Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.12pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.18pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.07pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
failures+3
unable+2
decline+2
challenges+1
strain+1
Positive rising
stability+2
profitability+1
able+1
profitable+1
achieve+1
Risk Factors (Item 1A)
8,596 words
Item 1A. Risk Factors.
RISK FACTORS
Our business, operating results or financial condition could be materially adversely affected by any of the following risks associated with any one of our businesses, as well as the other risks highlighted elsewhere in this document. The trading price of our common stock could decline due to any of these risks. Note that references to “our”, “us”, “we”, “the Company”, etc. used in each risk factor below refers to the business about which such risk factor is provided.
Risks Associated with Our Businesses
We have a history of continued operating losses at IDWE and IDWP and cannot be certain of our future profitability.
We had accumulated a net deficit through October 31, 2022, of approximately $81.5 million . Prior to the CTM Sale, which closed on February 15, 2021, and until the start of the COVID-19 pandemic in March 2020, we often used cash flows from CTM to partially provide funding for corporate overhead and for our IDWP and IDWE operations. In fiscal 2022, on a consolidated basis, the Company had negative cash flows of $7.5 million. In fiscal 2021, the Company on a consolidated level generated cash flow of $5.4 million, as a result of net proceeds from the offering on August 6, 2021, of $9.4 million.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
loss+6
discontinued+1
closed+1
shut+1
lack+1
Positive rising
gain+3
creative+2
exclusive+1
improved+1
profitability+1
MD&A (Item 7)
3,548 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in this Annual Report. The forward-looking statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.
We may incur losses in the foreseeable future as we invest in our IDWE and IDWP businesses and operations. IDWE’s revenues depend on the delivery of properties and provision of services, which can vary significantly from period to period and be unpredictable. While in certain prior periods, our Chairman of the Board from time to time provided us with financing on favorable terms and conditions, there is no guarantee that we will be able to secure financing from our Chairman of the Board or other sources in the future, or, if available, the terms on which such financing may be provided. The time required for us to become profitable is uncertain, and there can be no assurance that we will obtain the financing required or achieveprofitability on a sustained basis, if at all. We expect that our results of operations may also fluctuate significantly in the future as a result of a variety of factors, including, without limitation: the impact of the COVID-19 pandemic, the ability to sell comic books, graphic novels, television and other media related sales to minimize the lag from negotiations to then sell in various theater forms as noted above with a quick enough turn around rate to establish profitability; our ability to attract, retain and motivate qualified personnel; specific economic conditions in the entertainment and publishing markets; and general economic conditions.
We will likely need additional capital to sustain our operations and will likely need to seek further financing to accelerate our growth, which we may not be able to obtain on acceptable terms or at all. If we are unable to raise additional capital, as needed, the future growth of our business and operations would be severely limited.
A factor limiting our growth, including our ability to enter our proposed markets, attract customers, and develop and deliver our products, is our limited capitalization overall and as compared to other companies in the industry. To sustain our operations, we will rely heavily on the stability and predictability from the publishing business. As these contracts can span out years into the future it allows us to have predictable cash flows and operating stability.
If we are unable to generate sufficient revenue and profits from our operations, we may decide to seek additional financing. It is possible we may need additional capital to bring our operations to a sustainable level over the next 15 months. In fiscal 2022, we raised $0, in fiscal 2021, we raised gross proceeds of $10,350,000 and in fiscal 2020 we raised gross proceeds of $12,300,000 inclusive of $4 million debt-to-equity conversion in equity financing. We believe that, in addition to the capital raised thus far, we may require up to an additional $7 to $10 million to satisfy our operating cash needs for the next 36 months after the raise. The above is premised on current operating metrics as we are aiming to become cash positive in 2024. However, there is no guarantee we will achieve our goal.
We may also seek additional financing to accelerate our growth. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of the Company held by existing shareholders will be reduced and our shareholders may experience significant dilution. In addition, new securities may contain rights, preferences or privileges that are senior to those of our Class B common stock. If we raise additional capital by incurring debt, this will result in increased interest expense. There can be no assurance that acceptable financing necessary to further implement our plan of operation can be obtained on suitable terms, if at all. Our ability to develop our business could suffer if we are unable to raise additional funds on acceptable terms, which would have the effect of limiting our ability to increase our revenues, develop our products, attainprofitable operations, which could result in a significant or complete loss of your investment.
Public health threats could have an adverse effect on the Company’s operations and financial results.
In early 2020, the spread of the COVID-19 virus resulted in a worldwide pandemic. We are actively monitoring the COVID-19 pandemic, the restrictive measures imposed to combat its spread and their potential and actual impact on each of our operating segments. While we believe that currently there has been significant improvement due to global and domestic vaccination efforts, we cannot predict the 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 our operations and our customers and partners may continue to be impacted.
In April 2020, as a result of the COVID-19 pandemic, IDWP’s direct-market distributor paused the release of new product, including IDWP’s, although such operations were subsequently restarted. Many retailers experienced closures, reduced operations, or de-prioritization of entertainment products, such as books and games, throughout the COVID-19 pandemic resulting in decreased sales of certain of IDWP’s products.
COVID-19 continues to impact domestic and international printing and shipping. Costs are beginning to level off as of the end of 2022 and the strain on the logistics network is easing, but prices and timing are still considerably higher than the pre-pandemic levels.
Additional closures, restrictions, or virus spikes could have a further negative impact on IDWP’s distribution channels and retail customers. We are unable to accurately predict the full impact that the COVID-19 pandemic will have on distributions, purchasing, sales, returns, cash receipts and overall revenue.
The COVID-19 pandemic resulted in the production of television shows being periodically suspended depending on local governmental authorities and regulatory requirements in place at any given time. Due to various uncertainties, including the ultimate geographic spread of the virus, the rise of variants that may occur, the severity of the disease, the duration of the outbreak, and actions that may be taken by governmental authorities, further production risks could arise.
For all these reasons, the COVID-19 pandemic could have a material adverse impact on our business and financial results.
Any loss of key personnel and the inability to attract and retain qualified employees could have a material adverse impact on our operations.
We are dependent on the continued services of key executives. The departure of key personnel without adequate replacement could severelydisrupt our business operations. Additionally, we need qualified managers and skilled employees with industry experience to operate our businesses successfully. From time to time there may be shortages of skilled labor which may make it more difficult and expensive for us to attract and retain qualified employees. If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our operations would be materially adversely affected.
