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GENIUS BRANDS INTERNATIONAL, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 14, 2014

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 and six months ended June 30, 2014 and 2013. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

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.

Overview



The MD&A 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



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.

On November 15, 2013, we entered into an Agreement and Plan of Reorganization (the "Merger Agreement") with A Squared Entertainment LLC, a Delaware limited liability company ("A Squared"), A Squared Holdings LLC, a California limited liability company and sole member of A Squared (the "Member") and A2E Acquisition LLC, our newly formed, wholly-owned Delaware subsidiary ("Acquisition Sub"). Upon closing of the transactions contemplated under the Merger Agreement (the "Merger"), which occurred concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of A Squared. A Squared is a children's entertainment production company that produces original content for children and families and provides entertaining and educational media experiences. A Squared also creates comprehensive consumer product programs in the forms of toys, books and electronics. A Squared works with broadcasters, digital and online distributors and retailers worldwide as well as major toy companies, video game companies and top licensees in the kids and family arena.

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On April 2, 2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and outstanding common stock on a one-for-one hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory Authority) on April 7, 2014. All common stock share and per share information in this Quarterly Report, including the accompanying consolidated financial statements and notes thereto, has been adjusted to reflect retrospective application of the reverse split, unless otherwise indicated.

Recent Updates



During the second quarter of 2014, the Company began a strategic initiative to restructure its product sales business by phasing out the direct sale of physical products including DVDs and CDs and shifting to a licensing model. On July 14, 2014, the Company employed Stone Newman in the newly created position of President - Worldwide Consumer Products wherein he will manage all consumer products, licensing and merchandising sales and rights for the Company's brands and programming.

On May 12, 2014, the Board of Directors authorized the designation of a class of preferred stock called the Series A Convertible Preferred Stock. On May 14, 2014, the Company filed the Certificate of Designation, Preferences and Rights of the 0% Series A Convertible Preferred Stock with the Secretary of State of the State of Nevada.

On May 14, 2014, we entered into securities purchase agreements with certain accredited investors pursuant to which the Company sold an aggregate of 6,000 shares of its newly designated Series A Convertible Preferred Stock at a price of $1,000 per share for gross proceeds to the Company of $6,000,000. The closing of the transaction was subject to certain customary closing conditions and closed on May 15, 2014.

24 Results of Operations



Comparison of Results of Operations for the three months ended June 30, 2014 and 2013

Our summary results for the three months ended June 30, 2014 and 2013 are below:

6/30/2014 6/30/2013 Change % Change Revenues $ 217,196$ 622,324$ (405,128 ) -65% Costs and Operating Expenses (1,046,389 ) (1,067,912 ) 21,523 -2% Depreciation and Amortization (29,088 ) (39,003 ) 9,915 -25% Loss from Operations (858,282 ) (484,591 ) (373,691 ) -77% Other Income 7,156 16 7,140 44625% Interest Expense (21 ) (155,483 ) 155,462 -100% Interest Expense - Related Parties (6,207 ) (6,810 ) 603 -9% Gain (loss) on distribution contracts (50,000 ) - (50,000 ) N/A Gain (loss) on extinguishment of debt 12,593 - 12,593 N/A Gain (loss) on disposition of assets (70,905 ) - (70,905 ) N/A Gain (loss) on inventory (174,963 ) - (174,963 ) N/A Gain (loss) on derivative valuation - 103,619 (103,619 ) -100%



Net Other Income (Expense) (282,347 ) (58,658 ) (223,689 ) 381%

Income tax provision - - - N/A Net Loss $ (1,140,629 )$ (543,249 )$ (597,380 ) -110%



Net Loss per common share $ (0.18 )$ (0.75 )

Weighted average shares outstanding 6,221,947 722,911 Revenues. Revenues by product segment and for the Company as a whole were as follows: 6/30/2014 6/30/2013 Change % Change Product Sales $ 118,495$ 394,772$ (276,277 ) -70% Content Distribution 36,814 - 36,814 N/A Licensing & Royalties 61,887 227,552 (165,665 ) -73% Total Revenue $ 217,196$ 622,324$ (405,128 ) -65%



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. During the three months ended June 30, 2014, product sales decreased by $276,277 due in part to a general decline in market demand for CDs and DVDs as well as the Company's shift in emphasis away from physical goods distribution.

