IDW MEDIA HOLDINGS, INC. - Quarter Report: 2023 January (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended January 31, 2023

or

☐ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission File Number: 001-34355

IDW MEDIA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

520 Broad Street, Newark, New Jersey 07102

(Address of principal executive offices, zip code)

323-433-6670

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of March 15, 2023 was:

IDW MEDIA HOLDINGS, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

IDW MEDIA HOLDINGS, INC. 

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

IDW MEDIA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

IDW MEDIA HOLDINGS, INC.

CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY

Three Months Ended January 31, 2023 and 2022

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

IDW MEDIA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

IDW HOLDINGS, INC. 

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 31^st. 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:

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: 

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:

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.

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.

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:

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:

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:

Changes in deferred revenue consist of the following:

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:

Note 8—Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

Note 9—Property and Equipment, net

Property and equipment consist of the following:

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:

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:

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:

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:

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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the related notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, which was filed with the U.S. Securities and Exchange Commission (“SEC”) on January 19, 2023 (the “2022 Form 10-K”).

As used below, unless the context otherwise requires, the terms “the Company,” “we,” “us,” and “our” refer to IDW Media Holdings, Inc., a Delaware corporation, and our subsidiaries. 

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 in the 2022 Form 10-K. The forward-looking statements are made as of the date of this 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 SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934.

OVERVIEW

We were incorporated in the State of Delaware in May 2009.

In 2009, IDT Corporation, our former parent corporation, completed a tax-free spinoff of the Company through a pro rata distribution of our common stock to IDT’s stockholders.

Our principal businesses include:

IDWP is an award-winning publisher of comic books, original graphic novels, and art books. Founded in 1999, IDWP has a long tradition of supporting original, powerful creator-driven titles. In 2002, IDWP published 30 Days of Night by Steve Niles and Ben Templesmith followed by other horror titles that helped kickstart a resurgence in horror-comic publishing across the industry. Since then, IDWP has significantly diversified its publications. Joe Hill and Gabriel Rodríguez’s Locke & Key, Scott Snyder’s Dark Spaces line, Stephen Graham Jones’s Earthdivers, Beau Smith’s Wynonna Earp, Alan Robert’s The Beauty of Horror adult coloring books, and Darwyn Cooke’s graphic novel adaptations of Richard Stark’s Parker novels are just a few of the hundreds of award-winning titles published since IDWP’s inception.

IDWE leverages IDWP original IP into television series, features, and other forms of media by developing and producing original content. IDWE maintains a development slate of properties based on IDWP properties for the adult series/features marketplace and the kids, family, and animation spaces. 

COVID-19: Overview and Long Lasting Impacts

We qualified for certain tax credits under the Coronavirus Aid, Relief and Economic Securities Act (“CARES Act”). During fiscal 2022, we recognized an employee retention credit (“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 our consolidated statements of operations. To date we have received a total of $564,000.

Business Description

IDW Publishing

There are two primary sources of the content that IDWP develops, publishes, and exploits across a range of distribution channels:

IDWP’s largest product group is the publication of comic book and trade paperback products. Its comics and graphic novels are primarily distributed through three channels: (i) to comic book specialty stores (the “direct market”); (ii) to traditional retail outlets, including bookstores and mass market stores, on a returnable basis (the “book market”); and (iii) to E-book distributors (“digital publishers”). IDWP’s publications are widely available digitally through popular distributors such as Comixology, Amazon, Apple iBooks, Google Play, Hoopla, Overdrive, and via IDWP’s own webstore at idwpublishing.com. Through the direct market and book market, IDWP, including its imprints sold over 3.9 million units in fiscal 2022 and is regularly recognized as one of the nation’s largest publishers in the comics & graphic novels category.

IDWP’s focus is to expand and market its library of titles, from both creator-owned titles in our IDW and Top Shelf brands; and also, in partnership with our top-of-class licensors under our IDW brand. IDWP works synergistically with IDWE to develop new titles and to support existing titles.

