (Loss) on Foreign Exchange (f) 641 (2,161)

Interest Income (g) 622 1,015

Loss on Early Lease Termination (h) (258) –

Finance Lease Interest Expense (i) (189) (116)

Gain on Contingent Consideration Revaluation (j) – 1,345

Other (k) 978 6

Other Income (Expense), net $ (2,679) $ 1,625

(a) Interest Expense during the year ended December 31, 2023 primarily consisted of $1.5 million of interest incurred on the margin loan and $1.5 million of interest incurred on production facilities loans and bank indebtedness.

(b) The Warrant Expense is related to the $12.7 million fair value of Exchange Warrants that were issued during the year ended December 31, 2023 to certain existing warrant holders in exchange for previously issued outstanding warrants.

(c) The Gain on Revaluation of Warrants during the year ended December 31, 2023 is primarily related to the changes in fair value of the Exchange Warrants of $10.1 million recorded prior to the warrants being reclassified to stockholder’s equity.

The decrease in fair value was due to decreases in market price.

(d) As accounted for using the fair value option, the Gain on Revaluation of Equity Investment in YFE is a result of the increases or decreases in YFE’s stock price as of the current reporting period when compared to the prior reporting period.

This excludes the impact of foreign currency recorded separately.

(e) The Realized Loss on Marketable Securities Investments reflects the loss that will not be recovered from the investments due to selling securities and issuers' prepayments of principals on certain mortgage-backed securities.

(f) The Gain (Loss) on Foreign Exchange during the year ended December 31, 2023 primarily related to the revaluation of the YFE investment, resulting in a gain of $0.5 million due to the EURO weakening against the USD as compared to the prior reporting period when a loss of $1.4 million was recognized.

(g) Interest Income during the year ended December 31, 2023 primarily consisted of interest income of $0.5 million, net of premium amortization expense, recorded for the investments in marketable securities, respectively.

The Loss on Early Lease Termination is due to early termination of the Lyndhurst, NJ office lease, effective August 1, 2023.

The loss includes fees of $0.2 million and the write-down of assets and liabilities resulting in a net $0.1 million loss.

The Finance Lease Interest Expense represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line.

(j) The Gain on Contingent Consideration Revaluation recorded during the year ended December 31, 2022 is related to the write-off of the contingent earn-out liability related to the earn-out arrangement with the sellers of the Beacon entities acquired during 2021 due to cancellation of the arrangement.

(k) The Company wrote-off a liability in the amount of $0.9 million that had legally expired during the fourth quarter of 2023 under the statute of limitations on debt collection, resulting in an increase in other income at December 31, 2023.

Liquidity and Capital Resources

During the year ended December 31, 2022, our cash, cash equivalents and restricted cash decreased by $2.6 million.

The decrease was primarily due to cash used in investment activities, inclusive of the Wow and Ameba acquisitions and the YFE investments, totaling $30.9 million, $23.7 million used in operational activities, $1.3 million of principal payments made on finance leases and $1.2 million distributed to SLU.

Cash used was offset by $55.3 million of proceeds provided by the margin loan, production facilities and bank indebtedness, net of repayments.

As of December 31, 2022, we held available-for-sale marketable securities with a fair value of $83.7 million, a decrease of $28.8 million as compared to December 31, 2021.

The decrease was primarily due to selling $14.1 million securities during the year, additional prepayment proceeds of $7.9 million on principals for certain mortgage-backed securities and an increase in unrealized loss of $5.4 million for the securities still held.

As of December 31, 2023, we had cash of $4.1 million, which decreased by $3.3 million as compared to December 31, 2022.

The decrease was primarily due to cash used in financing activities of $60.8 million and cash used in operating activities of $16.1 million, offset by cash provided by investing activities of $73.9 million.

The cash used in financing activities was primarily due to repayment of the margin loan, production facilities and bank indebtedness, net proceeds of $63.6 million and payments on finance leases of $2.2 million, offset by cash received from the warrant exchange of $5.3 million.

The cash provided by investing activities was due to sales and maturities of marketable securities of $72.1 million.

As of December 31, 2023, we held available-for-sale marketable securities with a fair value of $12.0 million, a decrease of $71.8 million as compared to December 31, 2022 due to sales and maturities during the year ended December 31, 2023.

The available-for-sale securities consist principally of corporate and government debt securities and are also available as a source of liquidity.

We borrowed an additional $68.8 million from our investment margin account during the year ended December 31, 2022 and repaid $15.7 million with cash received from sales and/or redemptions of our marketable securities.

