See accompanying notes to condensed consolidated
financial statements.
See accompanying notes to condensed consolidated
financial statements.
See accompanying notes to condensed consolidated
financial statements.
See accompanying notes to condensed consolidated
financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation and Summary of Significant Accounting
Policies
Overview
IDW Media Holdings, Inc., a Delaware corporation,
(“IDWMH”) together with its subsidiaries (collectively, the “Company”) is a diversified media company with operations
in publishing and television entertainment. The terms “Company,” “we,” “us,” and “our”
are used in this report to refer collectively to IDWMH and its subsidiaries through which various businesses are conducted.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated
financial statements have been prepared by management in accordance with generally accepted accounting principles in the United States
of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all information and footnotes
required by U.S. GAAP for complete financial statements. Certain information and footnote disclosures normally included in our annual
consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted consistent with Article 10 of Regulation
S-X. In the opinion of management, all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair
presentation have been included. Interim results of operations are not necessarily indicative of the results for the full year or for
any future period. These financial statements should be read in conjunction with the annual consolidated financial statements and notes
thereto also included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. The condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. All amounts in these condensed consolidated financial statements and notes to the condensed consolidated
financial statements are reflected on a consolidated basis for all periods presented.
The Company’s fiscal year ends on October
31st. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2022
refers to the fiscal year ended October 31, 2022).
Reclassification of prior year presentation
Certain prior year balances have been reclassified
to conform to the current year’s presentation. Amortization of television costs, were previously netted against the change in television
costs, are disclosed separately on the Condensed Consolidated Statement of Cash Flows. Such reclassifications had no effect on net income
(loss).
Use of Estimates
The preparation of the condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company
has considered information available to it as of the date of issuance of these condensed consolidated financial statements and is not
aware of any specific events or circumstances that would require an update to its estimates or judgements, or an adjustment to the carrying
value of its assets or liabilities. The accounting estimates and other matters assessed include, but were not limited to, goodwill and
other long-lived assets, and revenue recognition. These estimates may change as new events occur and additional information becomes available.
Actual results could differ materially from these estimates.
Risks and Uncertainties
In March 2020, the World Health Organization declared
the outbreak of a novel coronavirus (“COVID-19”) as a pandemic, which continues to spread throughout the World. The Company
is actively monitoring the COVID-19 pandemic, the restrictive measures imposed to combat its spread and their potential impact on each
of its operating segments. While the Company believes that in fiscal 2022 and through the first quarter of fiscal 2023, there has been
significant improvement in the impact of the pandemic and the related measures, there is uncertainty around the duration and ongoing impact,
if any, of COVID-19 related to both known and unknown risks, including future quarantines, closures and other restrictions resulting from
the outbreak, and the Company’s operations and its customers and partners may continue to be impacted.
In February 2022, the Russian Federation and Belarus
commenced a military action with the country of Ukraine. As a result of this action, various nations, including the United States
of America, have instituted economic sanctions against the Russian Federation and Belarus. Further, the impact of this action and related
sanctions on the world economy are not determinable as of the date of these financial statements and the specific impact on the Company’s
financial condition, results of operations, and cash flows related to IDW Publishing’s foreign licenses is also not determinable
as of the date of these financial statements.
On March 10, 2023, Silicon Valley Bank (“SVB”) was shut
down, followed on March 11, 2023 by Signature Bank and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as
receiver for those banks. Since that time, there have been reports of instability at other U.S. banks, including First Republic. The Company
maintains an account at First Republic and certain customers make payments to the Company via that account, although the Company does
not generally maintain significant deposits in that account beyond the short term. If First Republic were to fail, we may not be able
to access the payments made by those of our customers who make payments via that account on a timely basis, if at all. Despite the steps
taken to date by U.S. agencies to protect depositors, the follow-on effects of the events surrounding the SVB and Signature Bank failures
and pressure on other banks are unknown, could include failures of other financial institutions to which we face direct or more significant
exposure, and may lead to significant disruptions to our operations, financial position, and reputation. The extent of such impacts
is uncertain, and there may be additional risks that we have not yet identified. We are taking steps to identify any potential impact
and minimize any disruptions to our operations. However, we cannot guarantee that we will be able to avoid negative consequences
directly or indirectly from the foregoing events or other impacts on U.S. financial institutions.
Segment Information
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 280, Segment Reporting, establishes standards for reporting information about
operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and
in assessing performance.
