Annual Reports

  • 10-K (Mar 31, 2015)
  • 10-K (Mar 31, 2014)
  • 10-K (Mar 28, 2013)
  • 10-K (Mar 23, 2012)
  • 10-K (May 13, 2011)
  • 10-K (Mar 31, 2011)

 
Quarterly Reports

 
8-K

 
Other

4Licensing Corp 10-K 2015

Documents found in this filing:

  1. 10-K
  2. Ex-23.1
  3. Ex-31.1
  4. Ex-32.1
  5. Ex-32.1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2014
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission File No. 0-7843

4Licensing Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
13-2691380
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

767 Third Avenue, New York, New York
 
10017
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (212) 758-7666
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No

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 the filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  ☐
Accelerated filer  ☐
Non-accelerated filer  ☐
    Smaller reporting company 
(Do not check if a smaller reporting company)

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the $1.41 closing price of the registrant’s Common Stock on June 30, 2014 as reported on the OTC Bulletin Board, was approximately $12,084,530. The calculation of the aggregate market value of voting stock excludes shares of Common Stock held by current executive officers, directors, and stockholders that the registrant has concluded are affiliates of the registrant. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes No ☐

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Common Stock, $.01 Par Value
14,904,119
(Title of Class)
(No. of Shares Outstanding at March 31, 2015)

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 are incorporated by reference into Part III of this Annual Report  on Form 10-K.
 


FORM 10-K REPORT INDEX

10-K Part
and Item No.
 
Page No.
     
PART I
   
Item 1
1
Item 1A
3
Item 1B
6
Item 2
6
Item 3
6
Item 4
7
     
PART II
   
Item 5
8
Item 6
8
Item 7
8
Item 7A
17
Item 8
17
Item 9
17
Item 9A
17
Item 9B
18
     
PART III
   
Item 10
19
Item 11
19
Item 12
19
Item 13
19
Item 14
19
     
PART IV
   
Item 15
19
PART I

Throughout this Annual Report on Form 10-K, we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (the “SEC”).  The SEC allows us to disclose important information by referring to it in that manner.  Please refer to such information.

This Annual Report on Form 10-K, including the sections titled "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements that relate to future events or our future financial performance. We may also make written and oral forward-looking statements in our SEC filings and otherwise. We have tried, where possible, to identify such statements by using words such as "believe," "expect," "intend," "estimate," "anticipate," "will," "project," "plan" and similar expressions in connection with any discussion of future operating or financial performance. Any forward-looking statements are and will be based upon our then-current expectations, estimates and assumptions regarding future events and are applicable only as of the dates of such statements. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statements. Such risks and uncertainties include our ability to generate sufficient cash flow to operate as a going concern, including our ability to successfully derive significant product revenue from the sale of IsoBLOX™ related products; our ability to raise additional capital; and those risks and uncertainties described in "Item 1A. Risk Factors" below as well as other factors. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.   Throughout this Annual Report on Form 10-K, all dollar amounts are reported in thousands unless otherwise specified.

Item 1.
Business.

(dollar amounts in thousands)

General Development and Narrative Description of Business - 4Licensing Corporation, a Delaware corporation (“4LC”), formerly, 4Kids Entertainment, Inc. (“4Kids”), together with the subsidiaries through which its business is conducted (collectively, the “Company”, “we”, “our”, “us”), is a licensing and technology company specializing in the sports and specialty brands. The Company was originally organized as a New York corporation in 1970, and in December 2012 was reincorporated in Delaware.

Liquidity – In recent years, the Company has incurred substantial net losses and has used substantial amounts of cash in its operating activities.  Sales by the Company of certain assets have significantly contributed to the funding of these operating losses.  While the timing of these sales was not primarily motivated by then-current cash needs, without these sales, the Company would not have had sufficient cash to fund its operations.  During 2015, the Company secured additional financing through capital raises that resulted in $750 of proceeds (see Note 18 of the notes to the Company’s consolidated financial statements).

The Company will consider all alternatives available to generate additional cash to fund its operations, including, but not limited to, sales of assets, issuance of equity or debt securities, and other third party arrangements.  There can be no assurance that any of these alternatives will generate additional cash on commercially reasonable terms or at all.

The Company’s consolidated financial statements have been prepared assuming that it will be able to continue to operate as a going concern.  The Company’s limited liquidity as of December 31, 2014 and the costs associated with the further development and launch of products, which could be substantial, raise substantial doubt about the Company’s ability to continue as a going concern.

Emerging from Chapter 11 Bankruptcy Proceedings – On April 6, 2011 (the “Petition Date”), the Company and all of its domestic wholly owned subsidiaries (the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Cases”) under Title 11 of Chapter 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”), which Bankruptcy Cases were jointly administered under Case No. 11-11607.  After filing the Bankruptcy Cases, the Company and its subsidiaries continued to operate as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  As debtors-in-possession, we were authorized under Chapter 11 of the Bankruptcy Code to continue to operate as an ongoing business.

The Company emerged from bankruptcy and commenced paying creditors in full in respect of each such creditor’s allowed claims.  As of December 31, 2013, all of the allowed claims have been paid.  In accordance with the Plan, 4Kids reincorporated in Delaware under the name “4Licensing Corporation.” On the effective date of the Plan, 4Kids’ common stock was cancelled and holders of 4Kids’ common stock were issued one share of common stock of 4LC in exchange for each share of 4Kids’ common stock held by them.

1

On July 23, 2014, the Bankruptcy Court issued a final decree closing the Chapter 11 case of the Company.

Financial Reporting Considerations - The Company’s emergence from bankruptcy did not qualify for fresh start accounting as holders of existing shares immediately before confirmation of the Plan did not receive less than fifty percent of the voting shares of the Company after emergence from bankruptcy.

The Company’s business consists of the following two segments:

IsoBLOX™ and Sports Licensing/Distribution – The IsoBLOX™ and Sports Licensing/Distribution business segment consists of the following wholly owned subsidiaries of the Company: 4LC Sports & Entertainment, Inc. (“4LC Sports”), formerly known as 4Kids Ad Sales, Inc., and 4LC Technology, Inc. (“4LC Technology”), which, in February 2013, acquired, through Pinwrest Development Group, LLC (“Pinwrest”), of which 70% of the membership interests are owned by 4LC Technology, a patent for the IsoBLOX™ technology (the “Patent”) from The Dodd Group, LLC (“TDG”), a Texas limited liability company. The Patent covers a protective shin guard for use in products in the athletic, recreational, police/military, medical and industrial sectors consisting of an elastomeric sleeve within which is deposited protective plastic material consisting of rigid plates joined together by living hinges. The protective plastic material is solid enough to provide protection, flexible enough to better fit the wearer of the shin guard and is lightweight.