Risks Related to IDWP
IDWP depends on one main distributor for its direct market and non-direct market publications and such dependence subjects IDWP to the risk that such distributor may be unable to perform its obligations to IDWP.
Historically, IDWP depended on Diamond and PRH, to distribute the vast majority of its publications. With the June 2022 change to PRH as IDWP’s direct market distributor, Diamond is now the company’s largest customer in that sales channel, as they have now become a wholesale client of PRH for IDWP products.
PRH has distributed substantially all of IDWP’s products to non-direct market accounts (i.e., bookstores, libraries, mass market) and, commencing in June 2022 began distributing to all of IDWP’s direct market accounts. Should PRH fail to perform its distribution obligations under the applicable distribution agreement or to experience financial difficulties that would hinder performance, distribution to the direct or non-direct market, respectively, would be significantly impaired in the short term, and IDWP’s ability to distribute and receive proceeds from its publications would be impaired which would have a material adverse impact on our business, prospects and financial condition.
IDWP may not be able to respond to changing consumer preferences and its sales may decline.
IDWP operates in highly competitive markets that are subject to rapid change, including changes in customer preferences. There are substantial uncertainties associated with IDWP’s efforts to develop successful publications and products for its customers. New fads, trends, and shifts in popular culture could affect the type of creative media consumers will purchase. Content in which IDWP has invested significant resources may fail to attract significant consumer demand at the time it is published. IDWP regularly makes significant investments in new products that may not be profitable, or whose profitability may be significantly lower than IDWP has experienced historically. A loss in sales due to the foregoing could have a material adverse effect on IDWP’s business, prospects and financial condition.
IDWP’s publications may be less successful than anticipated.
IDWP cannot accurately predict the commercial success of any of its publications because the revenue derived from the distribution of a publication depends primarily upon its acceptance by the public, which cannot be accurately predicted. The commercial success of a publication also depends upon the public’s acceptance of competing publications, critical reviews, the availability of alternative forms of entertainment and leisure time activities, piracy and unauthorized distribution of publications, general economic conditions, and other tangible and intangible factors, none of which can be predicted with certainty. Additionally, if the movies or television programs that IDWP licenses are not successful, or if the characters that IDWP licenses lose some of their popularity, IDWP’s ability to sell publications based on such characters would decline, which could have a material adverse effect on IDWP’s business, prospects and financial condition.
Significant returns of IDWP products sold to mass market stores may have a material impact on IDWP’s cash flow.
Through its distribution arrangement with PRH, IDWP sells its publications to bookstores, such as Barnes & Noble, in which PRH allows to be on a fully returnable basis. As a result, these customers can return publications to PRH for credit, which in turn is charged back to IDWP. There is no time limit on the customers’ right to return publications distributed to them. In addition to IDWP being charged back the wholesale cost of the publications, IDWP also incurs a return processing fee by PRH. Such returns and fees are credited against IDWP’s current sales revenue from PRH, which reduces IDWP’s cash flow and operating capital. Product returns are a normal part of book publishing and IDWP estimates and records a reserve for such returns based on its return history and current trends that are expected to continue. A significant over-estimation of demand for a publication by the mass market bookstores, however, could result in a larger-than-expected volume of returns that would significantly reduce IDWP’s cash flows and operating capital. Further, a general downturn in the economy may also result in significant returns as bookstores reduce their outstanding debts to improve their own cash flow. Any or all of these events that result in significant returns in excess of IDWP’s estimates could have a material adverse effect on IDWP’s revenue, cash flow and operating results.
If IDWP fails to maintain positive relationships with its key licensors, authors, illustrators and other creative talent, as well as to develop relationships with new licensors and creative talent, its business could be adversely affected.
IDWP’s business is highly dependent on maintaining strong relationships with the entertainment companies that license their entertainment properties to IDWP, and with authors, illustrators and other creative talent who produce the products that are sold to IDWP’s customers. Any weakening of these relationships, or the failure to develop successful new relationships, could have an adverse impact on IDWP’s business and financial performance. Effective January 1, 2023, our licenses for Transformers and GI Joe titles terminated. While the cancellation of the licenses for Transformers and GI Joe are anticipated to decrease revenues by approximately $1.2 million in fiscal year 2023, IDWP plans to mitigate the loss of revenue by enhancing our other key licensed brands through new initiatives for Star Trek , Godzilla , Dungeons & Dragons , and My Little Pony and an expansion of Teenage Mutant Ninja Turtles: The Last Ronin . We expect these efforts to offset any material impact on our gross margin from the loss of the licensed titles.
IDWP depends on freelance creators who choose how to spend their time and utilize their talents. It is important for IDWP to maintain strong relationships with those freelance creators, so they devote their time and talent to IDWP’s projects. IDWP’s inability to maintain and secure these relationships could have a material adverse effect on IDWP’s business, prospects and financial condition.
The competitive pressures IDWP faces in its business could adversely affect its financial performance and growth prospects.
IDWP is subject to significant competition, including from other publishers, many of which are substantially larger than IDWP and have much greater resources than it, such as Marvel Comics and DC Comics. To the extent IDWP cannot meet the challenges from existing or new competitors or develop new product offerings to meet customer preferences or needs, its revenues and profitability could be materially and adversely affected.
IDWP cannot control certain publication delays, cancellations and shipping delays which could adversely affect IDWP’s sales and its ability to meet delivery obligations.
IDWP does not control the decision to proceed with the production of publications based on characters that it licenses from others, and it does not have full control of the timing of the releases of those publications, which are often the subject to long and inflexible schedules. Disruptions, delays or cancellations to those schedules (especially those connected to COVID-19-related supply and logistics issues) could cause IDWP to incur additional costs, miss an anticipated publication date, endure long periods without publishing a publication or all of the above, which could hurt IDWP’s associated licensing programs and business.
IDWP cannot control the increased industry costs in shipping, printing and paper which in turn impact profitability.