During the year ended December 31, 2022, the borrowed amounts were used to finance our additional investments in YFE and the closing of the acquisitions of Ameba and Wow, in each case pledging certain of our marketable securities as collateral.

The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 0.65% with interest only payable monthly.

The weighted average interest rate was 2.59% and 0.72% on an average margin loan balance of $48.2 million and $5.9 million during the years ended December 31, 2022 and December 31, 2021, respectively.

We incurred interest expense on the loan of $1.3 million during the year ended December 31, 2022.

The amount of interest incurred on the margin loan during the year ended December 31, 2021 was insignificant.

The investment margin account borrowings do not mature but are payable on demand as the custodian can issue a margin call at any time, therefore the margin loan is recorded as a current liability on our consolidated balance sheets.

As of December 31, 2023 and December 31, 2022, our margin loan balance was $0.8 million and $60.8 million, respectively.

Upon the acquisition of Wow, we assumed certain credit facilities (the “Facilities”).

The Facilities are comprised of:

(i) an $8.0 million CAD revolving demand facility, (ii) a $4.3 million CAD equipment lease line, (iii) a treasury risk management facility for foreign exchange forward contracts, (iv) interim financing facilities for specific production titles and (v) a $1.4 million CAD equipment lease facility, separate from the equipment lease line.

Refer to Note 13 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

During the year ended December 31, 2023, we borrowed an additional $21.2 million from our investment margin account and repaid $81.2 million primarily with cash received from sales and maturities of marketable securities.

The borrowed amounts were primarily used for operational costs.

The interest rates for the borrowings fluctuate based on the Fed Funds Upper Target plus 0.60%.

The weighted average interest rates were 0.98% and 1.66% on average margin loan balances of $27.4 million and $27.1 million as of December 31, 2023 and December 31, 2022, respectively.

We incurred interest expense on the loan of $1.5 million and $1.3 million during the years ended December 31, 2023 and December 31, 2022, respectively.

The investment margin account borrowings do not mature but are collateralized by the marketable securities held by the same custodian and the custodian can issue a margin call at any time, effecting a payable on demand loan.

Due to the call option, the margin loan is recorded as a current liability on our consolidated balance sheets.

We are subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility, revolving equipment lease line and treasury risk management facility that have an aggregate total outstanding balance of USD 4.2 million (CAD 5.5 million).

We were in technical violation of two financial covenants requiring a minimum fixed charge ratio and a maximum senior funded debt to EBITDA ratio as of December 31, 2023.

We have continued to make regular principal and interest payments in a timely basis since the effective borrowing date.

The revolving demand facility and the treasury risk management facility can be called at any time by the lender as per the original terms of the facilities.

The risk of the lender demanding repayment can be deemed greater due to the breach of covenants.

Subsequent to December 31, 2023, the Company amended the revolving demand facility, equipment lease line, and treasury risk management facility during March 2024.

As a result of the amendment, the revolving demand facility allows for draws of up to CAD 1.0 million to be made by way of CAD prime rate loans, CAD overdrafts, USD base rate loans or letters of credit up to a maximum of $200,000 in either CAD or USD and having a term of up to 1 year.

The CAD prime borrowings and overdrafts bear interest at a rate equal to bank prime plus 2.00% per annum.

The USD base rate borrowings bear interest at a rate equal to bank base rate plus 2.00% per annum.

The equipment lease line was amended to set the maximum that can be borrowed under the equipment lease line to CAD 1.6 million.

As at December 31, 2023, the Company has drawn down the maximum of CAD 1.6 million under the equipment lease line.

The Company has and will continue to make the regular principal and interest payments under the specific financing terms of the existing equipment lease agreements.

The amendment removed the treasury risk management facility that allowed for advances of up to CAD 0.5 million.

As of December 31, 2023 and the date of the amendment, there were no outstanding amounts drawn under the treasury risk management facility.

The amendment also introduced revised financial covenants that are effective as of March 15, 2024.

The amendment did not have any impact on the Company’s existing production facilities that are separate from the revolving demand facility and are used for financing specific productions.

Working Capital

As of December 31, 2022, we had current assets of $139.5 million, including cash and cash equivalents of $7.4 million and marketable securities of $83.7 million, and our current liabilities were $110.9 million.

As of December 31, 2023, we had current assets of $57.1 million, including cash of $4.1 million and marketable securities of $12.0 million, and our current liabilities were $45.6 million.