In November 2014, Pinwrest filed a patent application (the “Patent”) with the U.S. Patent Office covering its newly developed body protection systems and devices that can be used to prevent or limit serious injuries from impacts or collisions during an activity.  The products covered by this Patent provide body protection systems and devices that can be incorporated into articles of clothing, materials or articles such as seats, linings, or walls of vehicles to reduce the effects of impact.  These body protection devices can form part of headgear, gear, or clothing that is designed to cover and protect one or more parts of a person, such as a military or law enforcement individual, or a professional or recreational athlete.

The protective material uses a combination of energy dispersion and absorption to diffuse impact on the wearer of the protective gear. The technology covered by the Patent is hereinafter referred to as “IsoBLOX™” technology.

After further development, Pinwrest intends to license and distribute the IsoBLOX™ technology in protective gear within the youth, teen and adult markets. During 2014, Pinwrest began selling IsoBLOX™ products to two sporting goods retailers.

4LC Sports is engaged in the business of licensing and distributing sports related brands.

The operations of Pinwrest, 4LC Sports, and 4LC Technology constitute the new IsoBLOX™ and Sports Licensing/Distribution business segment of the Company. The Company reports its financial operations from these entities under the IsoBLOX™ and Sports Licensing/Distribution segment in its consolidated financial statements.

Entertainment and Brand Licensing – The Entertainment and Brand Licensing business segment consists of the operations of the following wholly-owned subsidiaries of the Company: 4Kids Entertainment Licensing, Inc. (“4Kids Licensing”) and 4Sight Licensing Solutions, Inc. (“4Sight Licensing”). 4Kids Licensing is engaged in the business of licensing the merchandising rights to popular children’s television series, properties and product concepts (individually, the “Property” or collectively the “Properties”). 4Kids Licensing typically acts as exclusive merchandising agent in connection with the grant to third parties of licenses to manufacture and sell all types of merchandise, including toys, videogames, trading cards, apparel, housewares, footwear, books and other published materials, based on such Properties. 4Sight Licensing is engaged in the business of licensing properties and product concepts to adults, teens and “tweens”.  4Sight Licensing focuses on brand building through licensing.

Discontinued Operations - On August 16, 2012, the Board of Directors determined to discontinue the operations of its United Kingdom (“UK”) subsidiary, 4Kids International, effective September 30, 2012.  The results of operations for the international business are reported as a discontinued operation.

Due to the Company’s sale of certain assets and the continued lack of profitability, effective June 30, 2012, the Company terminated the operations of 4Kids Ad Sales, Inc. (“4Kids Ad Sales”), 4Kids Productions, Inc. (“4Kids Productions”), 4Kids Entertainment Music, Inc. (“4Kids Music”) and 4Kids Entertainment Home Video, Inc. (“4Kids Home Video”).  Additionally, effective September 30, 2010, the Company terminated the operations of TC Digital Games LLC (“TC Digital”) and TC Websites LLC (“TC Websites”).  The results of operations attributable to these discontinued companies are reported in the Company’s consolidated financial statements as discontinued operations (see Note 13 of the notes to the Company’s consolidated financial statements).

Dependence on a Few Sources of Revenues - The Company has historically derived a substantial portion of its revenues from a small number of Properties and brands, which usually generate revenues for only a limited period of time. Those revenues are highly subject to changing trends in the sports, technologies and entertainment businesses, causing dramatic increases and decreases from year to year due to the popularity of particular brands. It is not possible to accurately predict the length of time that a Property or brand will be commercially successful and/or if a Property or brand will be commercially successful at all. The popularity of Properties and brands can vary from months to years. As a result, the Company’s revenues from particular Properties or brands may fluctuate significantly between comparable periods.

2

The Company expects to derive a substantial amount of its product revenue from the sale of IsoBLOX™ related products, sold through its majority-owned subsidiary, Pinwrest.  While the IsoBLOX™ technology continues to be developed and marketed, there is no certainty that these products will be commercially viable in the marketplace, that revenues will be derived from such products or how soon products will become available for sale, if at all.

One Pinwrest customer, Dick’s Sporting Goods, represented 14% of consolidated net revenues and two licensing Properties, “American Kennel Club” and “Cabbage Patch”, represented 33% and 19%, respectively, for a total of 66% of consolidated net revenues for fiscal 2014.  Three Properties, “American Kennel Club”, “Dinosaur King” and “Huntik”, represented 21%, 14% and 10% of consolidated net revenues, respectively, for a total of 45% of consolidated net revenues for fiscal 2013.  As of December 31, 2014, licensing agreements with the “American Kennel Club” and “Artlist’s The Dog and Friends” have expired.  Additional licensing revenue may be generated from the “American Kennel Club” property though June 30, 2015. For more information on the Company’s Revenues/Major Customers, please see Note 9 of the notes to the Company’s consolidated financial statements.

Trademarks and Copyrights - Except as provided below, the Company generally does not own any trademarks or copyrights in Properties which the Company represents as a merchandising agent. The trademarks and copyrights are typically owned by the creators of the Properties or by other entities, which may have expended substantial amounts of resources in developing or promoting the Properties.

The Company owns the copyrights and trademarks to the “WMAC Masters” live action television series.  The Company is also a joint copyright holder of the “Chaotic” animated television series.   Additionally, the Company is a joint copyright holder of the “Chaotic” trading card artwork for the “Chaotic” trading card game. The Company also jointly owns the copyright to the “Chaotic” trading card game as it relates to revisions to the original “Chaotic” trading card game previously sold in Denmark.

Competition - The Company’s principal competitors in its IsoBLOX™ and Sports Licensing/Distribution business are large sporting goods and apparel companies (e.g., Nike, EvoShield and Under Armour) with consumer products/merchandise and licensing divisions. Many of these companies have substantially greater resources than we do and represent products which have been commercially successful for longer periods than our products.

Employees - As of March 31, 2015, the Company had a total of six employees all of whom were full-time employees in its operations.

Available Information - The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Stockholders will be made available, free of charge, through its website, http://www.4LicensingCorp.com, as soon as reasonably practicable after such reports have been filed with or furnished to the SEC.  In addition, you may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site, http://www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Executive Officer of the Company

Name
 
Age
 
Employed By Registrant Since
 
Recent Position(s) Held As Of March 31, 2015
Bruce R. Foster
 
55
 
2002
 
Chief Executive Officer, Executive Vice President and Chief Financial Officer

Item 1A.
Risk Factors.

