Kartoon Studios, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the three and six months ended June 30, 2020 and 2019. 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 in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed on March 30, 2020 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 experienced industry personnel, we distribute our content in all formats as well as a broad range of consumer products based on our 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. New intellectual property titles include the preschool property Rainbow Rangers , which debuted in November 2018 on Nickelodeon and which was renewed for a second season and preschool property Llama Llama , which debuted on Netflix in January 2018 and was renewed by Netflix for a second season. Our library titles include the award winning Baby Genius , adventure comedy Thomas Edison's Secret Lab® and Warren Buffett's Secret Millionaires Club , created with and starring iconic investor Warren Buffett, which is distributed across our Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Sling and Zumo as well as Connected TV. We are also developing an all-new animated series, Stan Lee’s Superhero Kindergarten with Stan Lee’s Pow! Entertainment, Oak Productions and Alibaba. Arnold Schwarzenegger lends his voice as the lead and is also an Executive Producer on the series. The show will be broadcast in the United States on Amazon Prime and the Company’s wholly owned distribution outlet, Kartoon Channel! In July, 2020, the Company entered into a binding term sheet with POW, Inc. (“POW!”) in which we agreed to form a joint venture with POW! to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The joint venture will be called “Stan Lee Universe, LLC” and POW! and the Company are currently finalizing the details of the venture. 32 In addition, we act as licensing agent for Penguin Young Readers, a division of Penguin Random House LLC who owns or controls the underlying rights to Llama Llama , leveraging our existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories. Recent Financings January 2020 Warrant Exercise Agreement On January 22, 2020, we entered into a private transaction pursuant to a Warrant Agreement (the “Agreement”) with the holder of the Company’s existing warrants (the “Original Warrants”). The Original Warrants were originally issued on October 3, 2017, to purchase an aggregate of 500,000 shares of the Common Stock (as defined below) at an exercise price of $3.90 per share and were to expire in October 2022. Pursuant to the Agreement, the holder of the Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and the Company would amend the Original Warrants to reduce the exercise price thereof to $0.34 (the average closing price (as reflected on Nasdaq.com) of the Common Stock (as defined below) for the five trading days immediately preceding the signing of the Agreement). We received approximately $170,000 from the exercise of the Original Warrants. March 2020 Secured Convertible Note and Warrant Private Placement On March 11, 2020, we entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (each an “Investor” and collectively, the “Investors”) pursuant to which we agreed to sell and issue (1) Senior Secured Convertible Notes to the Investors in the aggregate principal amount of $13,750,000 (each, a “Note” and collectively, the “2020 Convertible Notes”) and $11,000,000 funding amount (reflecting an original issue discount of $2,750,000) and (2) warrants to purchase 65,476,190 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), exercisable for a period of five years at an initial exercise price of $0.26 per share (each a “Warrant” and collectively, the “Warrants”), for consideration consisting of (i) a cash payment of $7,000,000, and (ii) full recourse cash secured promissory notes payable by the Investors to the Company (each, an “Investor Note” and collectively, the “Investor Notes”) in the principal amount of $4,000,000 (the “Investor Notes Principal”) (collectively, the “Financing”). Andy Heyward, our Chairman and Chief Executive Officer, participated as an Investor and invested $1,000,000 in connection with the Financing, all of which was paid at the closing and not pursuant to an Investor Note. The Special Equities Group, LLC, a division of Bradley Woods & Co. LTD, acted as placement agent and received warrants to purchase 6,547,619 shares at an exercise price of $0.26 per share (the “Placement Agent Warrants”). The closing of the sale and issuance of the 2020 Convertible Notes, the Warrants and the Placement Agent Warrants occurred on March 17, 2020 (the “Closing Date”). The maturity date of the 2020 Convertible Notes is September 30, 2021 and the maturity date of the Investor Notes is March 11, 2060. The Company agreed to hold a stockholder meeting (the “Stockholder Meeting”) by no later than May 15, 2020, to approve the issuance of shares of Common Stock issuable under the 2020 Convertible Notes and pursuant to the terms of the SPA for the purposes of compliance with the stockholder approval rules of The Nasdaq Stock Market (“Stockholder Approval”) and the Company will be obligated to