We had working capital of $11.5 million as of December 31, 2023 as compared to working capital of $28.6 million as of December 31, 2022.

The decrease of $86.4 million in working capital as compared to December 31, 2021 was primarily due to a decrease in our cash and cash equivalents and marketable security position, offset by the change in net current assets and liabilities as a result of the acquisition of Wow and Ameba and additional short-term borrowings from our margin loan account.

The decrease of $17.1 million was primarily due to a decrease in our cash and marketable security position, offset by the change in net current

assets and liabilities as a result of the acquisition of Wow and Ameba and additional short-term borrowings from our margin loan account.

During the year ended December 31, 2023, we met our immediate cash requirements through existing cash balances.

Additionally, we used equity and equity-linked instruments to pay for services and compensation.

We believe that our current cash and cash equivalents balances and our investments in available for sale marketable securities are sufficient to support our operations for at least the next twelve months.

We believe that our current cash balances and our investments in available for sale marketable securities are sufficient to support our operations for at least the next twelve months.

To meet our short and long-term liquidity needs, we expect to use existing cash and marketable securities balances.

Comparison of Cash Flows for the Years Ended December 31, 2023 and December 31, 2022

Our total cash, cash equivalents and restricted cash as of December 31, 2022 and December 31, 2021 was $7.4 million and $10.1 million, respectively.

Our total cash as of December 31, 2023 and December 31, 2022 was $4.1 million and $7.4 million, respectively.

Year Ended December 31,

2022 2021 Increase (Decrease) in Net Cash

2023 2022 Change

(in thousands)

Net Cash Used in Operating Activities $ (16,092) $ (25,923) $ 9,831

Net Cash Used in Investing Activities (30,937) (128,732) 97,795

Net Cash Provided by Financing Activities 52,174 62,171 (9,997)

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash (212) (16) (196)

Decrease in Cash, Cash Equivalents and Restricted Cash $ (2,628) $ (90,396) $ 87,768

Net Cash Provided by (Used in) Investing Activities 73,858 (30,937) 104,795

Net Cash Provided by (Used in) Financing Activities (60,802) 54,444 (115,246)

Effect of Exchange Rate Changes on Cash (301) (212) (89)

Decrease in Cash

$ (3,337) $ (2,628) $ (709)

Net Noncash Expenses

Items necessary to reconcile from net loss to cash flow used in operating activities included net noncash expenses of $40.1 million for the year ended December 31, 2022 as compared to net noncash expenses of $108.9 million for the year ended December 31, 2021.

The majority of the decrease of $68.9 million was due to the $69.1 million incurred in the prior year for warrant incentive expense that did not incur in the current year, a decrease in write-downs of film and television costs of $11.4 million and a decrease of $5.6 million in stock based compensation expense.

The decreases in non-cash expenses incurred during December 31, 2022, were offset by an increase in amortization of film and television costs $4.8 million, an increase in the write-off of the contingent consideration liability of $4.5 million, an increase of $2.1 million in the depreciation of property, plant and equipment and an increase of $1.7 million in the amortization of ROU assets.

Change in Operating Assets and Liabilities

The change in the net increase in operating asset activity of $1.9 million as of December 31, 2022 compared to December 31, 2021 was primarily due to acquisition of the tax credits earned, net by the Wow entity of $4.2 million.

The change in operating liability activity of $10.9 million as of December 31, 2022 compared to December 31, 2021 was primarily due to the decrease in deferred revenue of $7.8 million and accrued production costs of $3.2 million.

Items necessary to reconcile from net loss to cash used in operating activities included net noncash expenses of $59.3 million for the year ended December 31, 2023 as compared to net noncash expenses of $37.8 million for the year ended December 31, 2022.

The majority of the increase of $21.5 million was primarily due to the recognition of $12.7 million as the fair value of Exchange Warrants classified as liabilities issued in June 2023 and impairment expenses of our long-lived assets, intangible assets and goodwill of $29.1 million recorded during the year ended December 31, 2023.

In addition, the realized loss on marketable securities increased by $4.1 million due to the increased sales of our marketable securities prior to their maturity date.

The increase is offset by a gain of $9.8 million from the revaluation of liability classified warrants, primarily the new Exchange Warrants, a decrease in our stock-based compensation of $8.2 million due to the absence of incurring a modification expense in the current year for the CEO’s restricted stock that occurred in the prior year, a decrease in the amortization of film and television costs of $5.6 million due to decreased project deliveries during the current year and a gain of $0.5 million related to the foreign currency revaluation of the equity investment in YFE versus a loss of $1.4 million in the prior year period.