(dollar amounts in thousands)

The following significant factors, as well as others of which we are unaware or deem to be immaterial at this time, could materially adversely affect our business, financial condition or operating results in the future. Therefore, the following information should be considered carefully together with other information contained in this report.  Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

3

Our inability to generate sufficient cash flows may result in our Company not being able to continue as a going concern.

The Company’s overall cash position as of December 31, 2014 provides only limited liquidity to fund the Company’s day-to-day operations. The Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern. We may need to seek additional financing or sell our assets to support our continued operation; however, there are no assurances that any such financing or asset sale can be obtained or achieved on commercially reasonable terms, if at all. In view of these conditions, our ability to continue as a going concern depends on our ability to generate sufficient cash flows from our operations or to obtain the necessary financing. The outcome of these matters cannot be predicted at this time. The consolidated financial statements for the year ended December 31, 2014 do not include any adjustment to the amounts and classification of assets and liabilities that might be necessary should we be unable to continue in business. Any such adjustment could be material.

Revenues are largely derived from a small number of brands and may dramatically decrease if we are not able to develop new revenue sources.

As of December 31, 2014, licensing agreements with the “American Kennel Club” and “Artlist’s The Dog and Friends” have expired.  A significant decrease in our licensing revenues could have a material adverse impact on our financial condition and results of operations.  We expect to derive future product revenue from the sale of IsoBLOX™ related products.  During the year ended December 31, 2014 one customer, Dick’s Sporting Goods”, accounted for 14% or $161 of our consolidated net revenues.  The IsoBLOX™ technology continues to be developed.  There can be no assurance that these products will be commercially viable in the marketplace, that revenues will be derived from such products, or how soon such products will become available for sale, if at all.

We have been and may continue to be negatively affected by adverse general economic and other conditions.

Conditions in the domestic and global economies are extremely unpredictable and our business has been impacted by changes in such conditions. Softening global economies, stock market uncertainty and wavering consumer confidence caused by economic weakness, the decline in the housing market, the threat or occurrence of terrorist attacks, war or other factors generally affecting economic conditions have adversely affected our business, financial condition and results of operations and may continue to do so in the future.

Continued turmoil in United States and foreign credit markets, equity markets, and in the global financial services industry,  and an unprecedented level of intervention from the U.S. and foreign governments, have continued to place pressure on the global economy and affect overall consumer spending, spending by advertisers and the availability of credit to us, our clients, and our customers.  If conditions in the global economy, U.S. economy or other key vertical or geographic markets remain uncertain or weaken further, they may have a further material adverse effect on our business, financial condition and results of operations.

The changing preferences of consumers could adversely affect our business.

Our business and operating results depend upon the appeal of our brands and product concepts to consumers.  Consumer preferences, as well as industry trends and demands are continuously changing and are difficult to predict as they vary over time. In addition, as brands often have short life cycles, there can be no assurances that:

(i) our current brands and product concepts will become popular for any significant period of time;
(ii) new brands and product concepts will achieve and or sustain popularity in the marketplace;
(iii) a brand’s life cycle will be sufficient to permit us to recover revenues in excess of the costs of advance payments, guarantees, development, marketing, royalties and other costs relating to such brand; or
(iv) we will successfully anticipate, identify and react to consumer preferences.

Our failure to accomplish any of these events could result in reduced overall revenues, which could have a material adverse effect on our business, financial condition and results of operations.  In addition, the volatility of consumer preferences could cause our revenues and net income to vary significantly between comparable periods.

We must continually seek new brands and technologies from which we can derive revenues.

It is difficult to predict whether a Brand will be successful, and if so, for how long.  Because of this, we are constantly seeking new brands and technologies that are already successful or that we believe are likely to become successful in the future.  If we are unable to identify and acquire the rights to successful new brands, our revenues, financial condition and results of operations could be adversely affected.

4

We operate in a highly competitive marketplace.

In the IsoBLOX™ and Sports Licensing/Distribution business segment, our principal competitors are large sporting goods and apparel companies (e.g., Nike, EvoShield and Under Armour) with consumer products/merchandise and licensing divisions. Many of these companies have substantially greater resources than we do and represent products which have been commercially successful for longer periods than our products.

Our future success is dependent on certain key employees.

The success of our business depends to a significant extent upon the skills, experience and efforts of a number of management personnel and other key employees.  The loss of the services of any of our management personnel or other key employees could have a material adverse effect on our business, results of operations or financial condition.

We may not be able to successfully protect our intellectual property rights.

We rely on a combination of copyright, trademark, patent and other proprietary rights laws to protect the intellectual property rights that we own or license.  It is possible that third parties may challenge our rights to such intellectual property.  In addition, there is a risk of third parties infringing upon our licensors’ or our intellectual property rights and producing counterfeit products.  These events may result in lost revenue as well as litigation, which may be expensive and time-consuming even if a favorable outcome is obtained.  There can be no assurance that adequate remedies would be available for any infringement of the intellectual property rights owned or licensed by the Company. Any such failure to successfully protect our intellectual property rights may have a material adverse effect on our competitive position.

We may be subject to audit claims from our partners.

We may be subject to audits by certain of our Property partners.  There can be no assurance that the parties will conclude their discussions regarding the audit issues satisfactorily. Any such failure to successfully resolve any audit issues may result in litigation which may have a material adverse effect on our financial position or the results of our operations.

Our stock price has been volatile and your investment could lose value.

The trading price of our Common Stock has been volatile and could be subject to wide fluctuations due to various factors. The timing of announcements in the public market regarding new products, product enhancements or technological advances by us or our competitors, and any announcements by us or our competitors of acquisitions, major transactions or management changes could also affect our stock price. Our stock price is subject to speculation in the press and the analyst community, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock and market trends unrelated to our performance. Stock sales by our directors, officers or other significant holders may also affect our stock price. A significant drop in our stock price could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business. Moreover, if the per share trading price of our Common Stock declines significantly, you may be unable to resell your shares at or above the public offering price. We cannot assure you that the per share trading price of our Common Stock will not fluctuate or decline significantly in the future.

The trading volume of our Common Stock has been low, and the sale of a substantial number of shares in the public market could depress the price of our Common Stock.

Our Common Stock is traded on the OTC pink sheets and historically has had a low average daily trading volume relative to many other stocks. Thinly traded stocks can have more price volatility than stocks trading in an active public market, which can lead to significant price swings even when a relatively small number of shares are being traded, and can limit an investor’s ability to quickly sell blocks of stock. If there continues to be low average daily trading volume in our Common Stock investors may be unable to quickly liquidate their investments or at prices investors consider to be adequate.