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Television & Home Entertainment revenue totaled $36,814 during three months ended June 30, 2014 with no comparable amounts in 2013 due to the Merger. Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television in domestic and foreign markets and the sale of DVDs for home entertainment.

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 June 30, 2014 compared to June 30, 2013, this category had decreased from $227,552 to $61,887, or $165,665 (73%). This decrease is due to the shift in the Company's focus from third party off-brand product to more kid-oriented product that is more consistent with the Company's brand.

Costs. Costs and expenses, excluding depreciation and amortization, consisting primarily of cost of sales, marketing and sales expenses, and general and administrative costs, decreased $21,524 (2%) for the three month period ended June 30, 2014 compared to the three month period ended June 30, 2013.

6/30/2014 6/30/2013 Change % Change Cost of Sales $ 105,112$ 332,668$ (227,556 ) -68% General and Administrative 855,238 628,324 226,914 36% Marketing and Sales 80,112 104,072 (23,960 ) -23% Product Development 5,926 2,848 3,078 108% Total Costs and Operating Expenses $ 1,046,388$ 1,067,912$ (21,524 ) -2%



Cost of Sales decreased $227,556 (68%), during three months ended June 30, 2014 compared to the same period of 2013. The decrease was a result of the decrease in product sales discussed above.

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 June 30, 2014 increased $226,914 (36%) as compared to the three months ended June 30, 2013. The aggregate increase for the category includes increases of professional fees of $186,621, other general and administration expenses of $162,173, and bad debt expense of $55,000 all offset by decreases of $108,165 in salaries and wages and $101,988 in stock based compensation expense.

Marketing and sales expenses decreased $23,960 (23%) for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to decreases in sales commission expenses and other advertising expenses.

Product development expenses are for routine and periodic alterations to existing products. For the three months ended June 30, 2014 compared to the three months ended June 30, 2013, these expenses increased by $3,078 (108%), primarily due to increased demand for alterations to our existing products.

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Interest Expense. During the three months ended June 30, 2014, interest expense resulted from certain related party short-term debt and other operating interest expense. During the prior period, interest expense related to interest expense recognized in relation to certain related-party notes payable and other operating interest expense as well as interest expense related to certain debentures.

6/30/2014 6/30/2013 Change % Change



Interest Expense - Operating $ 21$ 2,222$ (2,202 ) -99% Interest Expense - Related Party 6,207 6,810

(603 ) -9% Interest Expense - Debenture - 153,261 (153,261 ) -100% Interest Expense $ 6,228$ 162,293$ (156,065 ) -96%



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 June 30, 2014 and 2013 in the amounts of $0 and $3,722, respectively.

During 2011, four of the Company's former officers agreed to convert accrued but unpaid salaries through December 31, 2010 to subordinated long term notes payable. 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 June 30, 2014 and 2013 in the amounts of $0 and $3,088, respectively.

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, Andrew Heyward. As of June 30, 2014, these advances totaled $415,787. These advances are interest free and have no stated maturity. The Company has applied an imputed interest rate of 6%. During the quarter ended June 30, 2014, the Company recognized imputed interest expense of $6,207 with no comparable amount recognized in the prior period.

On June 27, 2012, the Company entered into a Securities Purchase Agreement whereby the Company issued and sold (i) a $1,000,000 16% senior secured convertible debenture due June 27, 2014 (the "Debenture"), and (ii) a common stock purchase warrant (the "Debenture Warrant") to purchase up to 50,000 shares of the Company's common stock. On August 29, 2013, pursuant to an agreement between the Company and certain holders, the original Debenture was assigned and exchanged for an aggregate of $1,163,333 in new notes with the same provisions (the "Reissued Debenture"). The interest rate and maturity date of the Reissued Debenture were not changed. In association with the Merger, the Company converted all remaining balances into shares of common stock. For the three months ended June 30, 2014 compared to the same period of 2013, interest expense for the Debenture and Reissued Debenture was recorded in amounts of $0 and $153,261, respectively.