Change in Operating Activities

The net change in operating asset and liability activities from cash used of $19.2 million as of December 31, 2022 to cash provided by operating activities of $1.8 million as of December 31, 2023 was primarily due to an increase in net receipts of tax credits during the current year of $10.0 million as credits were received for production completed in the prior year and the decrease in film and television costs of $7.0 million and accrued production costs of $2.6 million due to less production activity during the current year.

Change in Investing Activities

Cash used in investing activities for the year ended December 31, 2022 decreased $97.8 million as compared to cash used during the year ended December 31, 2021.

The decrease was primarily due to the decrease of cash used in investments of marketable securities of $305.4 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021.

The decrease of cash used in investing activities is offset by a decrease of $168.4 million in cash received from our investments in marketable securities and an increase of $39.6 million in our investment activity related to the acquisitions of Wow and Ameba and investments in YFE, as compared to the acquisition of Beacon in the prior year period.

The change in cash investing activities of $104.8 million from cash used in investing of $30.9 million at December 31, 2022 to cash provided by investing of $73.9 million at December 31, 2023 was primarily due to an increase in proceeds from the sales and maturities of marketable securities of $50.6 million during the year ended December 31, 2023 and the decrease in cash used of $50.7 million for investments and acquisitions in the prior year that did not occur in the current period.

Change in Financing Activities

Cash provided by financing activities for the year ended December 31, 2022 decreased by $10.0 million as compared to cash provided during the year ended December 31, 2021.

The primary source of cash during the year ended December 31, 2022 was the net proceeds borrowed from our margin loan of $53.1 million and $2.0 million from production loans, compared to the primary source of cash during the year ended December 31, 2021 of $57.3 million from the warrant exercise during January 2021.

The change in cash financing activities of $115.2 million from cash provided by financing of $54.4 million at December 31, 2022 to cash used in financing of $60.8 million at December 31, 2023 was primarily due to paying down the margin loan during the year ended December 31, 2023 compared to additional borrowings during the year ended December 31, 2022.

Material Cash Requirements

1 unchanged sentence

Our material cash requirements from known contractual and other obligations primarily relate to our debt and lease obligations and our employment and consulting contracts.

The aggregate amount of future minimum purchase obligations under these agreements over the period of next five years is approximately $103.4 million as of December 31, 2022, of which about $74.3 million, could be owed within one year, if the margin loan and interim

production facilities are called.

For additional information on our contractual commitments and timing of future payments see Note 20 of the consolidated financial statements included in this Annual Report on Form 10-K.

The aggregate amount of future minimum purchase obligations under these agreements over the period of next five years is approximately $34.2 million as of December 31, 2023, of which about $26.3 million could be owed within one year if the margin loan and interim production facilities are called.

We plan to utilize our liquidity (as described above) to fund our material cash requirements.

As of December 31, 2022, we have $2.6 million in commitments for capital expenditures, related to equipment leases.

As of December 31, 2023, we had $2.2 million in commitments for capital expenditures, related to equipment leases.

Critical Accounting Policies and Estimates

20 unchanged sentences

The variable interest relates to 50% ownership in the entity that is comprised of the Stan Lee Assets and that requires additional financial support from us to continue operations.

Our total cash investment in SLU was $2.0 million as of December 31, 2021.

As of December 31, 2022, our investment in SLU was $1.2 million, net $0.8 million of distributions.

We are considered the primary beneficiary and are required to consolidate the VIE.

15 unchanged sentences

Tax Credits Receivable

The Canada Revenue Agency (“CRA”) and certain Provincial governments in Canada provide programs that are designed to assist film and television production in the form of refundable tax credits or other incentives.

The Canadian federal government and certain provincial governments in Canada provide programs that are designed to assist film and television production in the form of refundable tax credits or other incentives.

Estimated amounts receivable in respect of refundable tax credits are recorded as an offset to the related production operating cost, or to investment in film and television costs when the conditions for eligibility of production assistance based on the government’s criteria are met, the qualifying expenditures are made and there is reasonable assurance of realization.

Determination of when and if the conditions of eligibility have been met is based on management’s judgment, and the amount recognized is based on management’s estimates of qualifying expenditures.

The ultimate collection of previously recorded estimates is subject to ordinary course audits from the CRA and Provincial agencies.

The ultimate collection of previously recorded estimates is subject to ordinary course audits from the Canada Revenue Agency (“CRA”) and provincial agencies.