We do not intend to pay dividends on our Common Stock, in the foreseeable future.

For the foreseeable future, we intend to retain any earnings to finance the development of our business, and we do not anticipate paying any cash dividends on our Common Stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our board of directors considers relevant. Accordingly, investors must rely on sales of their Common Stock after price appreciation, which may never occur, as the only way to realize a return on their investment.

5

Our certificate of incorporation, by-laws and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our Common Stock.
 
Our certificate of incorporation and by-laws provisions may have the effect of delaying, deferring or discouraging a prospective acquirer from making a tender offer for our shares or otherwise attempting to obtain control of us. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their Common Stock. Moreover, these provisions could discourage accumulations of large blocks of Common Stock, thus depriving stockholders of any advantages which large accumulations of Common Stock might provide.
 
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the General Corporation Law of the State of Delaware. Section 203 prevents some stockholders holding more than 15% of our outstanding Common Stock from engaging in certain business combinations unless the business combination was approved in advance by our board of directors, results in the stockholder holding more than 85% of our outstanding Common Stock or is approved by the holders of at least 662/3% of our outstanding Common Stock not held by the stockholder engaging in the transaction.
 
Any provision of our certificate of incorporation or our by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Common Stock and could also affect the price that some investors are willing to pay for our Common Stock.

Item 1B.
Unresolved Staff Comments.

None.

Item 2.
Properties.

The following table sets forth, the location of the Company’s executive office and other properties, the date on which the leases expire and the use which the Company makes of each such facility:

Address
Expiration of Lease
Use
Approximate
Square Feet
       
767 Third Avenue,  17th Floor
New York, New York 10017
October 30, 2015
Executive and Administrative Facilities
6,850

3608 Commerce Drive
Arnold, Missouri 63010
January 31, 2015
Administrative and General Warehousing
2,500

The lease for the Arnold, Missouri facility transitioned to a month-to-month obligation on February 1, 2015.

Item 3.
Legal Proceedings.

(dollar amounts in thousands)

TCD International, Ltd. - On February 12, 2010, Home Focus Development, Ltd., a British Virgin Islands corporation (“Home Focus”), filed suit against the Company in the United States District Court for the Southern District of New York. Home Focus alleged that the Company owed Home Focus $1,075 under an Interest Purchase Agreement among the Company, Home Focus and TC Digital entered into on March 2, 2009, pursuant to which the Company acquired a 25% ownership interest in TCD International, Ltd. (“TDI”).

On April 26, 2010, the Company filed an answer and asserted various counterclaims against Home Focus and its owners, in their individual capacities. In its counterclaims, the Company has alleged that Home Focus failed to make its contractually required initial capital contribution of $250 to TDI necessary to acquire the 25% ownership interest in TDI it purported to sell to the Company and also failed to contribute its 50% share of the expenses. The Company has further asserted counterclaims of fraud and misrepresentation.

On May 7, 2014, the Company entered into a settlement agreement with Home Focus, which was approved by the Bankruptcy Court on July 23, 2014.  Under the terms of the agreement, the Company was required to pay Home Focus $750, which the Company paid on August 8, 2014.

6

Cornerstone Patent Technologies, LLC – On April 25, 2011, Cornerstone Patent Technologies, LLC (“Cornerstone”) filed proof of claim No. 20 (the “Cornerstone Claim”) in the Bankruptcy Court against the Debtors in the Bankruptcy Cases in the amount of $3,300.  Other than filing the Cornerstone Claim, Cornerstone has not commenced litigation against the Debtors.  The Cornerstone Claim alleges (i) breach of a Patent License Agreement dated September 10, 2007 by non-Debtors TC Digital and TC Websites; (ii) breach of Patent Purchase Agreement dated by September 7, 2007, by 4Kids Technology for failing to notify Cornerstone of alleged wrongdoing by TC Digital and TC Websites; (iii) unfair competition; (iv) tortious interference with contract; (v) unjust enrichment; and (vi) piercing the corporate veil.  The Company disputes the Cornerstone Claim in its entirety.  On November 12, 2012, the Company filed a motion with the Bankruptcy Court to estimate the Cornerstone Claim at $0 or in the alternative disallow the claim.  On December 5, 2012, the Bankruptcy Court entered an agreed order between the Company and Cornerstone providing that on the effective date of the Plan, the Debtors would establish a disputed claims reserve on account of the Cornerstone Claim in the amount of $228, without prejudice to (i) Cornerstone’s rights to pursue an allowed claim or judgment against the Debtors in an amount greater than the reserve, with such allowed claim or judgment to be paid pursuant to the Plan and (ii) the Debtors’ rights to defend, contest or otherwise oppose on any grounds, the Cornerstone Claim or any other claims or litigation asserted by or on behalf of Cornerstone or any other party.  On August 29, 2013, the Bankruptcy Court entered an order disallowing and expunging the Cornerstone Claim.  As a result, a gain of $443 from the reversal of a liability was recognized during the year ended December 31, 2013 in the income from discontinued operations.

Lehman Brothers, Inc. Claim - The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the auction rate securities on behalf of the Company violated its legal obligations to the Company.  As a result, the Company took various measures to obtain appropriate legal relief, including initiating an arbitration on April 3, 2008 against Lehman Brothers, Inc. and the brokers who had serviced the Company’s Lehman account with the Financial Industry Regulatory Authority.  On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy.  The Company’s arbitration proceeding was stayed by the Lehman Brothers Holdings, Inc. bankruptcy.  On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc.  The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008.  On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”).  SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC.  In late September, 2009, the Company filed a proof of claim against Lehman Brothers, Inc. in the United States Bankruptcy Court for the Southern District of New York. The principal amount of the claim was approximately $31,500 plus interest. In addition, the proof of claim requested treble damages. The proof of claim is a general unsecured claim. On October 18, 2011, the Company entered into a settlement agreement and general release with the brokers who had serviced the Company’s account with Lehman Brothers, Inc. in exchange for a payment to the Company of approximately $489. On May 5, 2014, the Company entered into a stipulation with the Trustee for the liquidation of Lehman Brothers, Inc., regarding its proof of claim.  As part of the stipulation the Company will have an allowed, general unsecured creditor claim against the general estate of Lehman Brothers, Inc. of $3,653, which represents the Company’s final settlement of all claims against Lehman Brothers, Inc.

On May 9, 2014, the Company sold its $3,653 general unsecured creditor claim against the Lehman Brothers, Inc. estate to a third party for $1,607.

Item 4.
Mine Safety Disclosures

Not applicable.

