The following discussion and analysis of our results of operations, financial
condition and liquidity and capital resources should be read in conjunction with
our unaudited financial statements and related notes for the three months ended
Forward Looking Statements
This report on Form 10-Q contains forward-looking statements which involve assumptions and describe our future plans, strategies and expectations. When used in this statement, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company's future plans of operations, business strategy, operating results, and financial position. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished.
Persons reviewing this report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward looking statements as a result of various factors. Such factors include, among other things, uncertainties relating to our success in judging consumer preferences, financing our operations, entering into strategic partnerships, engaging management, seasonal and period-to-period fluctuations in sales, failure to increase market share or sales, inability to service outstanding debt obligations, dependence on a limited number of customers, increased production costs or delays in production of new products, intense competition within the industry, inability to protect intellectual property in the international market for our products, changes in market condition and other matters disclosed by us in our public filings from time to time. Forward-looking statements speak only as to the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
The MD&A is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in
We create and distribute products which we believe are entertaining, educational and beneficial to the well-being of infants and young children under our brands. We create market and sell children's videos, music, books and other products. We license the use of our intellectual property, both domestically and internationally, to others to manufacture, market and sell products based on our characters and brand. We own, control, distribute and seek to build animated content and brands aimed at kids, and then license the brands and characters onto various products, including toys, publishing video games, music, apparel and soft goods. In most cases, we create our own original content. In other cases, we partner with existing rights holders to develop an idea or an existing brand.
Upon formation, the parties agreed that POW would contribute certain properties to
Upon closing of the Merger, the Company assumed the rights to
Results of Operations
Three Months Ended
Our summary results are presented below:
3/31/2014 3/31/2013 Change % Change Revenues
$ 176,283 $ 734,239 $ (557,956 )-76% Costs and Operating Expenses (1,039,792 ) (1,386,103 ) 346,311 -25% Depreciation and Amortization (24,539 ) (39,172 ) 14,633 -37% Loss from Operations (888,048 ) (691,036 ) (197,012 ) -29% Other Income 633 16 617 3857% Interest Expense (2,209 ) (155,259 ) 153,050 -99% Interest Expense - Related Parties (7,163 ) (6,724 ) (439 ) 7% Gain (loss) on distribution contracts 2,771 - 2,771 N/A Gain (loss) on extinguishment of debt 39,854 - 39,854 N/A Gain (loss) on derivative valuation - (92,862 ) 92,862 -100% Net Other Income (Expense) 33,886 (254,829 ) 288,715 -113% Income tax provision - - - N/A Net Loss $ (854,162 ) $ (945,865 ) $ 91,70310% Net Loss per common share $ (0.14 ) $ (1.31 )
Weighted average shares outstanding 6,029,573 722,159
21 Revenues. Revenues by product segment and for the Company as a whole were as follows: 3/31/2014 3/31/2013 Change % Change Product Sales
$ 86,141 $ 702,812 $ (616,671 )-88% Television & Home Entertainment 50,462 - 50,462 N/A Licensing & Royalties 39,680 31,427 8,253 26% Total Revenue $ 176,283 $ 734,239 $ (557,956 )-76%
Product sales represent physical products in which the Company holds intellectual property rights such as trademarks and copyrights, whether registered or unregistered, to the characters and which are manufactured and sold by the Company either directly at wholesale to retail stores or direct to consumers through daily deal sites and our website. Product sales decreased by
Licensing and royalty revenue includes items for which we license the rights from other companies to copyrights and trademarks of select brands we feel will do well within our distribution channels as well as for our brands licensed to others to manufacture and/or market, both internationally and domestically. During the three month period ended
The 2014 economic outlook is uncertain and although we cannot guarantee, we anticipate continued growth in all areas of revenue. The Company has retained new foreign sales agents to expand the foreign markets for TV distribution and licensing. New projects and continued series productions will expand the US domestic distribution channels. There is also an increasing shift from CD and DVD sales to digital downloading through various digital platforms which we anticipate will increase revenue.