The Company’s chief operating decision maker
is the Chief Executive Officer, who reviews the financial performance and the results of operations of the segments prepared in accordance
with U.S. GAAP when making decisions about allocating resources and assessing performance of the Company (see Note 5).
The Company’s principal business consists
of the following segments:
| i. | IDWP
Publishing (“IDWP”) creates comic books, graphic novels and digital content through its imprints IDW, Top Shelf Productions
and Artist’s Editions; and |
| ii. | IDW
Entertainment (“IDWE”) is a production company and studio that develops, produces, and distributes content based on IDWP’s
original copyrighted intellectual property (“IP”), published in the form of comic books, graphic novels and any other forms
of print publication, for a variety of formats including film and television. |
Allowance for Doubtful Accounts
Trade accounts receivables are recorded at the
invoiced amount and are generally unsecured as they are uncollateralized. The Company provides an allowance for doubtful accounts to reduce
receivables to their estimated net realizable value. Judgement is exercised in establishing allowances and estimates are based on the
customers’ payment history and liquidity. Any amounts that were previously recognized as revenue and subsequently determined to
be uncollectible are charged to bad debt expense included in selling, general and administrative expense in the accompanying condensed
consolidated statements of operations. The Company had an allowance for doubtful accounts of $0 as of January 31, 2023 and October 31,
2022.
Television Costs
The Company capitalizes television production,
participation and residual costs and amortizes them over the applicable product life cycle based upon the ratio of the current period’s
revenues to the estimated remaining total revenues (“Ultimate Revenues”) for each production. If the Company’s estimate
of Ultimate Revenues decreases, amortization of film and television costs may be accelerated. Conversely, if the Company’s estimate
of Ultimate Revenues increases, film and television cost amortization may be slowed. For television series, Ultimate Revenues include
revenues that are expected to be earned within ten years from delivery of the first episode, or if still in production, five years from
delivery of the most recent episode. Advertising, marketing, general and administrative costs are expensed as incurred.
Every quarter, the Company undertakes an analysis
to support its content amortization expense. Critical assumptions used in determining content amortization include: (i) determining the
grouping of contents (ii) the application of an ultimate revenue forecast model based on the contracts of televisions, (iii) gathering
the schedules of delivered television episodes from the relative customers, (iv) calculating current period amortization, (v) assessing
the accuracy of the Company’s forecasts.
The Company continually reviews its estimates
and contracts and revises its assumptions if necessary. Any material adjustments from the Company’s review of the amortization are
applied prospectively in the period of the change for assets.
With respect to television series or other television
productions intended for broadcast, the most sensitive factors affecting estimates of Ultimate Revenues are program ratings and the strength
of the advertising market. Television development costs for projects that have been abandoned or have not been set for production within
three years are generally written off in the relevant period.
Television costs are stated at the lower of cost
less accumulated amortization or fair value. The Company evaluates impairment by the fair value of television costs at the individual
level by considering expected future revenue generation, when an event or change in circumstances indicates a change in the expected revenue
of the television costs or that the fair value of a film or film group may be less than unamortized costs.
IDWE regularly enters into agreements for the
production of its television shows. The agreements provide for the rights and obligations related to the agreement including timing, delivery,
and payments. IDWE capitalizes the resulting production costs under the agreements in production cost inventory as payments are made or
when the products or services are delivered. Amortization of television costs during the three months ended January 31, 2023 and 2022
were a recoupment of $166,000 and amortization of $999,000, respectively.
Variable Interest Entities
The Company, through its subsidiary IDWE has arrangements
with seven special-purpose entities (“SPEs”). Some SPEs were formed for the sole purpose of providing production services
of a television pilot and series in Canada, and other SPEs were formed for production and writing purposes. The SPEs are independently
owned companies that are effectively controlled by IDWE and are parties to the related bank production financing arrangements. The Company
has determined that SPEs are variable interest entities (“VIEs”) and that the Company is the primary beneficiary of the SPEs
activities and was the obligor on the SPEs’ debt. All financial activity of the SPEs has been included in IDWE’s financial
statements, which are part of these condensed consolidated financial statements. IDWE is not obligated to provide any support to the VIE’s
and therefore, there are no additional losses foreseen. The SPEs have finished all the productions and these shows have been delivered.