7

PART II

Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information - On February 26, 2013, our Common Stock resumed trading on the OTC pink sheets under the trading symbol “FOUR.”  Prior to that, our Common Stock was quoted on the OTC Bulletin Board Market since June 1, 2010 under the trading symbol “KIDEQ.PK.” Prior to June 1, 2010, our common stock was listed for trading on the New York Stock Exchange under the symbol “KDE”.  The following table indicates high and low sales quotations for the periods indicated based upon information reported by the OTC Bulletin Board. The prices quoted on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, markdown or commissions. The OTC Bulletin Board prices listed below may not represent actual transaction prices.

2014
 
Low
   
High
 
First Quarter
 
$
0.59
   
$
1.65
 
Second Quarter
   
1.25
     
1.60
 
Third Quarter
   
0.90
     
1.45
 
Fourth Quarter
   
0.62
     
1.15
 
                 
2013
 
Low
   
High
 
First Quarter
 
$
0.02
   
$
0.62
 
Second Quarter
   
0.38
     
0.54
 
Third Quarter
   
0.45
     
0.73
 
Fourth Quarter
   
0.49
     
0.75
 

(b) Holders - The approximate number of holders of record of the Company’s Common Stock on March 31, 2015 was 268.

(c) Dividends - There were no dividends or other distributions declared or made by the Company during 2014 or 2013. Future dividend policies will be determined by the Board of Directors based on the Company’s earnings, financial condition, capital requirements and other existing conditions. It is anticipated that cash dividends will not be paid to the holders of the Company’s Common Stock in the foreseeable future.

(d) Equity Compensation Plan Information - Information regarding the Company’s equity compensation plans is incorporated by reference to Item 12 in Part III of this Form 10-K.
 
(e) Sales or Unregistered Securities by the Issuer – None that have not previously been disclosed on Form 8-K.

(f) Purchases of Equity Securities by the Issuer – None.

Item 6.
Selected Financial Data

Not applicable.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in thousands)

The following is a discussion and analysis of our financial position and results of operations for each of the two years in the period ended December 31, 2014.  This commentary should be read in conjunction with our consolidated financial statements and the notes to the Company’s consolidated financial statements, which begin on page F-1 under “Item 8. Financial Statements and Supplementary Data”.

Overview

Through its majority-owned subsidiary, Pinwrest, the Company during 2013 acquired the rights to the Patent, which covers the IsoBLOX™ technology. The Patent covers a protective shin guard for use in products in the athletic, recreational, police/military, medical and industrial sectors consisting of an elastomeric sleeve within which is deposited protective plastic material consisting of rigid plates joined together by living hinges. In November 2014, Pinwrest filed the Patent with the U.S. Patent Office covering its newly developed body protection systems and devices that can be used to prevent or limit serious injuries from impacts or collisions during an activity.  The products covered by this Patent provide body protection systems and devices that can be incorporated into articles of clothing, materials or articles such as seats, linings, or walls of vehicles to reduce the effects of impact.  These body protection devices can form part of headgear, gear, or clothing that is designed to cover and protect one or more parts of a person, such as a military or law enforcement individual, or a professional or recreational athlete.

8

During 2014, the Company was primarily focused on developing the IsoBLOX™ technology.  In January 2014, the Company received approval of its protective pitcher’s cap for use in Major League Baseball (“MLB”).  The Company is currently working with MLB teams to custom fit their players for the protective cap.  A significant amount of the Company resources have been deployed for product development, manufacturing and the commercial launch of the IsoBLOX™ brand at retail.  Our initial product development strategy is to design and introduce products into the sports marketplace, utilizing our patented impact protection technology.  The costs associated with the further development and launch of products could be substantial.  Provided that we generate the necessary resources, we will continue to work to refine both our technology and our product lines.

These initiatives, while important to the future of the Company, did not translate into significant revenues during 2014.  Our ability to achieve and maintain profitability and positive cash flow is dependent upon the success of the IsoBLOX™ products that we launch into the marketplace and upon the success of our reorganizational efforts and a number of other factors, including our ability to generate additional revenues.

Emerging from Chapter 11 Bankruptcy Proceedings – On April 6, 2011, the Company and all of its domestic wholly owned subsidiaries filed under the Bankruptcy Code in the Bankruptcy Court.  After filing the Bankruptcy Cases, the Company and its subsidiaries continued to operate as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  As debtors-in-possession, we were authorized under Chapter 11 of the Bankruptcy Code to continue to operate as an ongoing business.

The Company emerged from bankruptcy and commenced paying creditors in full in respect of each such creditor’s allowed claims.  As of December 31, 2013, all of the allowed claims have been paid.  In accordance with the Plan, 4Kids reincorporated in Delaware under the name “4Licensing Corporation.” On the effective date of the Plan, 4Kids’ common stock was cancelled and holders of 4Kids’ common stock were issued one share of common stock of 4LC in exchange for each share of 4Kids’ common stock held by them.

On July 23, 2014, the Bankruptcy Court issued a final decree closing the Chapter 11 case of the Company.

Financial Reporting Considerations - The Company’s emergence from bankruptcy did not qualify for fresh start accounting as holders of existing shares immediately before confirmation of the Plan did not receive less than fifty percent of the voting shares of the Company after emergence from bankruptcy.

General

The Company receives revenues from licensing and product sales.  The Company historically has derived a substantial portion of its licensing revenues from a small number of Properties and brands, which usually generate revenues for only a limited period of time. The Company’s revenues are highly subject to changing trends in the youth oriented markets, sports and specialty brands, potentially causing dramatic increases and decreases from year to year due to the popularity of particular Properties or brands. It is not possible to accurately predict the length of time a Property or brand will be commercially successful and/or if a Property or brand will be commercially successful at all. The popularity of Properties or brands can vary from months to years. As a result, the Company’s revenues from particular Properties or brands may fluctuate significantly between comparable periods.

The Company expects to derive future product revenue from the sale of IsoBLOX™ related products, sold through its majority-owned subsidiary Pinwrest.  While the IsoBLOX™ technology continues to be developed and marketed, there is no certainty that these products will be commercially viable in the marketplace, that revenues will be derived from such products or how soon products will become available for sale, if at all. There can be no assurance that these products will generate revenue.

Because of the sale of a significant amount of  assets and the continued lack of profitability, effective June 30, 2012, the Company terminated the operations 4Kids Music, 4Kids Home Video, 4Kids Production and 4Kids Ad Sales.  The closure of the business of these wholly-owned subsidiaries resulted in the Company being reduced to having operations in only the licensing business segment in 2012.