continue to seek Stockholder Approval every 90 days until such approval is obtained, (ii) until the date that the 2020 Convertible Notes are no longer outstanding, the Company will not issue, offer, sell or grant any equity or equity-linked security, subject to certain limited exceptions described in the SPA, unless (A) Stockholder Approval has been obtained prior thereto and (B) (i) at least 75% of the gross proceeds in excess of the first $2,000,000 of gross proceeds of all subsequent Financings consummated prior to the six month anniversary of the Closing Date are first applied to the redemption of the 2020 Convertible Notes (pro-rata based on an Investor’s Purchase Price which redemption may be waiver by an Investor and it will not increase the pro-rata percentage of any other Investors) or (ii) at least 75% of the gross proceeds of any such subsequent placement consummated after the six month anniversary of the Closing Date are first applied to the redemption of the 2020 Convertible Notes (pro-rata), (iii) the Company shall use its best efforts to effectuate the transactions contemplated by the Voting Agreements executed by the Company and the stockholders who hold in the aggregate approximately 40% of the outstanding shares of Common Stock which require that such stockholders vote in favor of the proposals voted on at the Stockholder Meeting, and (iv) promptly securing the listing of certain shares issuable pursuant to the transaction documents and maintaining the listing of the shares of Common Stock on an eligible market. 33 In addition, pursuant to the terms of the SPA, the 2020 Convertible Notes and the Warrants, the Company agreed that the following will apply or become effective only following Stockholder Approval: (1) the conversion price of the 2020 Convertible Notes shall be reduced to $0.21 per share and may be further reduced to any amount and for any period of time deemed appropriate by the board of directors of the Company (the “Board of Directors”), (2) the exercise price of the Warrants shall be immediately reduced to $0.21 per share and may be further reduced to any amount and for any period of time deemed appropriate by the Board of Directors, (3) the 2020 Convertible Notes and Warrants shall each have full ratchet anti-dilution protection for subsequent financings (subject to certain exceptions), (4) existing warrant holders that are participating in the Financing (representing warrants to purchase an aggregate of 8,715,229 shares of Company Common Stock) will have their existing warrants’ exercise prices reduced to $0.21 and (5) the investors shall have a most favored nations right which provides that if the Company enters into a subsequent financing, then the Investors (together with their affiliates) at their sole discretion shall have the ability to exchange their 2020 Convertible Notes on a $1 for $1 basis into securities issued in the new transaction. Additionally, in the event that any warrants or options (or any similar security or right) issued in a subsequent financing include any terms more favorable to the holders thereof (less favorable to the Company) than the terms of the Warrants, the Warrants shall be automatically amended to include such more favorable terms. In addition, for as long as any 2020 Convertible Notes or Warrants remain outstanding, the Company will not (i) issue or sell any rights, warrants or options to subscribe for or purchase Common Stock or directly or indirectly convertible into or exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including by way of one or more reset(s) to any fixed price, unless the conversion, exchange or exercise price of any such security cannot be less than the then applicable Conversion Price with respect to the Common Stock into which any 2020 Convertible Notes are convertible or redeemable or the then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into which any Warrant is exercisable or (ii) enter into, or effect any transaction under, any agreement, including, but not limited to, an equity line of credit, an “at-the-market” offering or similar agreement, whereby the Company may issue securities at a future determined price. On March 16, 2020 the holders of the August 2018 Secured Convertible Notes were repaid in full including any outstanding interest. The 2020 Convertible Notes provide that the Company will repay the principal amount of the 2020 Convertible Notes in equal monthly installments of 1/12th of the principal amount of the 2020 Convertible Notes beginning October 31, 2020 and the last business day of each calendar month anniversary thereafter (each an “Installment Date”). On each Installment Date, assuming that certain Equity Conditions are met and Stockholder Approval has been obtained, all or some of the Installment Amount (as defined in the 2020 Convertible Notes) shall be converted into shares of Common Stock, provided however that the Company may elect prior to any Installment Date to pay all or a portion of the installment amount in cash. Each 2020 Convertible Note is convertible, at the option of the holder, into shares of Common Stock at an initial conversion price of $1.375, subject