All outstanding loans and other obligations have been paid off and all bank accounts have been closed. The carrying amounts and classification
of the VIEs’ assets are presented below:
(in thousands) | |
January 31, 2023 | | |
October 31, 2022 | |
Cash and cash equivalents | |
$ | - | | |
$ | 126 | |
Revenue Recognition
The Company applies the five-step approach as
described in ASC 606, Revenue from Contracts with Customers, which consists of the following: (i) identifying the contract with
a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the
transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance
obligation.
IDWP generates revenue primarily from the sale
and licensing of comic books, graphic novels, digital content, and games through IDWP’s imprints IDW, Top Shelf, and Artist’s
Editions. Revenue from direct market and book market sales of comic books and graphic novels is recognized, net of an allowance for estimated
sales returns, at the later of the time of the On Sale Date (“OSD”) or shipment by IDWP’s distributors to the distributors’
customers. Revenue from direct-to-consumer sales of comic books, graphic novels, and games is recognized at the later of the OSD or shipment
from the printer or third-party logistics warehouse to the customer. Licensing revenues are recognized upon execution of the agreement
for such rights, and other creative revenues are recognized upon completion of services rendered on a contractual basis.
IDWE generates revenue primarily from the licensing
and distribution of content across various platforms and formats to audiences globally including television series and films. IDWE’s
revenue is recognized when the content promised in an executed contract is transferred to the customer in an amount that reflects the
consideration to which the Company expects to be entitled in exchange for the content. Revenue is also generated from serving as a co-studio
and executive producer of content across various platforms and formats to audiences globally including television series and films. This
revenue is recognized when the services promised in the contract are transferred to the customer in an amount that reflects the consideration
to which the Company expects to be entitled in exchange for the services. IDWE also earns revenue from the sale of the option to purchase
the media rights for IDWP properties to studios and streamers. This revenue is recognized when the goods promised in the contract are
transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the
goods.
IDWE enters into production agreements which provide
for the rights and obligations related to the agreement including timing, delivery, and payments. In certain productions in which IDWE
is the distributor, IDWE has the obligation to pay artist, director, and writer guilds for residuals for the creative writers of content.
In addition, IDWE has the right to receive participation rights recoupment based on viewership of the cumulative production. The Company
is unable to make an estimate as the recoupment is based on future viewership and therefore revenue will be recognized at a future date
once the amount is known.
IDWE’s production activities included some
of those provided by Canadian SPEs, and some of those productions qualified for tax credits in Canada. These credits were recorded as
either revenue or reductions in production cost when the SPEs become entitled to the Canadian tax credits. The Canada Revenue Agency (“CRA”)
has completed the audit on these productions and the related final tax refunds have been reflected in the Company’s condensed consolidated
statement of operations in the periods they were received.
The timing of the Company’s revenue recognition
may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and the Company
has an unconditional right to payment. Alternatively, when payment precedes the satisfaction of performance obligations, the Company records
a contract liability on the balance sheets within deferred revenue until the performance obligations are satisfied.
In the ordinary course of business, the Company’s
reportable segments enter into transactions with one another. The most common types of intersegment transactions include IDWE obtaining
rights to produce television series based on content created by IDWP. All intersegment transactions are eliminated in consolidation and,
therefore, do not affect consolidated results.
Revenue Recognition When Right of Return Exists
IDWP’s books market distributor offers a
right of return to retail customers with no expiration date in accordance with general industry practices. IDWP generally does not offer
the right of return on the sale of comic books. Sales returns allowances represent a reserve for IDWP products that may be returned due
to dating, competition or other marketing matters, or certain destruction in the field. Sales returns are generally estimated and recorded
based on historical sales and returns experience and current trends that are expected to continue. As of January 31, 2023 and October
31, 2022, the Company’s estimated returns were $89,000 and $110,000, respectively.
Direct Cost of Revenues
Direct cost of revenues excludes depreciation
and non-production cost amortization expense. Direct cost of revenues for IDWP consists primarily of printing expenses and costs of artists
and writers. Direct cost of revenues for IDWE consists primarily of the amortization of production costs that were capitalized during
the production of the television episodes, residuals, accrued third party participation, and distribution fees directly related to revenue.
Deferred Revenue
The Company records deferred revenue upon invoicing
for contracted commitments for products and services. Revenue is recognized on the date such product or service is provided or delivered
in accordance with the contract.
Concentration Risks
Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash, cash equivalents, and trade accounts receivable. The Company
holds cash and cash equivalents at major financial institutions, which often exceed Federal Deposit Insurance Corporation’s insurance
limits. Historically, the Company has not experienced any losses due to such concentration of credit risk.