9

Effective September 30, 2012, the Company’s wholly-owned subsidiary, 4Kids International terminated its operations.  4Kids International, based in London, England, managed Properties represented by the Company in the UK and European marketplaces.  The closing of 4Kids International has enabled the Company to further reduce costs and focus on its core licensing business.

The results of operations for these terminated operations which constituted the advertising media and broadcast segment, television and film production/distribution segment and the trading card and game distribution segment, are reported as discontinued operations.

Critical Accounting Policies

The Company’s accounting policies are fully described in Note 2 of the notes to the Company’s consolidated financial statements. Below is a summary of the critical accounting policies, among others, that management believes involve significant judgments and estimates used in the preparation of its consolidated financial statements.

Reorganization Items - The Company’s costs relate to professional, consulting and trustee fees in conjunction with the filing of the Bankruptcy Cases.  These types of expenditures are expensed as incurred and reported as reorganization items.

Other Estimates - The Company estimates reserves for uncollectible receivables. The Company estimates the amount of uncollectible receivables by monitoring delinquent accounts and estimating a reserve based on contractual terms and other customer specific issues.

Inventory Obsolescence - The Company reviews the carrying value of its inventory for estimated obsolete or unmarketable inventory. When the carrying value of the inventory exceeds its realizable value, the Company records an inventory write-down in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and current market conditions.  As of December 31, 2014, the Company recorded a write-down of $171 to reduce the carrying value of its finished goods. If actual market conditions are less favorable than those estimated by management, additional inventory reserves may be required.

Customer Allowance - We generally maintain a customer allowance for product returns based on estimates of the amount of product to be returned by our customers which may result from expired or damaged product on delivery or for price reductions on the related sales and is based on historical patterns, analysis of market demand and/or a percentage of sales based on industry trends, and management’s evaluation of specific factors that may increase the risk of product returns. The customer allowance also provides for promotional arrangements and other adjustments taken by our customers. The calculation of the customer allowance requires estimates and involves a high degree of subjectivity and judgment. As a result of the uncertainties involved in estimating the customer allowance, there is a possibility that materially different amounts could be reported under different conditions or using different assumptions. As of December 31, 2014, our customer allowances were approximately $219; of which $213 was recorded as accrued liabilities and $6 as a reduction of accounts receivable in the accompanying consolidated balance sheet.

We evaluate our customer allowances quarterly and adjust it when events indicate that a change in estimate is appropriate. Changes in estimates could materially affect our results of operations or financial position. It is possible that we may need to adjust our estimates in future periods.

Revenue Recognition - The Company’s revenue recognition policies are appropriate to the circumstances of its business.  See Note 2 of the notes to the Company’s consolidated financial statements for a discussion of these revenue recognition policies.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates the policies and estimates that it uses to prepare its consolidated financial statements.  In general, management’s estimates and assumptions are based on historical experience, known trends or events, information from third-party professionals and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

10

Recently Adopted Accounting Standards – The Company did not adopt any new accounting standards in 2014.

Recently Issued Accounting Standards – In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-8, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The standard changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has a major effect on an entity’s operations and financial results. This accounting guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale. The guidance is effective for the Company on a prospective basis beginning in the first quarter of fiscal 2015.

In May 2014, the FASB issued an ASU which supersedes the most current revenue recognition requirements. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption not permitted. We are currently evaluating the standard to determine the impact of its adoption on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern", which establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. ASU 2014-15 also provides guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. This update is effective for interim and annual reporting periods beginning after December 15, 2016; early adoption is permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

11

Results of Operations

The following table sets forth our results of operations expressed as a percentage of total net revenues for the years ended December 31, 2014 and 2013.

   
2014
   
2013
 
Net revenues
   
100
%
   
100
%
                 
Costs and expenses:
               
Selling, general and administrative
   
367
     
442
 
Cost of product sales
   
31
     
4
 
Total costs and expenses
   
398
     
446
 
                 
Loss from operations
   
(298
)
   
(346
)
                 
Other income (expense):
               
Gain on settlement of claims
   
138
     
 
Gain on sale of assets
   
23
     
 
Interest expense
   
(29
)
   
 
Total other expense
   
132
     
 
                 
Loss from continuing operations before reorganization and litigation items
   
(166
)
   
(346
)
                 
Reorganization items
   
(3
)
   
(12
)
Gain on settlement of pre-petition liabilities
   
     
2
 
Loss from continuing operations before income taxes
   
(169
)
   
(356
)
Benefit from (provision for) income taxes
   
     
 
                 
Loss from continuing operations
   
(169
)
   
(356
)
Income from discontinued operations
   
33
     
96
 
Net loss
   
(136
)
   
(260
)
                 
Loss attributable to noncontrolling interests, continuing operations
   
61
     
27
 
Income attributable to noncontrolling interests, discontinued operations
   
(2
)
   
(33
)
                 
Net loss attributable to 4Licensing Corporation
   
(77
)%
   
(266
)%

Year Ended December 31, 2014 as compared to Year Ended December 31, 2013

(dollar amounts in thousands)

Revenues
   
2014
   
2013
   
$ Change
   
% Change
 
Revenues
 
$
1,166
   
$
1,214
   
$
(48
)
   
(4
)%

The decrease in consolidated net revenues for the year ended December 31, 2014, as compared to 2013, was primarily attributable to reduced licensing revenues of approximately $250 partially offset by increased product revenue of approximately $200.

12

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 20%, or $1,080, to $4,284 for the year ended December 31, 2014, when compared to 2013.  The decrease was primarily attributable to broad cost-cutting initiatives implemented throughout the Company as well as the completion of legal proceedings during the year and included:

(i) decreased professional fees of approximately $740; and
(ii) decreased personnel costs of approximately $390; as well as
(iii) decreased general office expenses of approximately $200; partially offset by
(iv) increased selling expenses of approximately $210.

Gain on Settlement of Claims

During the year ended December 31, 2014, the Company realized a gain on settlement of claims of $1,607 from the sale of its $3,653 general unsecured creditor claim against the Lehman Brothers, Inc. estate to a third party.