Since 2020, the cost of shipping internationally has increased more than 50% above the long-term trend, established since the last recession in 2004, and is expected to continue to rise through 2022. Prices are expected to stabilize in 2023, but at a higher rate than previously seen in the industry. The strong demand for consumer goods is clogging transportation networks worldwide leading to the increased costs to ship internationally. Additionally, once on US soil the goods are subject to increased rail or trucking costs, roughly 23% over 2020. Increased capacity allows transporters to have leverage to continue to increase prices when negotiating contracts, affecting not only trucks and rail, but also seeping into warehouse costs as the supply-chain bottlenecks continue to squeeze capacity.
Additionally, rising labor costs are contributing to the increased costs in transportation, printing, and paper, across the industry. As well as, an influx of publishers moving their printing to domestic printers, due to the global shipping costs & delays, causing domestic prices to rise due to capacity concerns on press. With a push from the big 5 US Publishers domestic printers are investing heavily in staff and equipment to increase capacity, but it is not expected to reach the same capacity highs seen in the early 2000’s. This increase in capacity should, however, begin to create more competition in the domestic printing market, leading to lower prices in both the domestic and overseas markets overall. The cost of paper has been steadily rising for the last several years due to consolidation of plants and changing operations to accommodate the consumer shipping industry. However, as of the end of 2022, the paper market has begun to stabilize, and many manufacturers are finally showing a small percentage of surplus as they prepare for 2023. This surplus suggests price increases should slow through 2023 compared with the quarterly paper increases seen throughout 2021 and 2022. Foreign paper markets are less affected by the paper market increases as China is the largest producer of paper in the world. Any increase in such costs will impact the Company’s profitability.
IDWP depends on the internal controls of its distributor for its financial reporting and revenues.
Because of PRH’s role as the distributor of IDWP’s publications and the fact that much of IDWP’s inventory is held at its distributor’s facilities, IDWP depends on the distributors to implement internal controls over financial reporting and to provide IDWP with information related to those internal controls. PRH’s internal controls might not be sufficient to allow IDWP to meet its internal control obligations or to allow IDWP’s management to properly assess those controls. The distributors may fail to cure any internal control deficiencies related to the publications that it distributes. IDWP may be unable to effectively create compensating controls to detect and prevent errors or irregularities in the distributors’ accounting to IDWP and others. Errors in properly tracking publication sales could also negatively impact IDWP’s revenues.
IDWP might lose sales and revenue because of piracy of publications.
With technological advances, the piracy of publications has increased. Unauthorized and pirated copies of IDWP’s publications will reduce the revenue generated by those publications. If consumers can obtain illegal copies of IDWP’s publications and media, IDWP’s revenues will decline. IDWP may not be able to identify or enforce violations of its intellectual property rights and even if legal remedies are available, they could be costly and drain its financial resources. Accordingly, illegal copying of IDWP’s content could negatively affect its revenues and earnings.
IDWP’s dependence on printers outside the United States subjects it to the risks of international business.
IDWP’s publications are printed primarily outside the United States in South Korea, China and Canada. International manufacturing is subject to a number of risks, including fluctuations and volatility in currency exchange rates, transportation delays and interruptions, political and economic disruptions, the impositions of tariffs, import and export controls and changes in governmental policies. The impact of changes in currency rates has been especially heightened by current global economic conditions and significant devaluations of local currencies in comparison to the U.S. Dollar. Although to date, currency fluctuations have not materially adversely affected IDWP’s costs, such fluctuations could materially and adversely affect IDWP in the future. Further, added tariffs may be imposed on our printing activities outside the United States which could increase IDWP’s costs. Possible increases in costs and delays of, or interferences with, product deliveries could result in losses of revenues, higher costs, reduced profitability and reductions in the goodwill of IDWP’s customers. Additional factors that may adversely affect IDWP’s printing activities outside of the United States and therefore materially and adversely affect the business and financial results of IDWP include international political situations, uncertain legal systems and applications of law, prejudiceagainst foreigners, corrupt practices, uncertain economic policies and potential political and economic instability that may be exacerbated in foreign countries.
Risks Related to IDWE
IDWE does not control the decisions to produce shows and relies on outside streamers/studios for greenlighting, and if an insufficient number of our properties are put into production, our profitability will be significantly impacted.
Since IDWE does not finance production for film or television, it ultimately rests on the buyers (specifically streamers and studios) of the projects we are developing and seeking to produce to both greenlight and finance productions. Our revenues and profitability are thus dependent on those parties’ decisions.
Reduction in budgets for content could impact our ability to sell television shows which could materially impact revenue and operating results at IDWE.
Increased competition coupled with slower growth and huge losses indicated presage that there may be a reduction in the streaming business’ addressable market. In an attempt to reduce costs, many streamers reduced the number of employees, and vowed to reduce their content spend. Reduction in budgets for content could impact our ability to sell TV shows which could materially impact revenue and operating results at IDWE.
The end of a peak period of investment could materially impact revenue and operating results at IDWE.
The entertainment industry is experiencing reductions in both the number of scripted shows being ordered and the amount spent on content. An emerging decline in advertising spending is an additional obstacle that may adversely impact our ability to sell our IPs to companies that produce television content, which could materially impact revenue and operating results at IDWE.
Viewership and revenue declines in historically profitable television programming companies limits their ability to purchase our IP.
The advancingdecline in both cable television and linear broadcast television business models and revenue generation limits their ability to purchase our IP, which could materially impact revenue and operating results at IDWE.
Increased costs for programming and other rights, as well as judgments we make on the potential performance of IDWE’s content, may adversely affect IDWE’s profits and balance sheet.
Due to increased costs for programming and other rights, IDWE shifted its investment strategy in content during the 2021-2022 calendar years – evolving its strategy to not fully fund or finance the productions of television shows or feature films. While the business model of fully funding these productions can present significant upside, it is also a major risk. That being said, as a result of being more cost conscious, IDWE’s capital it spends on developing properties for media opportunities could ultimately be exhausted in any given year due to rising costs of talent and rights. As a result, IDWE might find itself in a position where it is unable to fund additional development or secure the talent required to take a project forward, and adversely affect its ability to build a significant slate of opportunities for sales to buyers.
The competitive pressures IDWE faces in its business could adversely affect its financial performance and growth prospects.