IDWP has three significant customers, Penguin
Random House (“PRH”), Scholastic Inc. (“Scholastic”), and, for periods prior to June 2022, Diamond Comic Distributors,
Inc. (“Diamond”), that pose a concentration risk.
Revenues from PRH, IDWP’s book market distributor
and, beginning June 1, 2022, IDWP’s direct market distributor, represented 70.1% and 21.7% of condensed consolidated revenue for
the three months ended January 31, 2023 and 2022, respectively. The receivable balances represented 65.0% and 63.9% of condensed consolidated
receivables at January 31, 2023 and October 31, 2022, respectively.
Revenues from Scholastic, a leading distributor
of children’s books, represented 12.0% and 1.6% of condensed consolidated revenue for the three months ended January 31, 2023 and
2022, respectively.
Revenues from Diamond, which was IDWP’s
direct market distributor until June 1, 2022, represented 0% and 15.0% of condensed consolidated revenue for the three months ended January
31, 2023 and 2022, respectively.
IDWE has two significant customers, Netflix and
Fifth Season (formerly Endeavor Content LLC), that pose a concentration risk.
Revenue from Netflix, a leading streaming video
subscription service, represented 0% and 35.4% of condensed consolidated revenue for the three months ended January 31, 2023 and 2022,
respectively.
The receivable balances from Fifth Season represented
15.3% and 17.7% of condensed consolidated receivables at January 31, 2023 and October 31, 2022, respectively.
Revision of previously issued consolidated
financial statements
During the quarter ended April 30, 2022, the Company
identified errors that caused an understatement of previously reported current liabilities and accumulated deficit. Specifically, the
error related to the lack of accrual for certain actor residuals related to Wynonna Earp incurred in 2016 and 2017. The correction of
these errors increased accumulated deficit by $589,000 as of October 31, 2021. This error had no impact on net loss, loss per share, or
net cash provided by operating activities for the year ended October 31, 2021.
In accordance with Staff Accounting Bulletin (“SAB”)
No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, the Company evaluated the errors and determined that the impact was not material to any of the
Company’s previously issued financial statements.
The following table presents a summary of the
impact by financial statement line item of the corrections as of October 31, 2021:
| |
As of October 31, 2021 | |
(in thousands) | |
As
Previously
Reported | | |
Adjustment | | |
As Revised | |
Consolidated Balance Sheet | |
| | |
| | |
| |
Accumulated deficit | |
$ | (80,114 | ) | |
$ | (589 | ) | |
$ | (80,703 | ) |
Total stockholders’ equity | |
$ | 22,637 | | |
$ | (589 | ) | |
$ | 22,048 | |
Commitments and Contingencies
The Company accrues for loss contingencies when
both (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that a liability
had been incurred at the date of the consolidated financial statements and (b) the amount of loss can reasonably be estimated. When
the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range, the Company records its best estimate
within the range. When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in
the range. The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may
have been incurred. Gain contingencies are not recorded until they are realized.
Recently Issued Accounting Pronouncements Adopted
In November 2021, the FASB issued ASU 2021-10, Government
Assistance (Topic 832), which requires business entities to disclose information about transactions with a government that are
accounted for by applying a grant or contribution model by analogy (for example, IFRS guidance in IAS 20 or guidance on contributions
for not-for-profit entities in ASC 958-605). For transactions within scope, the new standard requires the disclosure of information about
the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line
items affected by the transaction. The new guidance is effective for annual reporting periods beginning after December 15, 2021. Early
application of the amendment is permitted. The Company adopted the ASU on May 1, 2022 and applied its provisions prospectively. In connection
with this adoption the Company increased its disclosures with respect to government assistance beginning in the third quarter of fiscal
year 2022 (See Note 14).
Recently Issued Accounting Standard Not Yet
Adopted
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments—Credit Losses (Topic 326), that changes the impairment model for most financial assets and certain
other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected
loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities
with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized
as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly
more information about allowances, credit quality indicators and past due securities. The new guidance becomes effective for fiscal years
beginning after December 15, 2022, though early adoption is permitted. The new provisions will be applied as a cumulative-effect adjustment
to retained earnings. The Company will adopt the new standard on November 1, 2023. The Company is evaluating the impact that the new standard
will have on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the measurement
of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value
of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair
value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds
the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on
the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective
for goodwill impairment tests in fiscal years beginning after December 15, 2022, though early adoption is permitted. The Company will
adopt this guideline prospectively for the fiscal year beginning November 1, 2023. The Company does not believe that the adoption of this
new accounting guidance will have a material impact on its condensed consolidated financial statements.
Note 2—(Loss) Earnings Per Share
Basic (loss) earnings per share is computed by
dividing net (loss) income attributable to all classes of common stockholders by the weighted average number of shares of all classes
of common stock outstanding during the applicable period. Diluted (loss) earnings per share is computed in the same manner as basic (loss)
earnings per share except that the number of shares is increased to include additional shares that would have been outstanding had the
potentially dilutive shares been issued and reduced by the number of shares the Company could have repurchased with proceeds from issuance
of potentially dilutive shares using the treasury stock method, unless the effect of such increase would be anti-dilutive. The Company
excluded 1,177,303 and 77,665 shares of unvested restricted Class B common stock, options to purchase 996,357 and 930,959 shares of Class
B common stock and warrants to purchase 187,579 and 187,579 shares of Class B common stock from the calculation of diluted (loss) earnings
per share for the three months ended January 31, 2023 and 2022, respectively, as the effect would have been anti-dilutive. Therefore,
basic and diluted (loss) earnings per share are the same for the three months ended January 31, 2023 and 2022.
Note 3—Equity
Voting Privileges and Protective Features
Each holder of outstanding shares of Class B common
stock is entitled to cast the number of votes equal to one tenth of the whole shares of Class B common stock held by such holder. Each
holder of outstanding shares of Class C common stock is entitled to cast the number of votes equal to three times the whole shares of
Class C common stock held by such holder. Each series of preferred stock, if any, are designated and issued, will have such number of
shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by
the Company’s Board of Directors, which may include, among others, dividends, voting rights, and liquidation preferences.
Warrants
Detailed below are outstanding warrants issued
to the Company’s Chairman associated with the two loans made by the Chairman to the Company, which have subsequently been repaid.
The exercise price and expiration of these warrants were amended on March 29, 2022. The warrants to purchase 98,336 shares had an original
exercise price of $26.44 per share and were set to expire on March 30, 2022. The warrants to purchase 89,243 shares had an original exercise
price of $42.02 per share. No additional compensation cost was incurred from the modification.
Number of Shares | |
Type of Share | |
Exercise Price | | |
Expiration | |
98,336 | |
Class B common stock | |
$ | 1.94 | | |
| August 21, 2023 | |
89,243 | |
Class B common stock | |
$ | 1.94 | | |
| August 21, 2023 | |
Note 4—Stock Based Compensation
2019 Stock Option and Incentive Plan
On March 14, 2019, the Company’s Board of
Directors adopted the 2019 IDW Stock Option and Incentive Plan (“2019 Incentive Plan”) to provide incentives to executive
officers, employees, directors, and consultants of the Company and/or its subsidiaries. The Plan, including amendments approved through
April 5, 2022, provides for the issuance of up to 2,550,000 shares of Class B Common stock. Options are generally granted with an exercise
price equal to the market price of the Company’s stock at the date of grant; those options generally vest based on 3 years of continuous
service and have 10-year contractual terms. As of January 31, 2023, 239,512 shares remained available to be awarded under the 2019 Incentive
Plan.
The following table summarizes stock option activity
during the three months ended January 31, 2023.
| |
Number of Options | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (in years) | | |
Aggregate Intrinsic
Value (in thousands) | |
Outstanding at October 31, 2022 | |
| 996,357 | | |
$ | 3.13 | | |
| 8.88 | | |
$ | - | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Cancelled / Forfeited | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding at January 31, 2023 | |
| 996,357 | | |
$ | 3.13 | | |
| 7.89 | | |
$ | - | |
Exercisable at January 31, 2023 | |
| 339,796 | | |
$ | 4.48 | | |
| 5.94 | | |
$ | - | |
At January 31, 2023, unamortized stock compensation
for stock options was $806,000, with is expected to be recognized over the next 3 years.
Restricted Stock
The fair value of restricted shares of the Company’s
Class B common stock is determined based on the closing price of the Company’s Class B common stock on the grant date. Share awards
generally vest on a graded basis over three years of service.
A summary of the status of the Company’s grants of restricted
shares of Class B common stock is presented below:
| |
Number of Non-vested Shares | | |
Weighted Average Grant Date Fair Value | |
Outstanding at October 31, 2022 | |
| 1,154,136 | | |
$ | 1.93 | |
Granted | |
| 48,283 | | |
| 1.17 | |
Vested | |
| (25,116 | ) | |
| 1.48 | |
Cancelled / Forfeited | |
| - | | |
| - | |
Non-vested shares at January 31, 2023 | |
| 1,177,303 | | |
$ | 1.91 | |
On November 16, 2022, 26,500 restricted shares
of the Company’s Class B common stock were issued to non-employee consultants who perform services for the Company with a vesting
period of 3 years.
On January 5, 2023, 21,783 restricted shares of
the Company’s Class B common stock were issued to members of the Company’s Board of Directors which vested immediately upon
grant.
At January 31, 2023, there was $1,806,000 of total
unrecognized compensation cost related to non-vested restricted shares stock-based compensation arrangements, which is expected to be
recognized over the next 4.25 years.
Non-cash compensation for stock options and restricted
stock issued to employees and non-employees included in selling, general and administrative expenses was $248,000 and $144,000 during
the three months ended January 31, 2023 and 2022, respectively.
Note 5—Business Segment Information
The Company has the following reportable business
segments: IDWP, and IDWE.
The Company’s reportable segments are distinguished
by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly
reviewed by the Company’s chief operating decision maker. The Company evaluates the performance of its business segments based primarily
on operating income. The accounting policies of the segments are the same as the accounting policies of the Company as a whole.
Operating results and assets for the business segments of the Company
are as follows:
(in thousands) | |
IDWP | | |
IDWE(a) | | |
IDWMH | | |
Total | |
| |
| | |
| | |
(unallocated overhead) | | |
| |
Three months ended January 31, 2023 | |
| | |
| | |
| | |
| |
Revenues | |
$ | 6,577 | | |
$ | 16 | | |
$ | - | | |
$ | 6,593 | |
(Loss) income from operations | |
| (335 | ) | |
| (445 | ) | |
| (1,210 | ) | |
| (1,990 | ) |
Net (loss) income | |
| (307 | ) | |
| (481 | ) | |
| (1,210 | ) | |
| (1,998 | ) |
Three months ended January 31, 2022 | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 7,531 | | |
$ | 4,318 | | |
$ | - | | |
$ | 11,849 | |
Income (loss) from operations | |
| 512 | | |
| 1,970 | | |
| (498 | ) | |
| 1,984 | |
Net income (loss) | |
| 512 | | |
| 1,985 | | |
| (508 | ) | |
| 1,989 | |
| (a) | IDWE
includes Thought Bubble LLC and Word Balloon LLC which consist of only television costs. |
Total Assets
At January 31, 2023 total assets were $14,019,000
at IDWP, $3,164,000 at IDWE, and $8,714,000 at IDWMH.
At October 31, 2022 total assets were $13,650,000
at IDWP, $3,663,000 at IDWE, and $10,628,000 at IDWMH.
Note 6—Trade Accounts Receivable, net and Deferred Revenue
Trade accounts receivable consists of the following:
(in thousands) | |
January 31, 2023 | | |
October 31, 2022 | |
Trade accounts receivable | |
$ | 5,750 | | |
$ | 6,558 | |
Less allowance for sales returns | |
| (89 | ) | |
| (110 | ) |
Trade accounts receivable, net | |
$ | 5,661 | | |
$ | 6,448 | |
Changes in deferred revenue consist of the following:
(in thousands) | |
Three months
ended
January 31,
2023 | |
Beginning Balance at October 31, 2022 | |
$ | - | |
Performance obligations satisfied during the period that were included in the deferred revenue balance at the beginning of the year | |
| - | |
Increases due to invoicing prior to satisfaction of performance obligations | |
| 42 | |
Ending Balance at January 31, 2023 | |
$ | 42 | |
Contract liabilities are recorded as deferred revenue when
customer payments are received in advance of the Company meeting all the revenue recognition criteria under ASC 606. Generally, the
remaining performance obligations will be satisfied within twelve months after prepayment. During the three months ended January 31, 2023,
significant changes in the deferred revenue balances were the result of net cash received related to executive producing fees for an IDWE
project in production.
Note 7— Inventory
Inventory consists of the following:
(in thousands) | |
January 31, 2023 | | |
October 31, 2022 | |
Work in progress | |
$ | 518 | | |
$ | 454 | |
Finished goods | |
| 3,700 | | |
| 3,831 | |
Total | |
$ | 4,218 | | |
$ | 4,285 | |
Note 8—Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
(in thousands) | |
January 31, 2023 | | |
October 31, 2022 | |
Royalties and deposits | |
$ | 1,618 | | |
$ | 1,242 | |
Insurance | |
| 489 | | |
| 672 | |
Games printing | |
| - | | |
| 104 | |
Employer retention credit receivable (see Note 14) | |
| - | | |
| 436 | |
Tradeshows | |
| 68 | | |
| - | |
Other prepaids | |
| 220 | | |
| 260 | |
Total | |
$ | 2,395 | | |
$ | 2,714 | |
Note 9—Property and Equipment, net
Property and equipment consist of the following:
(in thousands) | |
January 31, 2023 | | |
October 31, 2022 | |
Equipment | |
$ | 407 | | |
$ | 521 | |
Furniture and Fixtures | |
| 304 | | |
| 310 | |
Leasehold improvements | |
| 198 | | |
| 169 | |
Computer software | |
| - | | |
| 24 | |
Total | |
| 909 | | |
| 1,024 | |
Less accumulated depreciation | |
| (222 | ) | |
| (299 | ) |
Property and equipment, net | |
$ | 687 | | |
$ | 725 | |
Depreciation expense totaled $44,000 and $40,000
for the three months ended January 31, 2023 and 2022, respectively. During the three months ended January 31, 2023, the Company disposed
of computers, computer software, furniture, and other equipment taken out of service, resulting in the removal of $157,000 from gross
property and equipment and $121,000 from accumulated depreciation and a loss on the disposal of $36,000 recorded in other expenses in
the condensed consolidated statement of operations.
Note 10—Intangible Assets, net
Intangible assets consist of the following:
(in thousands) | |
Amortization Period | |
January 31, 2023 | | |
October 31, 2022 | |
Licensing contracts | |
7 years | |
$ | 893 | | |
$ | 893 | |
Software | |
3-5 years | |
| 966 | | |
| 769 | |
Total amortized intangible assets | |
| |
| 1,859 | | |
| 1,662 | |
Database development costs | |
| |
| 68 | | |
| 235 | |
Total in-process intangible assets | |
| |
| 68 | | |
| 235 | |
Less accumulated amortization | |
| |
| (1,196 | ) | |
| (1,038 | ) |
Intangible assets, net | |
| |
$ | 731 | | |
$ | 859 | |
Amortization expense totaled $158,000 and $43,000 for the three months
ended January 31, 2023 and 2022, respectively.
Note 11—Television costs, net and Amortization
Television costs consist of the following:
(in thousands) | |
January 31, 2023 | | |
October 31, 2022 | |
In production | |
$ | - | | |
$ | - | |
In development | |
| 1,536 | | |
| 1,486 | |
Total | |
$ | 1,536 | | |
$ | 1,486 | |
| |
Three Months Ended January 31 | |
(in thousands) | |
2023 | | |
2022 | |
Television cost amortization | |
$ | (166 | ) | |
$ | 999 | |
Total | |
$ | (166 | ) | |
$ | 999 | |
During the three months ended January 31, 2023, the Company recouped
$166,000 of costs previously expensed. Amortization expense for television costs is expected to be approximately $0 over the remaining
nine months of fiscal 2023. As a result of management’s period assessment of in development projects, no write-offs were recorded
during the three months ended January 31, 2023 or 2022.
Note 12—Accrued Expenses
Accrued expenses consist of the following:
(in thousands) | |
January 31, 2023 | | |
October 31, 2022 | |
Royalties | |
$ | 418 | | |
$ | 813 | |
Residuals | |
| 101 | | |
| 65 | |
Payroll, bonus, accrued vacation and payroll taxes | |
| 1,543 | | |
| 1,623 | |
Executive producing fees | |
| 325 | | |
| 325 | |
Printing | |
| - | | |
| 173 | |
Other | |
| 323 | | |
| 354 | |
Total | |
$ | 2,710 | | |
$ | 3,353 | |
Note 13—Commitments and Contingencies
Lease Commitments
The Company has various lease agreements with
remaining terms up to 4.5 years, including leases of office space and equipment. Some leases include options to purchase, terminate or
extend for one or more years. These extension options are included in the lease term when it is reasonably certain that the option will
be exercised.
The assets and liabilities from operating leases
are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s
secured incremental borrowing rates or implicit rates, when readily determinable. Short-term leases, which have an initial term of 12
months or less, are not recorded on the balance sheet.
The Company’s operating leases do not provide
an implicit rate that can readily be determined. Therefore, the Company estimated its incremental borrowing rate to discount the lease
payments based on information available at either the implementation date of Topic 842 or at lease commencement for leases entered thereafter.
The Company’s weighted-average remaining
lease term relating to its operating leases is 3.82 years, with a weighted-average discount rate of 5.73% as of January 31, 2023.
The Company recognized lease expense for its operating
leases of $86,000 and $125,000 for the three months ended January 31, 2023 and 2022, respectively. The cash paid under operating leases
was $84,000 and $157,000 for the three months ended January 31, 2023 and 2022, respectively.
At January 31, 2023, the Company had a right-of-use-asset
related to operating leases of $2,028,000 and accumulated amortization related to operating leases of $940,000, both of which are included
as a component of right-of-use assets. At October 31, 2022, the Company had a right-of-use-asset related to operating leases of $2,028,000
and accumulated amortization related to operating leases of $871,000.
As of January 31, 2023, future minimum lease payments required under
operating leases are as follows:
Maturity of Lease Liability (in thousands) | |
Total | |
Fiscal years ending October 31: | |
| |
Rest of 2023 | |
$ | 255 | |
2024 | |
| 342 | |
2025 | |
| 320 | |
2026 | |
| 191 | |
Thereafter | |
| 146 | |
Total minimum lease payments | |
| 1,254 | |
Less: imputed interest | |
| (133 | ) |
Present value of future minimum lease payments | |
$ | 1,121 | |
Gain Contingencies
On February 15, 2021, the Company consummated
the sale of CTM Media Group (“CTM”) to an assignee of Howard S. Jonas, the Company’s Chairman. CTM was previously reported
as a discontinued operation in the Company’s condensed consolidated financial statements. Per the sale agreement, the only remaining
clause states that the Company is entitled to a contingent payment if CTM is sold within 36 months of the sale for more than $4.5 million.
Note 14—Employee Retention Credit
The Coronavirus Aid, Relief and Economic Securities
Act (“CARES Act”) provides for an employee retention credit (“ERC”) that is a refundable tax credit against certain
employer taxes. On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, expanded certain benefits made
available under the CARES Act, including modifying and extending the ERC. As modified, the ERC provides eligible employers with less than
500 employees a refundable tax credit against the employer’s share of social security taxes. The ERC is equal to 70% of qualified
wages paid to employees during calendar 2021 for a maximum credit per employee of $7,000 per employee for each calendar quarter through
December 31, 2021.
The Company qualifies for the tax credit under
the CARES Act. During the fiscal year ended October 31, 2022, the Company recognized an ERC for qualified wages paid between January
1, 2021 and March 31, 2021 of $564,000 as an offset to payroll tax expenses within selling, general and administrative expenses in the
Company’s consolidated statements of operations. The Company received $128,000 of the refund in cash in the third quarter of fiscal
2022 and $436,000 in cash in the first quarter of fiscal 2023. As of January 31, 2023, the Company has a $0 receivable balance for unsettled
ERCs.
We accounted for the employee retention credit by
analogy to International Accounting Standards (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance,
of International Financial Reporting Standards (IFRS). Under an IAS 20 analogy, a business entity would recognize the credit on a
systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant/ tax credit is intended to compensate
when there is reasonable assurance, and it is probable that the entity will comply with any conditions attached to the grant and the grant/tax
credit will be received.
Note 15—Subsequent events
The Company has evaluated subsequent events through
March 15, 2023, the date on which the condensed consolidated financial statements were available to be issued. There were no material
subsequent events that require recognition or additional disclosures in these condensed consolidated financial statements, except as follows:
On February 10, 2023, options to purchase 486,166
shares of Class B common stock were forfeited in connection with the termination of the employment of the Company’s Vice Chairman.
The change will result in the reversal of $36,000 stock compensation recorded in selling, general, and administrative expenses in our
condensed consolidated statement of operations during the second quarter of fiscal 2023. Additionally, $615,000 of unamortized stock compensation
reported in Note 4 will not be recognized in future periods. The employee held 162,056 of vested stock options at the date of termination
which will expire eighteen months following the termination date.