The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the auction rate securities on behalf of the Company, violated its legal obligations to the Company.  As a result, the Company took various measures to obtain appropriate legal relief, including initiating an arbitration on April 3, 2008 against Lehman Brothers, Inc. and the brokers who had serviced the Company’s Lehman account with the Financial Industry Regulatory Authority.  On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy.  The Company’s arbitration proceeding was stayed by the Lehman bankruptcy.  On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc.  The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008.  On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”). SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC.  In late September, 2009, the Company filed a proof of claim against Lehman Brothers, Inc. in the United States Bankruptcy Court for the Southern District of New York. The principal amount of the claim was approximately $31,500 plus interest. In addition, the proof of claim requested treble damages. The proof of claim is a general unsecured claim. On October 18, 2011, the Company entered into a settlement agreement and general release with the brokers who had serviced the Company’s account with Lehman Brothers, Inc. for approximately $489. On May 5, 2014, the Company entered into a stipulation with the Trustee for the liquidation of Lehman Brothers, Inc., regarding its proof of claim.  As part of the stipulation the Company will have an allowed, general unsecured creditor claim against the general estate of Lehman Brothers, Inc. of $3,653, which represents the Company’s final settlement of all claims against Lehman Brothers, Inc.

On May 9, 2014, the Company sold its $3,653 general unsecured creditor claim against the Lehman Brothers, Inc. estate to a third party for $1,607.

Gain on Sale

During the year ended December 31, 2014, the Company realized a gain on sale of $270, primarily from the sale of its rights to the copyright and trademark to the “Charlie Chan” live action television series.

Interest Expense

Interest expense of $336 for the year ended December 31, 2014 was primarily the result of interest on outstanding debt issued in 2014 and the amortization of the related debt discount.

Reorganization Items

Reorganization costs decreased 72%, or $109, to $42 for the year ended December 31, 2014 as compared to 2013.  These costs included professional and consulting fees charged for services retained in connection with the Bankruptcy Cases, as well as fees paid to the Office of the United States Bankruptcy Trustee.  The decrease in these items was due to the resolution of claims during 2014.

Loss From Continuing Operations Before Income Taxes

 
2014
 
2013
 
$ Change
   
% Change
 
Loss From Continuing Operations Before Income Taxes
 
$
(1,976
)
 
$
(4,331
)
 
$
2,355
     
(54
)%

13

The decreased loss from continuing operations for the year ended 2014, as compared to 2013, was primarily attributable to the settlement of claims against Lehman Brothers, Inc. that resulted in a gain of $1,607 and reduced professional fees of approximately $740 primarily as a result of the Company’s exit from bankruptcy and the completion of legal proceedings during the year.

Income Tax Expense

The Company regularly reviews its deferred tax assets for recoverability taking into consideration such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. The Company records a valuation allowance when it is more likely than not that all or some portion of the deferred tax assets will not be realized. In view of the level of deferred tax assets as of December 31, 2014, and the Company’s historical losses from operations, the Company has determined that a full valuation allowance against its net deferred tax assets is required.

In the event that the Company earns pre-tax income in the future such that it will be able to use some or all of its deferred tax assets, the Company will reduce or eliminate the valuation allowance.  If the Company were to reverse the valuation allowance, in whole or in part, the Company’s income statement for such reporting period would record a reduction in income tax expense and an increase in net income, to the extent of the reversal of the valuation allowance.

No benefit from income taxes was recorded for the years ended December 31, 2014 and 2013, as it is more likely than not that the Company will not be able to realize its deferred tax assets.

The Company files tax returns in multiple tax jurisdictions and from time to time is subject to audit in certain tax jurisdictions.  The Company is no longer subject to examinations by income tax authorities in most jurisdictions for years prior to 2011.

Income (Loss) from Continuing Operations

As a result of the above, the Company had a loss from continuing operations for the year ended December 31, 2014 of $1,976, as compared to a loss from continuing operations in 2013 of $4,331.

Discontinued Operations

Pursuant to the sale of a significant amount of assets and the continued lack of profitability, effective June 30, 2012, the Company terminated the operations of 4Kids Ad Sales, 4Kids Productions, 4Kids Music and 4Kids Home Video.  The closure of the business of these wholly-owned subsidiaries resulted in the Company having operations in only the licensing business segment in 2012.

Effective September 30, 2012, the Company’s wholly-owned subsidiary, 4Kids International, terminated its operations.  4Kids International, based in London, England, managed Properties represented by the Company in the UK (“UK”) and European marketplaces.  The closing of 4Kids International has enabled the Company to further reduce costs and focus on its core licensing business.

The results of operations for those terminated operations which constituted the advertising media and broadcast segment, television and film production/distribution segment and the trading card and game distribution segment, are reported as discontinued operations.

Additionally, effective September 30, 2010, the Company terminated the operations of TC Digital and TC Websites.  The results of operations attributable to those entities are reported in the Company’s consolidated financial statements as discontinued operations (see Note 13 of the notes to the Company’s consolidated financial statements).

The following are the summarized results of discontinued operations for the years ended December 31, 2014 and 2013:

 
Years Ended December 31,
   
2014
   
2013
 
Total net revenues
 
$
   
$
 
Total income
   
389
     
1,170
 
Income from discontinued operations
 
$
389
   
$
1,170
 

The income from discontinued operations for the years ended December 31, 2014 and 2013 was primarily the result of the reversal of liabilities upon the settlement of claims.
 
14

Liquidity and Capital Resources

Financial Condition

Cash and cash equivalents for the years ended December 31, 2014 and 2013 were as follows:

   
2014
   
2013
   
$ Change
 
             
Cash and cash equivalents
 
$
235
   
$
356
   
$
(121
)

In recent years, the Company has incurred substantial net losses and has used substantial amounts of cash in its operating activities.  Sales by the Company of certain assets have significantly contributed to the funding of these operating losses. While the timing of these sales was not primarily motivated by then current cash needs, without these sales the Company would not have had sufficient cash to fund its operations.  During 2015, the Company secured additional financing through capital raises that resulted in $750 of proceeds (See Note 18 of the notes to the Company’s consolidated financial statements).

The Company will consider all alternatives available to generate additional cash to fund its operations, including, but not limited to, sales of assets, issuance of equity or debt securities, and third party arrangements. There can be no assurance that any of these alternatives will help the Company in generating additional cash or that we will be able to sell debt/equity on commercially reasonable terms or at all.

Sources and Uses of Cash

Cash flows for the years ended December 31, 2014 and 2013 were as follows:

Sources (Uses)
 
2014
   
2013
 
Operating Activities
 
$
(2,672
)
 
$
(8,316
)
Investing Activities
   
249
     
(1,126
)
Financing Activities
   
2,302
     
787
 

Working capital (deficiency), consisting of current assets less current liabilities, was $(45) as of December 31, 2014 and $(1,661) as of December 31, 2013.

Operating Activities
2014
Net cash used in operating activities of $2,672 in 2014 primarily reflects the purchase of inventory, the payment of liabilities, primarily professional fees, and the funding of the operating loss.