IDWE is subject to significant competition, including from other studios/producers/distributors many of which operate with significantly larger staffs and funding than IDWE. Competitors include (i) smaller independent studios such as Entertainment One, Blumhouse, iTV, Annapurna and Miramax, (ii) major independent studios such as Sony TV and Warner Bros TV, (iii) vertically integrated studios such as Twentieth Television, Universal TV, CBS TV Studios and ABC Studios who develop, distribute and produce original television programming and; (iv) other entertainment divisions of comic book or graphic novel publishers such as Dark Horse, Oni Press, Image and BOOM who develop and produce television and film based on their publishing company’s slate of IP. To the extent IDWE cannot meet the challenges from existing or new competitors or develop new product offerings to meet customer preferences or needs, its revenues and profitability could be adversely affected.
The public health risk of COVID-19 and its impact on productions could adversely affect IDWE’s business.
Multiple television productions of IDWE had been delayed due to the COVID-19 pandemic.
Given the potential public health risk of COVID-19 and related possible imposition of new local, state and federal guidelines limiting the filming and production of our live-action shows, IDWE could be adversely affected and experience significant production delays or cancellations. Production costs of IDWE shows may also rise as additional safety protocols related to the COVID-19 pandemic are necessary on the set of these shows.
Risks Related to Our Intellectual Property
The success of our businesses is highly dependent on the existence and maintenance of intellectual property rights in the publishing and entertainment products and services we create.
The value to us of our intellectual property rights is dependent on the scope and duration of our rights as defined by applicable laws in the United States and abroad and the manner in which those laws are construed. If those laws are drafted or interpreted in ways that limit the extent or duration of our rights, or if existing laws are changed, our ability to generate revenue from our intellectual property may decrease, or the cost of obtaining and maintaining rights may increase.
The unauthorized use of our intellectual property may increase the cost of protecting our rights in our intellectual property or reduce our revenues. The unauthorized distribution and access to content generally continues to be a significant challenge for intellectual property rights holders. Inadequate laws or weak enforcement mechanisms to protect entertainment industry intellectual property in one country can adversely affect the results of the Company’s operations worldwide, despite the Company’s efforts to protect its intellectual property rights. COVID-19 may increase incentives and opportunities to access content in unauthorized ways, as negative economic conditions coupled with a shift in government priorities could lead to less enforcement. These developments may require us to devote substantial resources to protecting our intellectual property againstunlicensed use and present the risk of increased losses of revenue as a result of unlicensed distribution of our content.
With respect to intellectual property developed by us and rights acquired by us from others, we are subject to the risk of challenges to our copyright, trademark, and patent rights by third parties. Successfulchallenges to our rights in intellectual property may result in increased costs for obtaining rights or the loss of the opportunity to earn revenue from the intellectual property that is the subject of such challenges .
Our intellectual property rights may not be protected, which could adversely affect our consolidated financial position and results of operations.
A substantial portion of our publications are protected by copyright, held either in our name, in the name of the author of the work, or in the name of a sponsoring professional society. Such copyrights protect our exclusive right to publish the work in many countries abroad for specified periods. Our ability to continue to achieve our expected results depends, in part, upon our ability to protect our intellectual property rights. Our consolidated financial position and results of operations may be adversely affected by lack of legal and/or technological protections for our intellectual property in some jurisdictions and markets.
Failure to adequately protect and enforce our intellectual property rights could substantially harm our business and operating results .
The success of our business depends in part on our ability to protect and enforce our trademarks, copyrights, trade secrets, and other intellectual property rights. We attempt to protect our intellectual property under trademark, copyright and trade secret laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection.
From time to time, legal action by us may be necessary to enforce our trademarks and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defendagainstclaims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources, distract management and technical personnel and negatively affect our business, operating results and financial condition. If we are unable to protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date. Any inability on our part to adequately protect our intellectual property may have a material adverse effect on our business, operating results, and financial condition.
Risk Factors Generally Relating to Us and Our Class B Common Stock
There can be no assurances that our Class B common stock will not be subject to potential delisting if we do not continue to maintain the listing requirements of the NYSE American.
We are subject to, among other things, our fulfilling all of the listing requirements of NYSE American. In addition, NYSE American has rules for continued listing, including, without limitation, minimum market capitalization and other requirements. Failure to maintain our listing (i.e., being de-listed from NYSE American), would make it more difficult for stockholders to sell our Class B common stock and more difficult to obtain accurate price quotations on our Class B common stock. This could have an adverse effect on the price of our Class B common stock. Our ability to issue additional securities for financing or other purposes, or otherwise to arrange for any financing we may need in the future, may also be materially and adversely affected if our Class B common stock is not traded on a national securities exchange.
Although we do not intend to utilize the “controlled company” exemption that may now or in the future be afforded to us by the NYSE American, we may do so in the future which could limit or reduce the effectiveness of our corporate governance.
The Trusts (as defined below) collectively hold shares that represent approximately 58.6% of the combined voting power of our outstanding stock as of January 17, 2023. See “Eight trusts for the benefit of sons and daughters of Howard S. Jonas, our Chairman of the Board of Directors, hold shares that, in the aggregate, represent more than a majority of the combined voting power of our outstanding capital stock, which may limit the ability of other stockholders to affect our management”, below, and “Holders of our Class B common stock have significantly less voting power than holders of our Class C common stock”, below.
Although we do not believe it to be the case currently, as a result of our current ownership by the Trusts or otherwise we may now or in the future qualify for the exceptions from the NYSE American’s corporate governance listing requirements available to us because we are a “controlled company” as defined in section 801(a) of the NYSE American Company Guide. Among other things, a “controlled company” may exempt itself from the requirement that (i) a majority of its directors be independent directors, (ii) its Compensation Committee, Corporate Governance Committee and/or Nominating Committee be comprised entirely of independent directors, and (iii) the Company not have a single Nominating/Corporate Governance Committee.
If we currently or in the future qualify as a “controlled company,” we do not intend to rely on any applicable exceptions from the NYSE American’s corporate governance listing requirements available to us because we are at that time a “controlled company.” However, there can be no assurance that we will not in the future, if at that time we are a “controlled company,” rely on any or all of the exceptions from the NYSE American’s corporate governance listing requirements available to us because we are a “controlled company.” If we do rely on any or all of the exceptions from the NYSE American’s corporate governance listing requirements because we are then a “controlled company,” the effectiveness of our corporate governance could be limited or reduced.
Our multi-class structure may render our shares ineligible for inclusion in certain stock market indices, and thus adversely affect the share price of our Class B common stock and its liquidity.