IDWP is an award-winning publisher of comic books, original graphic novels, and art books. Founded in 1999, IDWP has a long tradition of supporting original, powerful creator-driven titles. In 2002, IDWP published 30 Days of Night by Steve Niles and Ben Templesmith followed by other horror titles that helped kickstart a resurgence in horror-comic publishing across the industry. Since then, IDWP has significantly diversified its publications. Joe Hill and Gabriel Rodríguez’s Locke & Key, Jonathan Maberry’s V Wars, Beau Smith’s Wynonna Earp, Alan Robert’s The Beauty of Horror adult coloring books, and Darwyn Cooke’s graphic novel adaptations of Richard Stark’s Parker novels are just a few of the hundreds of award-winning titles published since its inception.

IDWP owns Top Shelf Productions, an award-winning critically acclaimed publisher of graphic novels. Top Shelf Productions is renowned for publishing works of literary significance including the #1 New York Times and Washington Post bestselling trilogy, March, by Congressman John Lewis, Andrew Aydin, and Nate Powell. March is the only graphic novel to have won the National Book Award and is one of the most taught graphic novels in schools. In July 2019, Top Shelf Productions released George Takei’s graphic memoir, They Called Us Enemy, which debuted at #2 on the New York Times Paperback Nonfiction Best Sellers list and as a #1 bestseller on Amazon. Both titles are now perennial bestsellers and considered two of the finest non-fiction graphic novels. Other iconic Top Shelf Productions titles include Kim Dwinell’s Surfside Girls, Jeff Lemire’s Essex County and The Underwater Welder, Hannah Templer’s Cosmoknights, and Alan Moore and Eddie Campbell’s From Hell.

In addition to its core of creator-driven franchises, IDWP has also partnered with the owners of major licensed brands to publish many successful licensed titles, including Paramount Global’s  Teenage Mutant Ninja Turtles and Star Trek; Hasbro’s Dungeons & Dragons, and My Little Pony; Sega’s Sonic The Hedgehog;  and Toho’s Godzilla. These licensed titles bring with them diverse built-in audiences and build cache and retailer support for IDWP. With licensed franchises, IDWP’s strategy is to focus not only on licenses that have eager, built-in fan followings, but also ongoing licensor support through other channels, such as toys, animation, and film. This strategy enables IDWP to expand its audience reach and to pursue sub-license opportunities with foreign publishers. IDWP also collaborates with other comic book publishers to co-publish certain titles, including Batman vs. Teenage Mutant Ninja Turtles and Locke & Key/The Sandman Universe: Hell & Gone (with DC Comics), Rick & Morty vs. Dungeons & Dragons (with Oni Press, Inc.) and Godzilla vs. Power Rangers (with Boom Studios).

IDW Originals, launched in July 2022, is a line of original comics and graphic novels from a diverse lineup of writers and artists creating content across all genres and for all age groups. IDW Originals works with top-tier talent including New York Times bestselling writers like Scott Snyder on Dark Spaces: Wildfire, Stephen Graham Jones on Earthdivers, and G. Willow Wilson on The Hunger and the Dusk, in addition to up-and-coming talent with the goal of creating the bestsellers of tomorrow. IDW Originals is also focused on creating IP that can be exploited across multiple media platforms.

IDWP is also home to Artist’s Editions, which publishes oversized deluxe hardcovers featuring scans of original art printed at the same size they were drawn with the distinctive creative nuances that make original art unique. Some of the standout Artist’s Editions titles include Jim Lee’s X-Men, Mike Mignola’s Hellboy, Todd McFarlane’s Spider-Man, David Mazzucchelli’s Daredevil Born Again and Dave Stevens’ The Rocketeer.

Many of IDWP’s titles are available worldwide through foreign licensing with 642 titles available in approximately 62 territories in approximately 24 languages. In 2020, IDW launched a new initiative to release key titles as Spanish-language graphic novels in the North American market with the release of Spanish-language editions of They Called Us Enemy, Red Panda & Moon Bear, Locke & Key and Sonic the Hedgehog.

Penguin Random House (“PRH”) serves as the exclusive worldwide distributor for all IDWP products other than periodical comic books for the book market channel and since June 2022, as the exclusive worldwide multi-year sales and distributor for IDWP’s newly published and backlist comic book periodicals, trade collections, and graphic novels to the direct market comic shops.

Prior to June 2022, Diamond Comic Distributors, Inc. (“Diamond”) served as IDWP’s distributor to the direct market, worldwide.  

