Note 1: Organization and Business

Organization and Nature of Business

Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a publicly traded (NASDAQ:GNUS) global content and brand management company that creates, produces, licenses, and broadcasts timeless and educational, multimedia animated content for children. Led by experienced industry personnel, the Company distributes its content primarily on streaming platforms and television and licenses its properties for a broad range of consumer products based on the Company’s characters. The Company is a leading “work for hire” producer for many of the streaming outlets and IP holders. In the children’s media sector, the Company’s portfolio features “content with a purpose” for toddlers to tweens, providing enrichment as well as entertainment. The Company’s programs, along with those programs it acquires and/or licenses, are being broadcast in the United States on the Company’s wholly-owned advertisement supported video on demand (“AVOD”) service, Kartoon Channel!, and its subscription video on demand (“SVOD”) distribution outlets, Kartoon Channel! Kidaverse, and Ameba TV. These streaming services are available on Apple TV, Apple iOS, Android TV, Android mobile, Amazon Prime, Amazon Fire, Tubi, Roku, Comcast, Cox, Dish/Sling, Zumo, Pluto, Samsung Smart TVs, LG Smart TVs, as well as YouTube, among other popular platforms. The Company’s in-house owned and produced shows include Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama starring Jennifer Garner, Rainbow Rangers, KC Pop Quiz, and the upcoming Shaq’s Garage starring Shaquille O’Neal, scheduled to debut in the fourth quarter of 2022. The Company’s 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.

The Company also licenses its programs to other services worldwide, in addition to the operation of its own channels, including but not limited to Netflix, HBO Max, Paramount+, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.

Through the Company’s recent investment in Germany’s Your Family Entertainment (“YFE”), a publicly traded company on the Frankfurt Exchange (RTV-Frankfurt), it has gained access to one of the largest animation catalogues in Europe with over 3,000 titles, and a global distribution network, which currently covers over 60 territories worldwide and, which the Company is currently in process of rebranding as Kartoon Channel! Worldwide.

The Company also recently acquired WOW Unlimited Media Inc. (“Wow”), and through that acquisition, established an affiliate relationship with Mainframe Studios, which is one of the largest animation producers in the world. In addition, Wow owns Frederator Networks Inc. (“Frederator”) and its Channel Frederator Network, the largest animation focused multi-channel network on YouTube, with over 2,500 content creators and currently averages over 1 billion views per month.

The Company owns a select amount of valuable IP, including among them a controlling interest in Stan Lee Universe (“SLU”), through which it controls the name, likeness, signature, and all consumer product and IP rights to Stan Lee (the “Stan Lee Assets”). The Company plans to launch a Stan Lee Centennial program of merchandise set to coincide with Stan Lee’s 100^th birthday on December 28, 2022.

The Company also owns Beacon Media, the largest media buying service for children in North America. Beacon represents over 30 major toy companies, including Playmobile, Bandai Toys, Bazooka, Moose Toys, and JAKKS Pacific.

In addition, the Company recently acquired the Canadian company Ameba TV (“Ameba”), which distributes a profitable SVOD channel for kids and is now expected to become the backbone of the newly launched SVOD channel of Kartoon Channel!, Kartoon Channel! Kidaverse.

The combination of the Company, its investment in YFE, its acquired companies Wow, Ameba and Beacon Media provide the Company with world class animation production studios, a catalogue representing thousands of hours of premium global content for children, a broadcast system for delivering that content and an in-house Consumer Products Licensing infrastructure to fully exploit the content.

Recent Investments

On January 13, 2022, the Company completed its acquisition of the issued and outstanding shares of Ameba and gained access to its kid-safe SVOD platform technology and 13,000 episodes of content. Refer to Note 3 for additional details.

On April 6, 2022, the Company completed its acquisition of Wow. On October 26, 2021, the Company’s 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. The Company purchased 100% of Wow’s issued and outstanding shares for approximately $38.3 million in cash and 11,057,000 shares of the Company’s common stock. Refer to Note 3 for additional details.