We have issued and outstanding shares of Class B common stock and shares of Class C common stock. Our multi-class structure may render our shares ineligible for inclusion in certain stock market indices, which may adversely affect the share price of our Class B common stock and its liquidity.
There is a limited trading market for shares of our Class B common stock and stockholders may find it difficult to sell our shares.
Our Class B common stock may be subject to the penny stock rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. The SEC regulations generally define a penny stock to be an equity that has a market price of less than $5.00 per share, subject to certain exceptions. If we do not retain a listing on NYSE American and if the price of our Class B common stock is less than $5.00, our Class B common stock will be deemed a penny stock. Unless an exception is available, those regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions and high net worth individuals). In addition, the broker-dealer must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. Moreover, broker-dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to transactions prior to sale. Regulations on penny stocks could limit the ability of broker-dealers to sell our Class B common stock and thus the ability of purchasers of our Class B common stock to sell their shares in the secondary market.
We cannot predict the extent to which investor interest in us and our Class B common stock will lead to the development or continuance of an active trading market or how liquid that trading market for our Class B common stock might become. If an active trading market for our Class B common stock does not develop or is not sustained, it may be difficult for investors to sell shares, particularly large quantities, of our Class B common stock at a price that is attractive or at all. As a result, an investment in our Class B common stock may be illiquid and investors may not be able to liquidate their investment readily or at all when they desire to sell.
There is limited liquidity in our Class B common stock, which may adversely affect your ability to sell your shares of our Class B common stock.
The market price of our Class B common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control. These factors include, but are not limited to:
developments concerning intellectual property rights and regulatory approvals relating to us;
quarterly variations in our business and financial results or the business and financial results of our competitors;
the ability or inability of us to generate increases in revenue and operate profitably;
the ability or inability of us to raise capital, if needed, and the terms and conditions associated with any such raising of capital;
developments in our industry and target markets;
the number of market makers who are willing to continue to make a market in our stock and the market or exchange on which they decide to make a market in our stock;
our ability to have our Class B common stock continue to be listed on the NYSE American; and
general market conditions and other factors, including factors unrelated to our own operating performance.
In recent years, the stock market in general has experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of shares of our Class B common stock, which could cause a decline in the value of our shares. Price volatility may be accentuated if trading volume of our Class B common stock is low, which historically has often been the case. The volatility in our Class B stock may be combined with low trading volume. Any or all of these above factors could adversely affect your ability to sell your shares of our Class B common stock or, if you are able to sell your shares, to sell your shares at a price that you determine to be fair or favorable.
We have no future plans to pay dividends on our Class B common stock.
We do not pay, and do not intend to pay, cash dividends on our Class B common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our businesses and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our current, as well as any future, financing agreements may preclude us from paying any dividends. As a result, capital appreciation, if any, of our Class B common stock will be investors’ sole source of potential gain for the foreseeable future.
We are a “smaller reporting company” and an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies and emerging growth companies will make our Class B common stock less attractive to investors.
We are a “smaller reporting company,” as defined in Rule 12b-2 under the Exchange Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including “emerging growth companies” such as, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Our status as a “smaller reporting company” is determined on an annual basis. We cannot predict if investors will find our Class B common stock less attractive or our company less comparable to certain other public companies because we will rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future financial results may not be as comparable to the financial results of certain other companies in our industry that adopted such standards. If some investors find our Class B common stock less attractive as a result, there may be a less active trading market for our Class B common stock and our stock price may be more volatile.
If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:
an extended transition period to comply with new or revised accounting standards applicable to public companies; and
an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.
We may take advantage of these provisions until the end of our fiscal year 2026, or such earlier time that we are no longer an emerging growth company and, if we do, the information that we provide stockholders may be different than you might receive from other public companies in which you hold equity. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our shares of common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.
In addition, if we no longer qualify as an emerging growth company, and are considered an accelerated filer, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our stock.
Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
The requirements of being a reporting public company may strain our resources, divert management’s attention and affect our ability to attract and retain additional executive management and qualified board members.
As a reporting public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the Dodd-Frank Act, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, making some activities more difficult, time-consuming or costly. This will put increased demand on our systems and resources, particularly after we are no longer a “smaller reporting company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. As a “smaller reporting company” and “emerging growth company”, as stated above, we receive certain reporting exemptions under The Sarbanes-Oxley Act.
Changing laws, regulations and standards relating to corporate governance and public disclosure create uncertainty for public companies, which increases legal and financial compliance costs and time expenditures for internal personnel. These laws, regulations and standards are subject to interpretation, which in many cases due to their lack of specificity, their application in practice may evolve over time as regulators and governing bodies provide new guidance. These changes may result in continued uncertainty regarding compliance matters and may necessitate higher costs due to ongoing revisions to filings, disclosures and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate regulatory or legal proceedings against us, and our business may be adversely affected.
As a public company under these rules and regulations, we expect that it may make it more expensive for us to hire external auditors to perform requisite outside audited financial statements, as well as obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee and could also make it more difficult to attract qualified executive officers.
As a result of disclosure of information in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations.
General economic conditions may negatively impact our operations .
Economic downturns may negatively affect our operations. These conditions may be widespread or isolated to one or more geographic regions in which we operate. Higher wages, related labor costs, printing costs, leasing costs, energy, insurance and fuel costs and the increasing cost trends in those markets may decrease our margins. Moreover, economic downturns present an additional challenge to us because a significant portion of our revenues are from sales through retail stores, which are more likely to close during economic downturns. In addition, decreases in travel and entertainment spending during economic downturns could impact our businesses, and thereby negatively impact our operations.
Failures in information technology could have an adverse effect on the Company’s operations.
We rely on both internal systems and third parties to provide information technology for many aspects of our business operations. Failures in information technology that could impact the Company’s operations include cybersecurity, business continuity and related operational risks, as well as other security failures or breaches of our internal systems or those of our customers, partners, service providers or other third parties.
We could find it difficult to raise additional capital in the future .
We may need to raise additional capital in order for stockholders to realize increased value on our securities. Given the current global economy, there can be no assurance that we would be able to obtain funding on commercially reasonable terms in a timely fashion. Failure to obtain additional funding, if necessary, could have a material adverse effect on our business, prospects and financial condition.