to adjustment as provided in the 2020 Convertible Notes (the “Conversion Price”); provided, however, upon receipt of Stockholder Approval, the conversion price shall be $0.21, subject to adjustment as provided in the 2020 Convertible Notes. On or after the date Stockholder Approval is obtained, if the Company issues or sells, or the Company publicly announces the issuance or sale of, any shares of Common Stock, or convertible securities or options issuable or exchangeable into Common Stock (a “New Issuance”), under which such Common Stock is sold for a consideration per share less than the Conversion Price then in effect, the Conversion Price will be adjusted to the New Issuance price in accordance with the formulas provided in the 2020 Convertible Notes. Any such adjustment will not apply with respect to the issuance of Excluded Securities (as defined in the 2020 Convertible Notes). Upon Stockholder Approval, the Conversion Price may be further reduced to any amount and for any period of time deemed appropriate by the Board of Directors. On May 15, 2020, the Company received the necessary Stockholder Approval in connection with the Nasdaq proposals described above. As a result, the Conversion Price of the 2020 Convertible Notes and the exercise price of the Warrants were each reduced to $0.21. In addition, existing warrant holders that participated in the Financing (representing warrants to purchase an aggregate of 9,172,463 shares of Common Stock) also had their existing warrants’ exercise prices reduced to $0.21. 34 March 2020 Securities Purchase Agreement On March 22, 2020, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain long standing investors (the “Investors”), pursuant to which we agreed to issue and sell, in a registered direct offering by the Company directly to the Investors, an aggregate of 4,000,000 shares of Common Stock, at an offering price of $0.2568 per share for gross proceeds of approximately $1.0 million before deducting offering expenses. May 2020 Securities Purchase Agreements On May 7, 2020, the Company entered into a Securities Purchase Agreement with certain long standing investors (the “Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the “Registered Offering”), an aggregate of 8,000,000 shares Common Stock at an offering price of $0.35 per share for gross proceeds of $2.8 million before deducting the placement agent fees and offering expenses. The Registered Offering closed on May 8, 2020. On May 8, 2020, the Company entered into a Securities Purchase Agreement with certain long standing investors (the “Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the “Registered Offering”), an aggregate of 12,000,000 shares Common Stock at an offering price of $0.454 per share for gross proceeds of $5.448 million before deducting the placement agent fees and offering expenses. The Registered Offering closed on May 12, 2020. On May 18, 2020, we entered into a Securities Purchase Agreement with certain long standing investors (the “May 18 th Investors”), pursuant to which we agreed to issue and sell, in a registered direct offering by the Company directly to the May 18 th Investors, an aggregate of 7,500,000 shares of our Common Stock, at an offering price of $1.20 per share for gross proceeds of approximately $9.0 million before deducting offering expenses. On May 28, 2020, we entered into a Securities Purchase Agreement with certain long standing investors (the “May 28 th Investors”), pursuant to which we agreed to issue and sell, in a registered direct offering by the Company directly to the May 28 th Investors, an aggregate of 20,000,000 shares of our Common Stock, at an offering price of $1.50 per share for gross proceeds of approximately $30.0 million before deducting offering expenses. Warrant Exercises Between May 18 and June 11, 2020, the Company received $5,649,319, net of expenses, from the exercise of 29,666,283 warrants at an exercise price of $0.21 per share. Investor Notes Payment On June 23, 2020, the Company received $3,600,000, net of expenses, from the payment of the Investor Notes Principal. Coronavirus (COVID-19) With respect to the ongoing and evolving coronavirus (“COVID-19”) outbreak, which was designated as a pandemic by the World Health Organization on March 11, 2020, COVID-19 has caused substantial disruption in international and U.S. economies and markets. COVID-19 has had an adverse impact on the entertainment industry and, if repercussions of COVID-19 are prolonged, could have a significant adverse impact on our business, which could be material. The majority of the Company’s employees have been working remotely from home, with only a few individuals monitoring the office as needed. We have not experienced any disruption in our supply chain, nor have we experienced any negative impact from our production partners. We have observed demand increases for streaming entertainment service provided by our partners in the first half of 2020, but we cannot estimate the impact COVID-19 will have in the future as business and consumer activity decelerates in the U.S. and across the globe. 