In 2014, IDWP launched IDW Games to develop and publish card, board, and tabletop games. Similar to IDWP’s book content, IDW Games offered a mix of popular licensed titles such as Dragon Ball Z and Batman the Animated Series, as well as creator developed strategic hobby games, such as Towers of Arkhanos and Tonari. IDW Games’ products were sold to distributors worldwide and are available through retailers such as GameStop, Barnes & Noble, and Amazon, independent games, and comics stores, as well as the direct-to-consumer channel through its website and marketing campaigns. In calendar 2021, the Company wound down IDW Games and, going forward, IDW Games is only backfilling final orders and reproducing select existing products.

To further expand and build creator-owned properties beyond publishing, IDWP works with IDWE, as well as other outside partners, to bring creator-owned franchises to television and film through licensing arrangements.

To expand its business and compete with other industry participants, IDWP continues to focus on launching new creator-owned titles and partnering with established brands to bring fan-favorite properties to the comics market. IDWP is expanding the reach of existing and new products through the development of specialty, library, and education markets; increased direct-to-consumer initiatives; and broadening the reach of creator-driven series through licensing opportunities.

IDWP’s revenues represented 99.8% and 63.6% of our consolidated revenues in the three months ended January 31, 2023 and 2022, respectively.

IDW Entertainment

IDWE is a production company and studio that develops, produces and distributes content based on IDWP’s original, copyrighted 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.

IDWE was formed on September 20, 2013 to leverage IDWP properties into television series, features, and other forms of media by developing and producing original content. IDWE maintains a development slate of properties based on IDWP properties for the adult series/features marketplace and the kids, family, and animation spaces.

IDWE has developed and/or produced a number of series for television:

Some historical series include:

IDWE recently announced a slate of six additional titles with closed development deals with major studios, streamers, and distributors. As a part of these deals, IDWE will work closely to develop these properties as narrative television series, with the ultimate goal of securing a greenlight to production. These titles include:

On August 30, 2022, we announced our first 360-development deal with writing team Matt Silverstein and Dave Jeser for the development and production of the sci-fi comedy “Family Time” into a television series and original comic book property simultaneously.

On November 30, 2022, we announced six additional development deals with writing & producing talent, which included properties Bacchus, Dragon Puncher & Spoony, Korgi, Lodger, Relic of the Dragon and Satellite Falling. IDWE attached such talent as Will Davies (Lyle, Lyle, Crocodile), Holly Huckins (Recess, Angela Anaconda), Aury Wallington (Veronica Mars, Heroes, Gravity Falls), Max & Adam Reid (Aeon Flux), Patricia Riggen, Bryan Q. Miller (Shadowhunters), Will Pascoe (Orphan Black) and Jude Weng (Finding Ohana).

On February 14, 2023, we announced our second 360-development deal with Raffaella Delle Donne (Flesh & Blood), Marc Dey (Ninja Princess) and Tshepo Moche (Kiya & the Kimoja Heroes) called Team Spirit. IDWP will release an original graphic novel for kids while IDWE will develop an animated series for kids based on the property.

Business Model

While in the past, IDWE focused on television development and financing production opportunities, a broadening of our strategic goals has evolved to focus on lower risk investments as well as developing IP for feature film and podcast opportunities. As was the case with Surfside Girls, IDWE provided co-studio services which enabled us to utilize our studio partners’ infrastructure to support the needs of productions while reducing our own risk. We have also diversified our position by acting as non-writing executive producers on current and future projects which allows us to secure fees for our services while minimizing costs. With more varied opportunities for our content/IP, we expect to grow our brand, expand the perception of IDWE, increase revenue opportunities for the publishing side of the business and develop a more robust entertainment footprint.

The path to greenlighting a project can take many routes, but the two most common include internal development and partnering with established studios and streamers. For internal development, IDWE partners with established television and film talent to develop pitches based on our IP, then takes those pitches to buyers. Buyers who want to partner on IDWE’s pitches will enter into a deal to commission a pilot script or feature screenplay, which will be the determining factor of a series or feature film being greenlit. In the second scenario, IDWE may option what’s called clean IP (projects without any attachments or development with talent) to a buyer/production partner and develop/package a series or feature. While this scenario may require more work between IDWE and the buyer to develop a concept for adaptation, the advantage is that IDWE is doing this in tandem with the buyer or platform – guaranteeing that what is developed is strategically what they are looking for.