Costs. Costs and expenses, excluding depreciation and amortization, consisting primarily of cost of sales, marketing and sales expenses, and general and administrative costs, decreased
3/31/2014 3/31/2013 Change % Change Cost of Sales
$ 136,035 $ 647,309 $ (511,274 )-79% General and Administrative 865,102 657,084 208,018 32% Marketing and Sales 37,768 54,719 (16,951 ) -31% Product Development 887 26,991 (26,104 ) -97%
Total Costs and Operating Expenses
Cost of Sales decreased
General and Administrative expenses consist primarily of salaries, employee benefits, as well as other expenses associated with finance, legal, facilities, marketing, rent, and other professional services. General and administrative costs for the three months ended
Marketing and sales expenses decreased
Product development expenses are for routine and periodic alterations to existing products. For the three months ended
Interest Expense. During the three months ended
3/31/2014 3/31/2013 Change % Change Interest Expense - Operating
$ 2,209 $ 1,998 $ 21111% Interest Expense - Related Party 7,163 6,724 439 7% Interest Expense - Debenture - 153,261 (153,261 ) -100% Total Interest Expense $ 9,372 $ 161,983 $ (152,611 )-94%
From 2007 through 2009, the Company borrowed funds from members of its previous management team, the proceeds of which were used to pay operating obligations of the Company. In association with the Merger, all remaining balances in association with these notes were converted into common stock. Interest expense was recorded in the three months ended
During 2011, four of the Company's former officers agreed to convert accrued but unpaid salaries through
As part of the Merger, the Company acquired certain liabilities from A Squared. From time to time, A Squared required short-term advances to fund its operations and provide working capital from its founder, the Company's Chief Executive Officer,
Three Months Ended
$992,753and $179,835at March 31, 2014and 2013, respectively. The change in cash is as follows: 3/31/2014 3/31/2013 Change Cash provided (used) by operations $ (476,146 ) $ (226,163 ) $ (249,983 )
Cash provided (used) in investing activities (62,455 ) (73,689 ) 11,234 Cash provided (used) in financing activities 1,004,244 32,139 972,105 Increase (decrease) in cash
$ 465,643 $ (267,713 ) $ 733,356
During our periods ended
During the comparable period in 2013, our financing activities related to the receipt of funds related to the issuance costs of certain debentures.
During both periods, these funds were primarily used to fund operations as well as investments in intangible assets and capitalized product development.
Cash used by operations in the three months ended
Cash used by investing activities for the three months ended
Cash generated from financing activities during the three months ended
Each share of Series A Preferred Stock is convertible into shares of the Company's common stock, par value
Critical Accounting Policies
The Company's accounting policies are described in the notes to the financial statements. Below is a summary of the critical accounting policies, among others, that management believes involve significant judgments and estimates used in the preparation of its financial statements.
Principles of Consolidation - The Company's consolidated financial statements include the accounts of
Intangible Assets - Intangible Assets acquired, either individually or with a group of other assets, are initially recognized and measured based on fair value. In the 2005 acquisition of the assets from Genius Products, fair value was calculated using a discounted cash flow analysis of the revenue streams for the estimated life of the assets. In the 2013 acquisition of the identifiable artistic-related assets from A Squared, fair value was determined through an independent appraisal. The Company determined that these assets are indefinite-lived. Additional, the Merger transaction with A Squared gave rise to goodwill representing the future economic benefits arising from the assets of A Squared that could not be individually identified and recognized.
The Company develops new video, music, books and digital applications, in addition to adding content, improved animation and songs/features to their existing productions. The costs of new product development and significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred. The Company begins amortization of new products when it is available for general release. Annual amortization cost of intangible assets are computed based on the straight-line method over the remaining economic life of the product, generally such deferred costs are amortized over five years.
The Company reviews all intangible assets periodically to determine if the value has been impaired following the guidance of ASC 350-20 - Goodwill and ASC 350-30 - General Intangibles Other Than Goodwill.
Capitalized Production Cost - The Company capitalizes production costs for episodic series produced in accordance with ASC 926-20, Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment over the period of commitment. The Company expenses all capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes.
The Company capitalizes production costs for films produced in accordance with ASC 926-20, Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair value of the film(s) delivered and recognized as revenue. The Company evaluates their capitalized production costs annually and limits recorded amounts by their ability to recover such costs through expected future sales.
The Company also develops new videos, music, books and digital applications in addition to adding content, improved animation and bonus songs/features to its existing product catalog. In accordance with ASC 350 - Intangible Assets and ASC 730 - Research and Development, the costs of new product development and significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition - The Company recognized revenue related to product sales when (i) the seller's price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer as required by ASC 605 - Revenue Recognition.
Revenues associated with the sale of products, are recorded when shipped to customers pursuant to approved customer purchase orders resulting in the transfer of title and risk of loss. Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each financial reporting date.
The Company recognizes revenue in accordance with ASC Topic 926-605, Entertainment-Films - Revenue Recognition. Accordingly, the Company recognizes revenue when (i) persuasive evidence of a sale with customer exists, (ii) the film is complete and has been delivered or is available for delivery, (iii) the license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale, (iv) the arrangement fee is fixed or determinable, and (v) collection of the arrangement fee is reasonably assured.
For its distribution, TV, and home entertainment income the Company generally enters in to flat fee arrangements to deliver multiple films or episodes. The Company allocates revenue to each film or episode based on their relative fair market values and recognizes revenue as each film or episode is complete and available for delivery.
The Company's licensing and royalty revenue represents both (a) variable payments based on net sales from brand licensees for content distribution rights. These license agreements are held in conjunction with third parties that are responsible for collecting fees due and remitting to the Company its share after expenses. Revenue from licensed products is recognized when realized or realizable based on royalty reporting received from licensees and (b) licensing income the Company recognizes revenue as an agent in accordance with ASC 605-45, Revenue Recognition - Principal Agent. Accordingly, the Company's revenue is its gross billings to its customers less the amounts it pays to suppliers for their products and services.
Other Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Off Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.