35 Results of Operations Our summary results for the three months ended June 30, 2020 and the three months ended June 30, 2019 are below. Revenues Three Months Ended June 30, 2020 June 30, 2019 Change % Change Licensing & Royalties $ 162,759 $ 149,659 $ 13,100 9 % Television & Home Entertainment 326,244 295,454 30,790 10 % Advertising Sales 70,357 17,522 52,835 302 % Product Sales 1,319 1,628 (309 ) -19 % Total Revenue $ 560,679 $ 464,263 $ 96,416 21 % Licensing and royalty revenue include 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 three months ended June 30, 2020 compared to the three months ended June 30, 2019, this category increased $13,100, or 9%, primarily due to the revenue generated from Rainbow Rangers and Llama Llama properties. 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 three months ended June 30, 2020 compared to the three months ended June 30, 2019, Television & Home Entertainment revenue increased $30,790, or 10%, primarily due to the revenue generated from the international television deliveries of our Rainbow Rangers and Llama Llama properties . Advertising sales are generated on the Kartoon Channel and Kid Genius Cartoon Channel in the form of either flat rate promotions or advertising impressions served. Advertising sales increased by $52,835, or 302%, during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, as we continue to focus on growing this business. The Kid Genius Cartoon Channel was rebranded the Kartoon Channel in June of 2020. Results of Operations Expenses Three Months Ended June 30, 2020 June 30, 2019 Change % Change Marketing and Sales $ 128,556 $ 226,738 $ (98,182 ) -43 % Direct Operating Costs 440,015 347,773 92,242 27 % General and Administrative 2,368,834 1,556,611 812,223 52 % Interest Expense 430,606 137,542 293,064 213 % Total $ 3,368,011 $ 2,268,664 $ 1,099,347 48 % Marketing and sales expenses decreased $98,182, or 43%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily due to the Coronavirus related cancellation of several trade shows in the second quarter of 2020. 36 Direct operating costs include costs of our product sales, unamortizable post-production 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. During the three months ended June 30, 2020, the Company recorded film and television cost amortization expense of $185,748 and participation expense of $251,347 compared to expenses of $192,803 and $145,705, respectively, for the three months ended June 30, 2019. The increases in direct operating costs for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 is primarily due to increased participation expenses related to revenues from the Rainbow Rangers property. 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 expenses for three months ended June 30, 2020 increased $812,223 or 52%, compared to the same period in 2019. This increase was primarily related to increases in salaries and related expenses, stock-based compensation expense, legal fees, and investor relations expense. Interest expense for the three months ended June 30, 2020 increased $293,064, or 213%, compared to the same period in 2019. This increase is due to the expensing of the debt discount in excess of principal related to the 2020 Convertible Notes. This was partially offset by reductions in the amortization of the debt discount related to the $4,500,000 of 2020 Convertible Notes, and interest paid on the lower outstanding balance. Our summary results for the six months ended June 30, 2020, and the six months ended June 30, 2019 are below. Revenues Six Months Ended June 30, 2020 June 30, 2019 Change % Change Licensing & Royalties $ 366,124 $ 499,845 $ (133,721 ) -27 % Television & Home Entertainment 378,461 1,145,561 (767,100 ) -67 % Advertising Sales 149,014 37,682 111,332 295 % Product Sales 1,819 2,106 (287 ) -14 % Total Revenue $ 895,418 $ 1,685,194 $ (789,776 ) -47 % Licensing and royalty revenue include 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 six months ended June 30, 2020 compared to the six months ended June 30, 2019, this category decreased $133,721, or 27%, primarily due to lower revenues generated from Rainbow Rangers and Llama Llama properties. 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 six months ended June 30, 2020 compared to the six months ended June 30, 2019, Television & Home Entertainment revenue decreased $767,100, or 67%, primarily due to the revenue generated from the delivery of Rainbow Rangers to the Viacom Media Network as well as international territories in 2019. There were no comparable deliveries in 2020. Advertising sales are generated on the Kid Genius Cartoon Channel in the form of either flat rate promotions or advertising impressions served. Advertising sales increased by $111,332, or 295%, during the six months ended June 30, 2020 compared to the six months ended June 30, 201, as we continue to focus on growing this business. The Kid Genius Cartoon Channel was rebranded the Kartoon Channel in June of 2020. 