IDWE’s revenues represented 0.2% and 36.4% of our consolidated revenues in the three months ended January 31, 2023 and 2022, respectively. 

Critical Accounting Policies

Our condensed consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“U.S. 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 included in our 2022 Form 10-K. 

Results of Operations

We evaluate the performance of our operating business segments based primarily on (loss) income 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

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Revenues. Revenues decreased by $954,000 in the three months ended January 31, 2023, compared to the three months ended January 31, 2022, primarily due to a decrease in games revenue of $1,888,000 driven by fulfillment of the direct-to-consumer games campaign for Batman Adventures in the fiscal 2022 period, a decrease in direct market publishing revenue of $462,000, and decreases in direct-to-consumer revenue and other licensing and royalty revenue, partially offset by an increase in retailer exclusive revenue of $551,000 predominately related to Sonic the Hedgehog, an increase in book market publishing revenue of $734,000 driven by strong Teenage Mutant Ninja Turtles: The Last Ronin hard cover sales, a decrease in sales returns and discounts on book sales of $90,000, and an increase in digital sales of $52,000. Sales returns improved compared to the prior period due to targeted incentives with accounts to reduce return rates and localization of inventory management at Barnes & Noble.

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. These efforts have begun to offset any material impacts and we expect to continue to substantially offset any material impact on our gross margin from the loss of the licensed titles.

Direct cost of revenues. IDWP’s direct cost of revenues decreased by $181,000 in the three months ended January 31, 2023, compared to the three months ended January 31, 2022, primarily due to a decrease in printing expenses and creative costs for IDW Games of $655,000 which corresponds to the decrease in revenue from games noted above and a decrease in royalty expenses of $209,000, partially offset by an increase in publishing printing costs of $599,000, and increases in publishing creative costs and digital and licensing costs. 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 three months ended January 31, 2023 decreased to 46.3% compared to 50.7% for the three months ended January 31, 2022.

Selling, General and Administrative. IDWP’s selling, general and administrative expenses decreased slightly by $33,000 in the three months ended January 31, 2023, compared to the three months ended January 31, 2022, primarily due to decreases in overhead allocations of $309,000, shipping and direct-to-consumer costs of $212,000, and occupancy expenses, severance, and consulting expenses, partially offset by increases in salaries and benefits of $297,000, marketing expenses of $264,000, and IT costs related to the Company’s website for the focus on direct-to-consumer.

As a percentage of IDWP’s revenues, selling, general and administrative expenses in the three months ended January 31, 2023, was 48.7% compared to 42.9% in the three months ended January 31, 2022.

IDWE

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Revenues. IDWE revenues for the three months ended January 31, 2023 decreased by $4,302,000 compared to the three months ended January 31, 2022. Revenues in three months ended January 31, 2023 consisted of revenue from optioned projects and royalties of $16,000. In the three months ended January 31, 2022, revenues consisted of revenue recognized due to the full delivery of Locke & Key season two of $4,200,000 and the French-Canadian license received for V Wars of $118,000.

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 three months ended January 31, 2023 increased by $1,161,000 compared to the three months ended January 31, 2022. The amortized television costs for the three months ended January 31, 2023, included cost recoupment from Wynonna Earp of $166,000 and tax credits for V Wars of $7,000, offset by residuals of $88,000. The amortized television costs for the three months ended January 31, 2022, included costs related to delivered episodes from Locke & Key season two of $999,000 and cost refinement from October Faction and V Wars of $77,000.

Gross Margin. IDWE’s gross margin for the three months ended January 31, 2023 was 631.3% compared to 75.1% for the three months year ended January 31, 2022. 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 $723,000 during the three months ended January 31, 2023, compared to the three months ended January 31, 2022. The decrease was driven by decreases in overhead allocation of $421,000, salary and benefits of $217,000, and travel expenses and non-cash compensation.

IDWE did not recognize meaningful revenue in the three months ended January 31, 2023. As a percentage of IDWE’s revenues, selling, general and administrative expenses in the three months ended January 31, 2022 was 29.2%.