Holders of our Class B common stock have significantly less voting power than holders of our Class C common stock.
Holders of our Class B common stock are entitled to one-tenth of a vote per share on all matters on which our stockholders are entitled to vote, while holders of our Class C common stock are entitled to three votes per share. Because of their voting power, the holders of our Class C common stock will be able to control matters requiring approval by our stockholders, including the election of all of the directors, amendment of organizational documents and the approval of significant corporate transactions, including any merger, consolidation or sale of all or substantially all of our assets. As a result, the ability of any of the holders of our Class B common stock to influence our management may be limited. In addition, our dual class structure has an anti-takeover effect, and accordingly, the holders of the shares of Class C common stock have the ability to prevent any change in control transactions that may otherwise be in the best interest of stockholders
Eight trusts for the benefit of sons and daughters of Howard S. Jonas, our Chairman and Chairman of the Board, hold shares that, in the aggregate, represent more than a majority of the combined voting power of our outstanding capital stock, which may limit the ability of other stockholders to affect our management.
Eight trusts for the benefit of sons and daughters of Howard S. Jonas (the “Trusts”), our Chairman and Chairman of the Board, collectively have voting power over 1,733,750 shares of our common stock (which includes 545,360 shares of our Class C common stock (which is all the issued and outstanding shares of the Class C common stock), which are convertible into shares of our Class B common stock on a 1-for-1 basis, and 1,188,390 shares of our Class B common stock), representing approximately 58.6% of the combined voting power of our outstanding capital stock, as of January 17, 2023. In addition, as of January 17, 2023, Howard S. Jonas beneficially holds 3,479,934 shares of our Class B common stock, warrants to purchase up to 89,243 shares of our Class B common stock at a price per share of $1.936 and warrants to purchase up to 98,336 shares of our Class B common stock at a price per share of $1.936. Each of the Trusts has a different, independent trustee.
Howard S. Jonas serves as our Chairman, an executive officer position, and Chairman of the Board, which is not an officer position. He is our founder and served as an executive officer, including our Chief Executive Officer, for a very significant time period, and the members of the Board and management often look to him for guidance on major financial, operational and strategic matters.
Howard S. Jonas does not have the right to direct or control the voting of the shares of our common stock that are held by the Trusts, and the independent trustees hold sole voting and dispositive power over the common stock held by the Trusts. However, Howard S. Jonas is the trustor of the trusts and is the father of each of the beneficiaries of the Trusts and his views may be taken into account by the trustees and others related to the Trusts.
We are not aware of any voting agreement between or among any of the Trusts and/or Howard S. Jonas, but if such a voting agreement or other similar arrangement exists or were to be consummated, if all or several or all of the Trusts were to act in concert, or if we issued additional Class C common stock, certain or all of the Trusts and/or Howard S. Jonas along with holders of the Class C common stock would be able to control matters requiring approval by our stockholders, including the election of all of the directors, amendment of organizational documents and the approval of significant corporate transactions, including any merger, consolidation or sale of all or substantially all of our assets. As a result, the ability of any of our other stockholders to influence our management may be limited. In addition, our dual class structure has an anti-takeover effect, and accordingly, the holders of the shares of Class C common stock have the ability to prevent any change in control transactions that may otherwise be in the best interest of stockholders.
Critical
Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts, goodwill, valuation of long-lived assets including intangible assets with finite useful lives and ultimate revenues for television costs. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. See Note 1 to the consolidated financial statements in this Annual Report for a complete discussion of our significant accounting policies.
Results of Operations
We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below loss from operations are only included in our discussion of the consolidated results of operations.
IDWP
(in thousands)
Change
Fiscal Year ended October 31,
Revenues
Direct cost of revenues
Selling, general and administrative
Depreciation and amortization
(Loss) income from operations
nm— not meaningful
Revenues . Revenues increased $555,000 in the fiscal year ended October 31, 2022, compared to the fiscal year ended October 31, 2021, primarily due to an increase in games revenue of $1,716,000 driven by fulfillment of the direct-to-consumer games campaign for Batman Adventures , an increase in retailer exclusive revenue of $1,200,000 predominately related to Sonic the Hedgehog and Transformers , an increase in non-direct market publishing revenue of $603,000 driven by strong Teenage Mutant Ninja Turtles: The Last Ronin and They Called Us Enemy sales, a decrease in sales returns and discounts on book sales of $474,000, and an increase in other licensing and royalty revenues of $44,000, partially offset by a decrease in direct market publishing revenue of $3,055,000 due to fewer titles being released during the period, and a decrease in digital sales of $427,000. Sales returns for fiscal 2022 improved compared to the prior year due to targeted incentives with accounts to reduce return rates, localization of inventory management at Barnes & Noble, and COVID-19 related pressures in fiscal 2021.
Effective January 1, 2023, our licenses for Transformers and GI Joe titles have been terminated. While the cancellation of the licenses for Transformers and GI Joe are anticipated to decrease revenues by approximately $1.2 million in fiscal year 2023, IDWP plans to mitigate the loss of revenue by enhancing our other key licensed brands through new initiatives for Star Trek, Godzilla, Dungeons & Dragons, and My Little Pony and an expansion of Teenage Mutant Ninja Turtles: The Last Ronin . We expect these efforts to substantially offset any material impact on our gross margin from the loss of the licensed titles.
During calendar 2021, we significantly wound down IDW Games and IDW Games is now only backfilling already developed games. The decision to shut down games was due to its lack of profitability, despite outliers like Batman Adventures, noted above.
Direct cost of revenues. IDWP’s direct cost of revenues increased by $311,000 in the fiscal year ended October 31, 2022, compared to the fiscal year ended October 31, 2021, primarily due to an increase in printing expenses and creative costs for IDW Games of $430,000 which corresponds to the increase in revenue from games noted above and an increase in publishing printing costs of $626,000, offset by a decrease in royalty expenses of $558,000, a decrease in publishing creative costs of $152,000, and a decrease in digital and licensing costs of $35,000. Although costs were recognized for fulfillment of the Batman Adventures game in the current year, future games costs will only be recognized with individual customer orders. Royalty expense as a percentage of sales is dependent on product and title mix as different revenue streams and titles have different royalty rates.