37 Expenses Six Months Ended June 30, 2020 June 30, 2019 Change % Change Marketing and Sales $ 241,256 $ 308,209 (66,953 ) -22 % Direct Operating Costs 667,521 1,087,828 (420,307 ) -39 % General and Administrative 4,131,416 3,206,131 925,285 29 % Interest Expense 1,151,609 666,744 484,865 73 % Total $ 6,191,802 $ 5,268,912 922,890 18 % Marketing and sales expenses decreased $66,953, or 22%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to the Coronavirus related cancellation of several trade shows in the second quarter of 2020 Direct operating costs include costs of our product sales, unamortizable post-production 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. During the six months ended June 30, 2020, we recorded film and television cost amortization expense of $292,362 and participation expense of $370,803 compared to June 30, 2019 expenses of $621,986 and $435,087, respectively, for the six months ended June 30, 2019. The decrease in direct operating costs in the six months ended June 30, 2020 compared to the same period in the prior year reflect decreases in film amortization and participation expenses related to revenues generated from the delivery of Rainbow Rangers to the Viacom Media Network as well as international territories in 2019.There were no comparable deliveries in 2020. 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 expenses for the six months ended June 30, 2020 increased $925,285 or 29%, compared to the same period in 2019. This increase was primarily related to increases in salaries and related expenses, stock-based compensation expense, legal fees, and investor relations expense. Interest expense for the six months ended June 30, 2020 increased $484,865, or 73%, compared to the same period in 2019. This increase is due to the expensing of the debt discount in excess of principal related to the 2020 Convertible Notes. This was partially offset by reductions in the amortization of the debt discount related to the $4,500,000 of 2020 Convertible Notes, and interest paid on the lower outstanding balance. Liquidity and Capital Resources Working Capital As of June 30, 2020, we had current assets of $58,460,486, including cash and cash equivalents of $54,382,775, and current liabilities of $8,783,171, resulting in working capital of $49,667,315, compared to negative working capital of $3,650,136 as of December 31, 2019. Prior to the Company’s successful capital raises, the Company applied a loan pursuant to the Paycheck Protection Program (PPP) established under Coronavirus Aid, Relief, and Economic Security Act (CARES Act) as interpreted and applied by Small Business Administration (SBA), an Agency of the United States of America. The application was approved and on April 30,2020, the Company received a loan with a principal amount of $366,267. The loan has an interest rate of one percent (1%) per year and matures on April 19, 2020. The loan may be eligible, in whole or in part, for forgiveness pursuant to the PPP. The Company shall apply to the lender for loan forgiveness in accordance with the PPP as implemented by SBA. The Company reported the proceeds from the PPP loan as debt using the effective interest rate method. 38 Increases in working capital were the result of proceeds from the 2020 Convertible Notes, the five Securities Purchase Agreements and the proceeds from various warrant exercises. The increase was partially offset by the repayments of the August 2018 Secured Convertible Notes and the production facility. Comparison of Cash Flows for the Six Months Ended June 30, 2020, and the Six Months Ended June 30, 2019 Our total cash, cash equivalents was $54,382,775 and $2,631,334 at June 30, 2020, and June 30, 2019, respectively. Comparison of Cash Flows Six Months Ended June 30, 2020 June 30, 2019 Change % Change Cash used in operations $ (2,331,261 ) $ (2,550,140 ) $ 218,880 -9 % Cash used in investing activities (500 ) (14,331 ) 13,831 -97 % Cash provided by financing activities 56,409,414 2,110,779 54,298,635 2,572 % Increase in cash and cash equivalents $ 54,077,654 $ (453,692 ) $ 54,531,346 -12,019 % During the six months ended June 30, 2020, our primary sources of cash were the net proceeds from the 2020 Convertible Notes of $6,098,000, the net sales of common shares for $44,755,672, net proceeds of $5,819,319 from warrant exercises and $3,600,000 from the collection of the Investor Notes. The primary uses of cash during the six months ended June 30, 2020, were $2,331,261 in operations, the repayment of the August 2018 Secured Convertible Notes of $2,866,664 and the repayment of the Production Facility of $1,202,313. Operating Activities Cash used in operating activities for the six months ended June 30, 2020 was $2,331,261 as compared to cash used in operating activities of $2,550,140 during the comparable period in the prior year. Investing Activities Cash used in investing activities for the six months ended June 30, 2020 was $500 as compared to a use of $14,331 for the six months ended June 30, 2019. Investing activities include the purchase of furniture and equipment in 2019. Financing Activities Cash provided by financing activities for the six months ended June 30, 2020 was $56,409,414 as compared to $2,110,779 cash provided by the comparable period in 2019 During the six months ended June 30, 2020, our primary sources of cash were the net proceeds from the 2020 Convertible Notes of $6,098,000, the net sales of common shares for $44,755,672, net proceeds of $5,819,319 from warrant exercises and $3,600,000 from the collection of the Investor Notes. The primary uses of cash during the six months ended June 30, 2020, were the repayment of the August 2018 Secured Convertible Notes of $2,866,664 and the repayment of the Production Facility of $1,202,313. Capital Expenditures As of June 30, 2020, we do not have any material commitments for capital expenditures. 