Changes in administrative policies by the CRA or subsequent review of eligibility documentation may impact the collectability of these estimates.

4 unchanged sentences

As this financing is fundamental to our ability to produce animated productions and generate revenue in the normal course of business, the normal operating cycle for such assets is considered to be a 12-to-24-month period, or the time it takes for the CRA to assess and refund the tax credits earned.

As of December 31, 2022, $26.3 million in current tax credit receivables related to Wow’s film and television productions was recorded, net of $0.2 million recorded as an allowance.

The allowance is related to uncertainties in tax credits applied for in the amount of $1.6 million with a Provincial government which we had not yet established a history.

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 amortized using the individual-film-forecast method, whereby these costs are amortized, and participations costs are accrued based on the ratio of the current period’s revenues to management’s estimate of ultimate revenue expected to be recognized from each production.

Accordingly, production costs are capitalized at actual cost and amortized

using the individual-film-forecast method, whereby these costs are amortized, and participations costs are accrued based on the ratio of the current period’s revenues to management’s estimate of ultimate revenue expected to be recognized from each production.

There are usually three stages for production projects with different costs incurred at each stage:

Productions in Development

Capitalized development costs are reclassified to productions in progress once the project is approved and physical production of the film or television program commences.

Development costs include the costs of acquiring film rights to books, scripts or original screenplays and the third-party costs to adapt such projects, including visual development and design.

1 unchanged sentence

Productions in Progress

For our film and television programs in progress, capitalized costs include all direct production and financing costs incurred during production that are expected to provide future economic benefit to us.

Capitalized development costs are reclassified to productions in progress once the project is approved and physical production of the film or television program commences.

Capitalized costs include all direct production and financing costs incurred during production that are expected to provide future economic benefit to the Company.

Borrowing costs and depreciation are capitalized to the cost of a film or television program until substantially all of the activities necessary to prepare the film or television program for its use intended by management are complete.

Completed Productions

Completed productions are carried at the cost of proprietary film and television programs which have been produced by us or to which we have acquired distribution rights, less accumulated amortization and accumulated impairment losses.

Completed productions are carried at the cost of proprietary film and television programs which have been produced by the Company or to which the Company has acquired distribution rights, less accumulated amortization and accumulated impairment losses.

Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and are likely to differ to some extent in the future from actual results.

4 unchanged sentences

These write-downs are included in amortization expense within Direct Operating Expenses on the consolidated statements of operations.

See further discussion in Note 9 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for impairment charges recorded during the year ended December 31, 2022.

All capitalized costs that exceed the initial market firm commitment revenue are expensed in the period of delivery of the episodes.

Additionally, for episodic series, from time to time, we develop additional content, improved animation and bonus songs/features for its existing content.

Additionally, for episodic series, 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 episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.

9 unchanged sentences

Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods.

Specifically, actual results may vary from our forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.

Further, continued adverse market conditions could result in the recognition of additional impairment if we determine that the fair values of our reporting units have fallen below their carrying values.

Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.

Further, continued adverse

market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values.

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.

We have performed our annual impairment test on goodwill and indefinite-lived intangible assets during the fourth quarter of the year ended December 31, 2022.

Refer to Note 10 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details.

Debt and Attached Equity-Linked Instruments

16 unchanged sentences

We have identified the following material and distinct performance obligations:

• Provide animation production services.

• License rights to exploit Functional Intellectual Property (“functional IP”) is defined as intellectual property that has significant standalone functionality, such as the ability to be played or aired.

• Providing animation production services

• Licensing rights to exploit Functional Intellectual Property (“functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability to be played or aired.

Functional IP derives a substantial portion of its utility from its significant standalone functionality)

• License rights to exploit Symbolic Intellectual Property (“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 our ordinary business activities, such as our licensing and merchandising programs associated with its animated content).

• Provide media and advertising services to clients.

• Fixed and variable fee advertising and subscription-based revenue generated from the Genius Brands Kartoon Channel!, the Frederator owned and operated YouTube channels and revenues generated from the operation of its multi-channel network on YouTube .

• Options to renew or extend a contract at fixed terms.

(While this performance obligation is not significant for our 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 our current contracts, it could become significant in the future).

• Licensing rights to exploit Symbolic Intellectual Property (“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, such as the Company’s licensing and merchandising programs associated with its animated content)

• Providing media and advertising services to clients

• Fixed and variable fee advertising and subscription-based revenue generated from the Kartoon Studios Kartoon Channel!, the Frederator owned and operated YouTube channels and revenues generated from the operation of its multi-channel network, Channel Frederator Network, on YouTube

• 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)

Production Services

1 unchanged sentence

For revenue from animation production services, the customer controls the output throughout the production process.