Gross Margin. IDWP’s gross margin for the fiscal year ended October 31, 2022 was essentially flat at 45.8% compared to 45.9% for the fiscal year ended October 31, 2021.
Selling, General and Administrative. IDWP’s selling, general and administrative expenses increased by $1,289,000 in the fiscal year ended October 31, 2022, compared to the fiscal year ended October 31, 2021, primarily due to increases in marketing expenses of $847,000, IT costs of $481,000 related to the Company’s website for the focus on direct-to-consumer and dues and subscriptions, shipping and direct-to-consumer costs of $188,000, salaries and benefits of $247,000, and travel expenses of $220,000, partially offset by decreases in severance of $400,000, overhead allocations of $79,000, legal fees of $85,000, occupancy expenses of $66,000, bad debt of $30,000, insurance costs of $30,000, and other net charges of $4,000. The increase in salary and benefits was comprised of an overall increase of $683,000 offset by a $436,000 ERC as a result of the CARES Act recorded as a reduction in payroll tax expense.
As a percentage of IDWP’s revenues, selling, general and administrative expenses in the fiscal year ended October 31, 2022, was 52.1% compared to 48.1% in the fiscal year ended October 31, 2021.
IDWE
(in thousands)
Change
Fiscal year ended October 31,
Revenues
Direct cost of revenues
Selling, general and administrative
Depreciation and amortization
Income (loss) from operations
nm— not meaningful
Revenues. IDWE revenues for the fiscal year ended October 31, 2022 increased by $3,114,000 compared to the fiscal year ended October 31, 2021. Revenues in fiscal year 2022, included revenue recognized due to the full delivery of Locke & Key seasons two and three in an amount of $8,944,000, revenue from the full delivery of season one of Surfside Girls of $1,149,000, the French-Canadian license received for V Wars of $119,000, and revenue from optioned projects of $43,000. In fiscal year 2021, revenues included recognition from delivered episodes from Wynonna Earp of $3,496,000, tax credits for V Wars and October Faction of $3,331,000, Lock & Key contingent compensation from season two of $200,000, and foreign receipts from Dirk Gently of $114,000.
Direct costs of revenues . Direct cost of revenues consists primarily of the amortization of production costs that were capitalized during the production of the television episodes and direct costs related to revenue recognized during related periods.
Direct costs of revenues for the fiscal year ended October 31, 2022 decreased by $5,590,000 compared to the fiscal year ended October 31, 2021. The amortized television costs for fiscal year 2022, included costs related to delivered episodes from Locke & Key seasons two and three of $1,875,000 and to full delivery of season one of Surfside Girls of $100,000, executive producing fees of $325,000, cost refinement from October Faction and V Wars of $78,000, inventory write offs of $278,000, residuals of $467,000, agency commission fees of $9,000, and cost of optioned projects of $6,000, offset by cost recoupment from Wynonna Earp of $432,000 and tax credits for V Wars and October Faction of $195,000. The amortized television costs for fiscal year 2021, included delivered episodes from Wynonna Earp of $5,251,000, impairment charges of $2,216,000, cost refinement from October Faction and V Wars of $586,000 and other costs of $48,000.
Gross Margin. IDWE’s gross margin for the fiscal year ended October 31, 2022 was 75.5% compared to negative 13.4% for the fiscal year ended October 31, 2021. These gross margin figures are aligned with the explanations provided for revenues and direct costs of revenues.
Selling, General and Administrative. Selling, general and administrative expenses decreased by $1,133,000 during the fiscal year ended October 31, 2022, compared to the fiscal year ended October 31, 2021. The decrease was driven by decreases in consulting costs of $445,000, legal fees of $117,000, marketing of $137,000, salary and benefits of $387,000, recruitment fees of $153,000, professional services of $75,000, severance of $175,000, travel expenses of $41,000 and other net changes of $87,000, offset by increases in overhead allocation of $284,000 and non-cash compensation of $200,000. The decrease in salary and benefits included a $87,000 ERC as a result of the CARES act recorded as a reduction in payroll tax expense.
As a percentage of IDWE’s revenues, selling, general and administrative expenses in the fiscal year ended October 31, 2022 , was 44.5% compared to 79.7% in the fiscal year ended October 31, 2021.
IDWMH
(in thousands)
Change
Fiscal year ended October 31,
Selling, general and administrative
Depreciation and amortization
Loss from operations
nm— not meaningful
Selling, General and Administrative. Selling, general and administrative expenses increased by $695,000 during the fiscal year ended October 31, 2022, compared to the fiscal year ended October 31, 2021. The increase was driven by increases in severance of $468,000, shareholder relations fees of $263,000, insurance costs of $235,000, non-cash compensation of $218,000, travel expenses of $113,000, and marketing expenses of $80,000, offset by decreases in overhead allocation to operating segments of $483,000, legal fees of $131,000, salary and benefits of $60,000, and other net changes of $8,000. The decrease in salary and benefits included a $42,000 ERC as a result of the CARES act recorded as a reduction in payroll tax expense.
Consolidated net loss IDW Media Holdings, Inc.
(in thousands)
Change
Fiscal year ended October 31,
Loss from continuing operations
Interest (expense) income, net
Other (expense) income, net
Net loss from continuing operations
Loss from discontinued operations, net
Gain on sale of discontinued operations
Net loss
Loss from operations. Loss from continuing operations decreased by $8,000,000 in the fiscal year ended October 31, 2022, compared to the fiscal year ended October 31, 2021, due to increased operating income from IDWE of $9,839,000, offset by an increase in operating loss from IDWP of $1,127,000 and an increase in corporate overhead of $712,000. These changes are described in the separate segment analyses above.
Interest (expense) income, net. Interest (expense) income decreased by $128,000 to interest expense of $10,000 in the fiscal year ended October 31, 2022, compared to interest income of $118,000 in the fiscal year ended October 31, 2021 due to interest income from CRA tax credits received in the fiscal year ended October 31, 2021.
Other (expense) income, net. Other (expense) income decreased by $2,386,000 to other expense of $53,000 in the fiscal year ended October 31, 2022, compared to other income of $2,333,000 in the fiscal year ended October 31, 2021, primarily due to PPP loan forgiveness received in the fiscal year ended October 31, 2021.