39 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. Right of Use Leased Assets 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. In July 2018, the FASB issued ASU 2018-11, Leases (“Topic 842”), Targeted Improvements, which allows for an additional optional transition method where comparative periods presented in the financial statements in the period of adoption will not be restated and instead those periods will be presented under existing guidance in accordance with ASC 840, Leases. Management used this optional transition method. As of January 1, 2019, management recorded lease liability of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization of $124,070, a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306. 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. 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. 40 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 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, we develop 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. Debt and Attached Equity-Linked Instruments The Company measures issued debt on an amortized cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method or the straight-line method when the latter does not lead to materially different results. The Company accounts for the proceeds from the issuance of convertible notes payable in accordance with FASB ASC 470-20 Debt with Conversion and Other Options. Pursuant to FASB ASC 470-20, the intrinsic value of the embedded conversion feature (beneficial conversion interest), which is in the money on the commitment date is included in the discount to debt and amortized to interest expense over the term of the note agreement. When the conversion option is not separated, the Company accounts for the entire convertible instrument including debt and the conversion feature as a liability. The Company analyzes freestanding equity-linked instruments including warrants attached to debt to conclude whether the instrument meets the definition of the derivative and whether it is considered indexed to the Company’s own stock. If the instrument is not considered indexed to the Company’s stock, it is classified as an asset or liability recorded at fair value. If the instrument is considered indexed to the Company’s stock, the Company analyzes additional equity classification requirements per ASC 815-40 Contract’s in Entity’s Own Equity. When the requirements are met the instrument is recorded as part of the Company’s equity, initially measured based on its relative fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument is recorded as an asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings. When required, the Company also considers the bifurcation guidance for embedded derivatives per FASB ASC 815-15 Embedded Derivatives. Revenue Recognition On January 1, 2018, we adopted the new accounting standard ASC 606 (“Topic 606”), Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. As a result of the change, beginning January 1, 2018, we began recognizing revenue related to licensed rights to exploit functional IP in two ways. For minimum guarantees, we will recognize fixed revenue upon delivery of content and the start of the license period. For functional IP contracts with a variable component, we 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. We began 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. We sell advertising on our Kid Genius channel 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 606 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. 41 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. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Recent Accounting Pronouncements In March 2019, the FASB issued ASU No. 2019-02, Entertainment-Films-Other Assets-Film Costs (“Subtopic 926-20”) and Entertainment-Broadcasters Intangibles-Goodwill and Other (“Subtopic 920-350”). The update aligns the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization. The amendments also require that an entity reassess estimates of the use of a film in a film group and account for any changes prospectively. The amendments in this update require that an entity test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We adopted ASU 2019-02 in 2019. The impact to our consolidated financial position, results of operations and cash flows were not material. Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries, and are not expected to have a material effect on our financial position, results of operations, or cash flows. Off Balance Sheet Arrangements We have no off-balance sheet arrangements. 42 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.