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Comparison of Results of Operations for the six months ended June 30, 2014 and 2013

Our summary results for the six months ended June 30, 2014 and 2013 are below:

6/30/2014 6/30/2013 Change % Change Revenues $ 393,478$ 1,356,563$ (963,085 ) -71% Costs and Operating Expenses (2,086,180 ) (2,454,015 ) 367,835 -15% Depreciation and Amortization (53,629 ) (78,175 ) 24,546 -31% Loss from Operations (1,746,331 ) (1,175,627 ) (570,704 ) -49% Other Income 7,789 32 7,757 24241% Interest Expense (2,230 ) (310,742 ) 308,512 -99% Interest Expense - Related Parties (13,370 ) (13,534 ) 164 -1% Gain (loss) on distribution contracts (47,229 ) - (47,229 ) N/A Gain (loss) on extinguishment of debt 52,447 - 52,447 N/A Gain (loss) on disposition of assets (70,905 ) - (70,905 ) N/A Gain (loss) on inventory (174,963 ) - (174,963 ) N/A Gain (loss) on derivative valuation - 10,757 (10,757 ) -100% Net Other Income (Expense) (248,461 ) (313,487 ) 65,026 -21% Income tax provision - - - N/A Net Loss $ (1,994,792 )$ (1,489,114 )$ (505,678 ) -34% Net Loss per common share $ (0.33 )$ (2.05 ) Weighted average shares outstanding 6,126,292 724,903 Revenues. Revenues by product segment and for the Company as a whole were as follows: 6/30/2014 6/30/2013 Change % Change Product Sales $ 204,636$ 1,097,585$ (892,949 ) -81% Content Distribution 87,275 - 87,275 N/A Licensing & Royalties 101,567 258,978 (157,411 ) -61% Total Revenue $ 393,478$ 1,356,563$ (963,085 ) -71%



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. During the six months ended June 30, 2014, product sales decreased by $892,949 due in part to a general decline in market demand for CDs and DVDs as well as the Company's shift in emphasis away from physical goods distribution.

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Television & Home Entertainment revenue totaled $87,275 during six months ended June 30, 2014 with no comparable amounts in 2013 due to the Merger. Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television in domestic and foreign markets and the sale of DVDs for home entertainment.

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 six month period ended June 30, 2014 compared to June 30, 2013, this category decreased from $258,978 to $101,567, or $157,411 (61%). This decrease is due to the shift in the Company's focus from third party off-brand product to more kid-oriented product that is more consistent with the Company's brand.

Costs. Costs and expenses, excluding depreciation and amortization, consisting primarily of cost of sales, marketing and sales expenses, and general and administrative costs, decreased $367,835 (15%) for the six month period ended June 30, 2014 compared to the six month period ended June 30, 2013.

6/30/2014 6/30/2013 Change % Change Cost of Sales $ 241,147$ 979,977$ (738,830 ) -75% General and Administrative 1,720,340 1,285,408 434,932 34% Marketing and Sales 117,880 158,791 (40,911 ) -26% Product Development 6,813 29,839 (23,026 ) -77% Total Costs and Operating Expenses $ 2,086,180$ 2,454,015$ (367,835 ) -15%



Cost of Sales decreased $738,830 (75%), during six months ended June 30, 2014 compared to the same period of 2013. The decrease was a result of the decrease in product sales discussed above.

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 six months ended June 30, 2014 increased $434,932 (34%) as compared to the six months ended June 30, 2013. The aggregate increase for the category includes increases of professional fees of $441,984, other general and administration expenses of $306,689, and bad debt expense of $55,000 all offset by decreases of $270,616 in salaries and wages and $160,268 in stock based compensation expense.

Marketing and sales expenses decreased $40,911 (26%) for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to decreases in sales commission expenses and other advertising expenses.

Product development expenses are for routine and periodic alterations to existing products. For the six months ended June 30, 2014 compared to the six months ended June 30, 2013, these expenses decreased by $23,026 (77%), primarily due to decreased demand for alterations to our existing products.

Interest Expense. During the six months ended June 30, 2014, interest expense resulted from certain related party short-term debt and other operating interest expense. During the prior period, interest expense related to interest expense recognized in relation to certain related-party notes payable and other operating interest expense as well as interest expense related to certain debentures.