Loss from discontinued operations, net. Loss from discontinued operations was $0 for the fiscal year ended October 31, 2022, compared to a loss of $1,281,000 for the fiscal year ended October 31, 2021, due to the sale of CTM which resulted in CTM no longer being consolidated with the Company as of February 15, 2021.
Gain on sale of discontinued operations. Gain on sale of discontinued operations decreased by $2,123,000 for the fiscal year ended October 31, 2022, compared to the fiscal year ended October 31, 2021, as a result of the sale of CTM.
Liquidity and Capital Resources
General
At October 31, 2022, we had cash and cash equivalents of $10,014,000 and working capital (current assets in excess of current liabilities) of $18,476,000.
We anticipate that our expected cash inflows from operations during the next twelve months together with our working capital, including the balance of cash and cash equivalents held as October 31, 2022, which includes proceeds from the offering closed on August 6, 2021, will be sufficient to sustain our operations for at least the twelve months following the date of this report.
We satisfy our cash requirements primarily through cash provided by the Company’s operating and financing activities.
Fiscal years ended
October 31,
(in thousands)
Cash flows (used in) provided by:
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Operating Activities
Cash flows used in operating activities was $6,618,000 for the fiscal year ended October 31, 2022, compared to cash flows provided by operating activities of $10,637,000 for the fiscal year ended October 31, 2021. For the fiscal year ended October 31, 2022, net use of cash was primarily a result of the net loss for the period of $748,000, adjusted for non-cash expenses of $2,712,000 and cash outflow from changes in assets and liabilities of $8,548,000 as a result of decreases to production costs payable and deferred revenue and increases in trade accounts receivable, inventory, television costs, and prepaid expenses and other assets. For the fiscal year ended October 31, 2021, the net cash provided was primarily a result of cash inflow from changes in assets and liabilities of $19,045,000 as a result of decreases in trade accounts receivable, inventory, and increases in production costs payable, offset by a net loss in the period of $5,392,000 adjusted for non-cash expenses of $8,421,000, cash outflow from changes in assets and liabilities of $6,945,000 as a result of increases in prepaid expenses and television costs and decreases in deferred revenue, and adjustments for non-cash items of $4,515,000 related to the gain on the sale of CTM and gain on the extinguishment of a PPP loan. Cash flows generated at IDWE vary widely year to year due to timing of productions.
Investing Activities
Our capital expenditures were approximately $900,000 and $832,000 in the fiscal years ended October 31, 2022 , and 2021, respectively. The fiscal year ended October 31, 2021 also included an unfavorable adjustment of $902,000 related to the disposal of CTM.
Financing Activities
During the fiscal year ended October 31, 2021, IDW repaid bank loans in the amounts of $14,204,000, partially offset by cash received for PPP loans of $1,196,000, and net cash proceeds received of from the issuance of Class B common stock of $9,551,000 in connection to our registered public offering.
Recent Accounting Pronouncements
For a description of recently issued accounting pronouncements, including the respective dates of adoption, and expected effects on our results of operations and financial condition, see Note 1 to the consolidated financial statements included in Item 8 of this Annual Report.
Changes in Trade Accounts Receivables and Allowance for Doubtful Accounts
Trade accounts receivable increased to approximately $6,448,000 at October 31, 2022, compared to $5,431,000 at October 31, 2021 principally due to changes in the accruals and collection of IDWE revenue, as well as the timing of receipts of payments of other receivable balances. The allowance for doubtful accounts as a percentage of gross trade accounts receivable was 0% at October 31, 2022 and 2021, reflecting the Company’s collectible receivable experience.
Off- Balance Sheet Arrangements
We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Other Sources and Uses of Resources
On August 6, 2021, IDWMH closed a registered public offering of Class B common stock and EF Hutton, as representative of the Underwriters exercised the overallotment option included as part of the offering in full. The Company sold an aggregate of 2,875,000 shares of the Company’s Class B common stock for gross consideration of $10,350,000 less Underwriters commissions of $724,500 and Underwriters expenses of $75,000.
The Company is using the net proceeds we received from the offering principally for the development of original IP and the purchase of associated publishing, media, and related rights. Funds are also used for marketing spend for our IP franchises, and additionally for technology investments and our website development. The Company also seeks to pursue potential investment and acquisition opportunities, should such opportunities arise.
We do not have any agreements at this time to potentially acquire other entities or businesses. The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. However, the nature, amounts and timing of our actual expenditures may vary significantly depending on numerous factors. We may find it necessary or advisable to use the net proceeds from this offering for other purposes. As a result, our management has and will retain broad discretion over the allocation and application of the net proceeds from this offering. To the extent that the net proceeds we receive from this offering are not immediately used for the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments.
Where appropriate, we evaluate strategic investments and acquisitions to complement, expand, and/or enter into new businesses. In considering acquisitions and investments, we search for opportunities to profitably grow our existing businesses, to add qualitatively to the range of businesses in our portfolio, and to achieve operational synergies. At this time, we cannot guarantee that we will be presented with acquisition opportunities that meet our return-on-investment criteria, or that our efforts to make acquisitions that meet our criteria will be successful.
The COVID-19 pandemic has had a negative impact on our business in past quarters with regard to (a) issues related to increased costs of international printing, shipping and cost rises, and (b) in 2021 we experienced production delays of IDWE’s television show Wynonna Earp . In the fiscal year 2022, our business as a whole has not suffered any material adverse consequences. The extent of the impact of the COVID-19 pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future, and cash requirements may fluctuate based on the timing and extent of many factors discussed above.
In the fourth quarter of fiscal 2020 we paid “pull down” costs pursuant to a previously announced, multi-year agreement with Cineflix related to international sales of Wynonna Earp. Specifically, under this agreement, IDWE purchased the distribution rights to seasons one and two of Wynonna Earp from the current licensor (Netflix) and had agreed to transfer those rights to Cineflix. Cineflix is now the international distributor of all four seasons of Wynonna Earp . Due to changes in competition as well as the COVID-19 pandemic, the Cineflix deal did not contribute revenue and operating cash flow in fiscal year 2021 at the levels originally anticipated at the inception of the deal, however in the third quarter of 2022 we began recouping some of our cash outlays.
Dividends
We have never declared or paid any cash dividends on our capital stock. The Company does not currently anticipate paying any cash dividends in the foreseeable future and is using cash flows to invest in the growth of the business.