Following the initial equity investment in YFE during the fourth quarter of 2021, the Company 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, the Company purchased an additional 2,637,717 shares of YFE at 2.00 EUROS per share or $5.7 million in the aggregate. On March 9, 2022, bonds held by YFE shareholders were converted into 2,574,000 shares of YFE common stock, 304,631 of which were purchased by the Company, at 2.00 EUROS per share or $0.6 million. On April 5, 2022, the Company exercised its subscription rights to purchase an additional 914,284 shares of YFE’s common stock at 3.00 EUROS per share, or $2.7 million, increasing the number of YFE’s outstanding shares to 6,857,132. As of September 30, 2022, the Company’s ownership in YFE is 48.0%.

Liquidity

During the nine months ended September 30, 2022, the Company’s cash, cash equivalents and restricted cash decreased by $3.0 million. The decrease was primarily due to cash used in investment activities, inclusive of the Wow and Ameba acquisitions and the YFE investments, totaling $35.9 million, $24.2 million used for operational activities, offset by $57.4 million of financing from the margin loan, production facilities and bank indebtedness assumed in the Wow Acquisition.

As of September 30, 2022, the Company held marketable securities with a fair value of $89.9 million as available-for-sale, a decrease of $22.7 million as compared to December 31, 2021 primarily due to the Company selling $8.8 million of its held securities during the period, a decrease in fair value of $6.4 million recorded as an unrealized loss, additional prepayment proceeds of $6.4 million on principals for certain mortgage-backed securities, a realized loss of $0.2 million and $0.8 million of continued amortization of premiums during the period. The available-for-sale securities consist principally of corporate and government debt securities and are also available as a source of liquidity.

The Company borrowed an additional $63.2 million from its investment margin account during the nine months ended September 30, 2022 and repaid $7.8 million with cash received from sales and/or redemptions of its marketable securities. During the nine months ended September 30, 2022, the borrowed amounts were used to finance the Company’s additional investments in YFE and the closing of the acquisitions of Ameba and Wow, in each case pledging certain of its marketable securities as collateral. During the three months ended September 30, 2022, the additional borrowings of $4.2 million related to quarterly operational costs. 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 2.65% on an average margin loan balance of $61.2 million during the three months ended September 30, 2022. The weighted average interest rate was 1.54% on an average margin loan balance of $43.4 million during the nine months ended September 30, 2022. The Company incurred interest expense of $0.6 million during the nine months ended September 30, 2022. 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 the Company’s condensed consolidated balance sheets.

Upon the acquisition of Wow, the Company assumed certain credit facilities (the “Facilities”) with a Canadian bank. The Facilities are comprised of: (i) a $5.0 million CAD ($3.9 million USD) revolving demand facility, (ii) an $8.0 million CAD ($6.2 million USD) equipment lease line, (iii) a treasury risk management facility of up to $0.5 million CAD ($0.4 million USD) for foreign exchange forward contracts, and (iv) interim financing facilities for specific production titles. The Facilities are guaranteed by the Company and the security reflects substantially all of the tangible and intangible assets of the Company and its subsidiary guarantors subject to permitted encumbrances, including a combination of federal and provincial tax credits, other government incentives, production service agreements, and license agreements. The Facilities are generally repayable on demand and are subject to customary affirmative and negative covenants, default provisions, representations and warranties and other terms and conditions. Refer to Note 14 for additional details.

Historically, the Company has incurred net losses. For the three months ended September 30, 2022 and 2021, the Company reported net losses of $11.2 million and $9.3 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company reported net losses of $29.1 million and $92.9 million, respectively. The Company reported net cash used in operating activities of $22.8 million and $16.0 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the Company had an accumulated deficit of $624.9 million and total stockholders’ equity of $128.5 million. As of September 30, 2022, the Company had current assets of $143.6 million, including cash and cash equivalents of $7.1 million and current liabilities of $111.2 million. The Company had working capital of $32.4 million as of September 30, 2022, compared to working capital of $115.1 million as of December 31, 2021.