Each production is made to an individual customer’s specifications and if the contract is terminated by the customer, we are entitled to be reimbursed for any costs incurred to date, and for any prepaid commitments made, plus the agreed contractual mark-up.

Each production is made to an individual customer’s specifications and if the contract is terminated by the customer, the Company is entitled to be reimbursed for any costs incurred to date, and for any prepaid commitments made, plus the agreed contractual mark-up.

Revenue and the associated costs of such contracts are recognized over time on a percentage of completion basis - i.e., as the project is being produced, prior to it being delivered to the customer.

14 unchanged sentences

The difference between contractual payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue.

When revenue exceeds milestone billings, we recognize this difference as unbilled accounts receivable within Other Receivable on our consolidated balance sheet.

When revenue exceeds milestone billings, we recognize this difference as unbilled accounts receivable within Other Receivable on our consolidated balance sheets.

Unbilled accounts receivables are transferred to accounts receivable when we have an unconditional right to consideration.

8 unchanged sentences

For subscription-based revenue, revenue is recognized when a customer downloads the mobile device application and their credit card is charged.

Following the acquisition of Wow, we generate advertising revenue from Frederator’s owned and operated YouTube channels as well as revenues generated from the operation of its multi-channel network on YouTube .

Upon the acquisition of Wow, we generate advertising revenue from Frederator’s owned and operated YouTube channels as well as revenues generated from the operation of its multi-channel network, Channel Frederator Network, on YouTube.

Revenue is recognized when services are provided in accordance with our agreement with YouTube, the price is fixed or determinable, and collection of the related receivable is probable.

7 unchanged sentences

Product Sales

We recognize revenue related to product sales when we complete our performance obligation, which is when the goods are transferred to the buyer.

We recognize revenue related to product sales (e.g., apparel and collectibles) when the Company completes its performance obligation, which is when the goods are transferred to the buyer.

Media Advisory & Advertising Services

Media and Advertising Services

We provide media and advertising services to clients.

Revenue is recognized when the services are performed.

When the Company purchases advertising for clients on linear and across digital and streaming platforms and receives a commission, the commissions are recognized as revenue in the month the advertising is displayed.

We provide media and advertising consulting services to clients.

Revenue is recognized when the services are performed or as paid through the monthly retainer.

When we purchase advertising for clients on linear and across digital and streaming platforms and receives a commission, the commissions are recognized as revenue in the month the advertising is displayed.

Gross Versus Net Revenue Presentation

16 unchanged sentences

We have elected to account for forfeitures when they occur.

We issue authorized shares available for issuance under our 2015 Incentive Plan and our 2020 Incentive Plan upon employees’ exercise of their stock options.

We issue authorized shares available for issuance under our 2020 Incentive Plan upon employees’ exercise of their stock options.

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.

9 unchanged sentences

The carrying amounts of cash, restricted cash, receivables, payables, accrued liabilities, bank indebtedness and the margin loan approximate fair value due to the short-term nature of the instruments.

We used the settlement value for our put option liability on certain warrants and the fair values of the liability-classified derivative warrants are revalued at the end of each reporting period determined using the BSM model (Level 2) with standard valuation inputs.

Refer to Note 18 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

We use the fair values of the liability-classified derivative warrants revalued at the end of each reporting period determined using the BSM option pricing model (Level 2) with standard valuation inputs.

Refer to Note 16 for additional details.

The investment in YFE is also revalued at the end of each reporting period based on the trading price of YFE (Level 1).

Refer to Note 5 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

Refer to Note 4 for additional details.

Upon the acquisition of Wow, foreign currency forward contracts that are not traded in active markets were assumed.

These are fair valued using observable forward exchange rates at the measurement dates and interest rates corresponding to the maturity of the contracts (Level 2).

The fair values of the available-for-sale securities are generally based on quoted market prices, where available.

The fair values of the AFS securities are generally based on quoted market prices, where available.

These fair values are obtained primarily from third-party pricing services, which generally use Level 1 or Level 2 inputs for the determination of fair value to facilitate fair value measurements and disclosures.

3 unchanged sentences

For a description of recent accounting pronouncements and the potential impact of these pronouncements on our consolidated financial statements, see Note 2 to the financial statements in Item 8 of this Annual Report.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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.

Financial Statements and Supplementary Data

The financial statements are included herein commencing on page F-1.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis