Business Context and Reporting Period
Company: Genius Brands International, Inc. (GNUS)
Filing Type: Form 8-K (Current Report)
Date of Report: October 26, 2021
Event: Entry into a Material Definitive Agreement (Arrangement Agreement) to acquire 100% of Wow Unlimited Media Inc. ("Wow") via a Plan of Arrangement under British Columbia law. The transaction is expected to close in the first half of 2022, subject to conditions.
Key Financial Metrics and Transaction Terms
Consideration for Wow Shareholders:
- Cash: CAN$1.169 per share.
- Stock: 0.271 of an Exchangeable Share (exchangeable for Genius common stock) or 0.271 Genius common shares directly.
Debt and Options Treatment:
- Wow's 9.5% convertible debenture notes will convert to Wow common shares and receive the same consideration as shareholders on an "as-converted" basis.
- Outstanding "in-the-money" options will be converted into awards relating to Genius common stock or exercised by departing optionholders.
Non-GAAP Financial Measures (Wow Unlimited Media Inc.):
The filing includes a reconciliation of Last Twelve Months (LTM) EBITDA to Net Loss for Wow as of June 30, 2021:
| Item (in thousands) | USD | CAD |
|---|---|---|
| Net Loss (GAAP) | $1,419 | $1,754 |
| EBITDA (Non-GAAP) | $5,148 | $6,435 |
Year-Over-Year EBITDA Growth: The press release disclosed a 45% year-over-year increase in EBITDA for the six months ended June 30, 2021 (CAD $3,724) compared to the same period in 2020 (CAD $(629)).
Material Changes and Conditions
Conditions to Closing:
- Approval by two-thirds of Wow shareholders and Noteholders.
- Final Court order approval from the Supreme Court of British Columbia.
- NASDAQ Capital Market listing approval for the Arrangement Securities.
- Regulatory clearances, including under the Investment Canada Act.
- Completion of a pre-acquisition reorganization of Wow to maximize tax credit eligibility.
Termination Fee: If the agreement is terminated due to Wow's failure to satisfy certain closing conditions, Wow is obligated to pay Genius a fee of CAN$250,000.
Outside Date: The agreement must be consummated by March 15, 2022, subject to a potential 60-day extension for governmental clearances.
Guidance, Outlook, and Risks
Management Commentary: Management utilizes LTM EBITDA to evaluate operating performance, excluding items such as stock-based compensation, restructuring charges, and write-offs of financing costs. The transaction is intended to consolidate intellectual property assets.
Risks and Contingencies:
- Failure to obtain shareholder, Noteholder, or Court approval.
- Failure to receive regulatory clearances (e.g., Investment Canada Act).
- Material Adverse Effect on either party prior to closing.
- Dilution to existing Genius shareholders due to the issuance of Arrangement Securities.
- Changes in Wow's board recommendation regarding the Arrangement.
Investor Verification Checklist
- Verify the final exchange ratio and cash consideration per share in the definitive Arrangement Agreement (Exhibit 2.1).
- Confirm the status of the Supreme Court of British Columbia hearings and the final Court order.
- Monitor the progress of regulatory approvals, specifically under the Investment Canada Act.
- Review the impact of the share issuance on Genius Brands' existing shareholder equity and potential dilution.
- Assess the accuracy of the non-GAAP EBITDA adjustments provided for Wow, particularly the write-off of financing costs and de-recognition of tangible benefits.