IDWMH

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Selling, General and Administrative. Selling, general and administrative expenses increased by $697,000 during the three months ended January 31, 2023, compared to the three months ended January 31, 2022. The increase was driven by decreases in overhead allocation to operating segments of $730,000 and increases in non-cash compensation of $140,000 and travel expenses and accounting expenses, offset by decreases in salary and benefits of $105,000 and in shareholder relation expenses, marketing expenses, consulting expenses and legal expenses.

Consolidated Net (Loss) Income IDW Media Holdings, Inc.

(Loss) income from operations. Loss from operations was $1,990,000 in the three months ended January 31, 2023, compared to net income of $1,984,000 in the three months ended January 31, 2022, a decline in bottom line performance of $3,974,000, due to negative changes in operational performance from IDWE of $2,415,000 and IDWP of $847,000 and an increase in non-allocated corporate overhead of $712,000. These changes are described in the separate segment analyses above.

Interest income (expense), net. Interest income was $28,000 in the three months ended January 31, 2023 compared to interest expense of $10,000 in the three months ended January 31, 2022 due to interest income earned on the ERC cash received in the three months ended January 31, 2023.

Other (expense) income, net. Other expense was $36,000 in the three months ended January 31, 2023 compared to other income of $15,000 in the three months ended January 31, 2022, primarily due to the loss on the disposal of property and equipment in the three months ended January 31, 2023. Other income in the three months ended January 31, 2022 was primarily due to franchise tax refunds received.

Liquidity and Capital Resources

General

At January 31, 2023, we had cash and cash equivalents of $9,328,000 and working capital (current assets in excess of current liabilities) of $16,837,000.

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 of January 31, 2023, will be sufficient to sustain our operations for at least the twelve months following the date of this report. The Company has a history of losses in many recent periods, and if we are unable to reverse those losses, the Company will need to raise additional funds in the medium term.

We satisfy our cash requirements primarily through cash provided by the Company’s operating and financing activities.

Operating Activities

Cash flows used in operating activities was $614,000 for the three months ended January 31, 2023, compared to $331,000 the three months ended January 31, 2022. For the three months ended January 31, 2023, net use of cash was primarily a result of the net loss for the period of $1,998,000, adjusted for non-cash items included in the determination of net loss, offset by $982,000 cash inflow related to the effect of changes in operating assets and liabilities. For the three months ended January 31, 2022, the net use of cash was primarily a result of $3,667,000 of cash outflow related to the effect of changes in operating assets and liabilities, offset by a net income in the period of $1,989,000, adjusted for non-cash items included in the determination of net income. Cash flows generated at IDWE vary widely year to year due to timing of productions.

Investing Activities

Our capital expenditures were approximately $72,000 and $204,000 in the three months ended January 31, 2023, and 2022, respectively.

Financing Activities

The Company had no financing activating in the three months ended January 31, 2023 or 2022.

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 condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Changes in Trade Accounts Receivables and Allowance for Doubtful Accounts

Trade accounts receivable decreased to approximately $5,661,000 at January 31, 2023, compared to $6,448,000 at October 31, 2022 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 January 31, 2023 and October 31, 2022, 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.

Cash Sources and Liquidity

The Company is using the net proceeds we received from the August 6, 2021 registered public offering of Class B common stock 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 issues related to increased costs of international printing and shipping. In the fiscal year 2022 through the first quarter of fiscal year 2023, our business as a whole has not suffered any material adverse consequences from the pandemic. 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.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risks  

There is a foreign currency exchange risk associated with IDWE’s arrangements with special-purpose entities, formed for the sole purpose of providing production services in Canada, as the value of assets denominated in CAD will fluctuate due to changes in exchange rates, which will affect the Company’s production costs.

Foreign Exchange Balances Held in CAD (in thousands)

Item 4. Control and Procedures

Evaluation of Disclosure Controls and Procedures 

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the effectiveness of our disclosure controls and procedures as of January 31, 2023 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our CEO and CFO have concluded that, as of January 31, 2023 our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting 

There were no significant changes made in the Company’s internal control over financial reporting during the quarter ended January 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A Risk Factors

There have been no material changes to the Risk Factors set forth in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, except as follows:

The collapse of certain U.S. banks and potentially other financial institutions may have adverse impacts on certain of our vendors and customers or our ability to access payments from certain customers which could negatively impact our operations and financial condition.

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.

Item 1B. Unresolved Staff Comments.

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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