6/30/2014 6/30/2013 Change % Change



Interest Expense - Operating $ 2,230$ 4,220$ (1,991 ) -47% Interest Expense - Related Party 13,370 13,534

(164 ) -1% Interest Expense - Debenture - 306,522 (306,522 ) -100% Interest Expense $ 15,600$ 324,276$ (308,676 ) -95%



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 six months ended June 30, 2014 and 2013 in the amounts of $0 and $7,388, respectively.

During 2011, four of the Company's former officers agreed to convert accrued but unpaid salaries through December 31, 2010 to subordinated long term notes payable. In association with the Merger, all remaining balances in association with these notes were converted into common stock. Interest expense was recorded in the six months ended June 30, 2014 and 2013 in the amounts of $0 and $6,146, respectively.

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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, Andrew Heyward. As of June 30, 2014, these advances totaled $415,787. These advances are interest free and have no stated maturity. The Company has applied an imputed interest rate of 6%. During the six months ended June 30, 2014, the Company recognized imputed interest expense of $13,370 with no comparable amount recognized in the prior period.

On June 27, 2012, the Company entered into a Securities Purchase Agreement whereby the Company issued and sold (i) the $1,000,000 16% Debenture, and (ii) the Debenture Warrant to purchase up to 50,000 shares of the Company's common stock. On August 29, 2013, pursuant to an agreement between the Company and certain holders, the original Debenture was assigned and exchanged for an aggregate of $1,163,333 a Reissued Debenture. The interest rate and maturity date of the Reissued Debenture were not changed. In association with the Merger, the Company converted all remaining balances into shares of common stock. For the six months ended June 30, 2014 compared to the same period of 2013, interest expense for the Debenture and Reissued Debenture was recorded in amounts of $0 and $306,522, respectively.

Liquidity



Six Months Ended June 30, 2014 Compared to June 30, 2013

Cash totaled $5,576,206 and $253,390at June 30, 2014 and 2013, respectively. The change in cash is as follows: 6/30/2014 6/30/2013 Change Cash provided (used) by operations $ (1,234,446 )$ (85,918 )$ (1,148,528 )



Cash provided (used) in investing activities (89,481 ) (172,518 ) 83,037 Cash provided (used) in financing activities 6,373,023

64,278 6,308,745 Increase (decrease) in cash $ 5,049,096$ (194,158 )$ 5,243,254



During our periods ended June 30, 2014 and 2013, our primary sources of cash were financing activities. During 2014, our financing activities related primarily to the sale of shares of common stock and Series A Convertible Preferred Stock as well as the execution of a long-term, exclusive supply chain services agreement. 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.

Operating Activities



Cash used by operations in the six months ended June 30, 2014 was $1,234,446 as compared to a use of $85,918 during the same period of 2013, representing an increase in cash used in operations of $1,148,528 based on the operating results discussed above as well as increases in film and television costs related to the commencement of production of the second installment of the feature film Stan Lee and the Mighty 7 and episodes of the Thomas Edison: Secret Lab off-set by the receipt of $250,000 for a musical composition administration services with a third party.

Investing Activities



Cash used by investing activities for the six months ended June 30, 2014 was $89,481 as compared to a use of funds of $172,518 for the comparable period in 2013 is the result of the creation of a new website and the ongoing development of the Company's web-based streaming service.

Financing Activities



Cash generated from financing activities during the six months ended June 30, 2014 was $6,373,023 as compared to $64,278 generated in comparable period in 2013. The increase in cash provided by financing activities relates to the following activities during the first half of 2014:

The sale of common stock during the first quarter of 2014 for which the Company

received net proceeds of $355,116;

The execution of a long-term, exclusive supply chain services agreement for

which it received $750,000 during the first quarter of 2014, with the remaining

$750,000 due by January 17, 2015;

The sale of 6,000 shares of the Company's newly designated Series A Convertible

Preferred Stock at a price of $1,000 per share for which the Company received

net proceeds of $5,379,915; and

Expenditures of $103,766 for the repayment of related party notes offset these

increases. 30 Capital Resources



As of June 30, 2014, the Company does not have any material commitments for capital expenditures.

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 Genius Brands International, Inc. and its wholly owned subsidiary A Squared Entertainment, LLC. All significant inter-company balances and transactions have been eliminated in consolidation.

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.

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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.

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