2013
Net cash used in operating activities of $8,316 in 2013 primarily reflects the payments of accounts payable and accrued expenses mostly related to severance and professional fees, the settlement of liabilities subject to compromise and the funding of the operating loss for the year ended December 31, 2013.

Investing Activities
2014
Net cash provided by investing activities of $249 in 2014 reflects proceeds of $270 from the sale of certain assets, offset by cash used in the purchase of property and equipment of $21.

2013
Net cash used in investing activities of $1,126 in 2013 reflects $2,100 used in the purchase of IsoBLOX™ assets and $26 used in the purchase of property and equipment, offset by $1,000 of proceeds from the release of escrow related to the sale of certain assets.

Financing Activities
2014
Net cash provided by financing activities for the year ended December 31, 2014 of $2,302 primarily reflects the capital contributions from the noncontrolling interests in Pinwrest of $630 and proceeds from the issuance of the Promissory Notes of $1,650.

15

On March 25, 2014, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Cleveland Capital, L.P. (“Cleveland Capital”) and Prescott Group Aggressive Small Cap Masterfund, GP (“Prescott Group”, and together with Cleveland Capital, the “Purchasers”), and the guarantors party thereto, each of which is a wholly-owned subsidiary of the Company (each a “Guarantor” and collectively, the “Guarantors”), pursuant to which the Company agreed to issue to the Purchasers (i) an aggregate principal amount of $1,650 of promissory notes (each a “Note” and collectively, the “Notes”), to be guaranteed by the Guarantors, and (ii) warrants (each a “Warrant” and collectively, the “Warrants”) to purchase up to an aggregate of 1,683,673 shares (the “Warrant Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”), for an aggregate purchase price of approximately $1,650 (the “Offering”).

On March 25, 2014, the Offering closed and the Company (i) issued and sold to Cleveland Capital a Note in the principal amount of $150 and a Warrant to purchase up to 153,061 Warrant Shares and received $150, and (ii) issued and sold to Prescott Group a Note in the principal amount of $1,500 and a Warrant to purchase up to 1,530,612 Warrant Shares and received $1,500.

The 1,683,673 detachable Warrants issued with the Notes were valued at approximately $1.43 per warrant using the Black-Scholes model at March 25, 2014. The relative fair value of the detachable Warrants of $979 was recorded as a component of stockholders’ equity with the offset recorded as a discount on the Notes and included as a component of long-term debt in the accompanying consolidated balance sheet as of December 31, 2014. The fair value of the Warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 2.75%, volatility – 100.00%, expected term – 10 years, expected dividends – 0%. The debt discount related to the Warrants is being amortized over a two-year period (through maturity) using the effective interest method.  Interest expense related to the amortization of the debt discount for the year ended December 31, 2014 was approximately $269.

The Notes accrue interest at a rate of 5.0% per year from and after the date of issuance of such Note, payable quarterly.  The interest paid to related parties under this agreement were $63 and $0 for the years ended December 31, 2014 and 2013, respectively.  The Notes provide for customary events of default, including nonpayment, certain events of bankruptcy or failure to comply with covenants or other agreements.  The Notes will mature on March 25, 2016.  The Warrants have an initial exercise price of $0.98 per Warrant Share. The Warrants are exercisable immediately and expire ten years from the date of issuance.

As part of the Purchase Agreement, as long as the Notes are outstanding, the Company may issue additional warrants if certain events were to occur. The number and term of the new warrants that would then be issuable would only be known upon such an occurrence (see Note 18 of the notes to the Company's consolidated financial statements).

Under the terms of the Notes, the Company was required to use any proceeds received in connection with the general unsecured creditor claim against Lehman Brothers, Inc. to repay principal and accrued but unpaid interest outstanding under the Notes.  In May 2014, the Company sold the claim against Lehman Brothers, Inc. to a third party for $1,607.  See Note 15 of the notes to the Company’s consolidated financial statements for a discussion of the claim against Lehman Brothers, Inc.  The Purchasers have waived the obligation to repay principal outstanding under the Notes with the proceeds that were received in connection with the claim.

Wade Massad, one of the Company’s directors, is the Co-Founder and Co-Managing Member of Cleveland Capital Management, L.L.C., which is the General Partner of Cleveland Capital. Cleveland Capital beneficially owns more than 5% of the Common Stock of the Company.  Duminda DeSilva, one of the Company’s directors, was previously the Managing Director at Prescott Group Capital Management, L.L.C., an affiliate of Prescott Group, which beneficially owns more than 5% of the Common Stock of the Company. Effective November 10, 2014, Mr. DeSilva is no longer employed with the Prescott Group.

2013
Net cash provided by financing activities for the year ended December 31, 2013 of $787 reflects capital contributions from the noncontrolling interests in Pinwrest.

The decrease in the Company's cash flow used in operations during 2014 as compared to the same period in 2013 resulted from the settlement of claims against Lehman Brothers, Inc., reduced costs subsequent to the Company’s exit from bankruptcy and reduced selling, general and administrative expense as a result of continuing cost cutting initiatives during the year ended December 31, 2014.  While the Company strives to further diversify its revenue streams, management remains cognizant of changing trends in the toy, game and entertainment businesses and the difficulty in predicting the length of time a property will be commercially successful.  In addition, the Company expects to derive a substantial amount of its product revenue from the sale of IsoBLOX™ related products, sold through its majority-owned subsidiary, Pinwrest.  While the IsoBLOX™ technology continues to be developed and marketed, there is no certainty that these products will be commercially viable in the marketplace, that revenues will be derived from such products or how soon products will become available for sale, if at all. As a result, the Company's revenues, operating results and cash flow from operations may fluctuate significantly from year to year and present operating results are not necessarily indicative of future performance.

16

Contractual Commitments

The Company has commitments under certain firm contractual arrangements (“firm commitments”) to make future payments for goods and services.  These firm commitments secure the future rights to various assets and services to be used in the normal course of operations.  The following table summarizes the Company’s material firm commitments as of December 31, 2014 and the impact that such obligations are expected to have on the Company’s liquidity and cash flows in future periods.  The Company expects to fund these commitments with operating cash flows generated in the normal course of business.

Year Ending
December 31,
 
Operating Lease
 
2015
 
$
211
 
2016 and after
   
 
Total
 
$
211
 

The Company’s contractual obligations and commitments are detailed in the Company’s consolidated financial statements. For additional information see Note 15 of the notes to the Company’s consolidated financial statements.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Rate Fluctuations.

From time to time, the Company may be exposed to the risk of future currency exchange rate fluctuations, which is accounted for as an adjustment to stockholders’ equity and changes in the exchange rates between various foreign currencies and the U.S. dollar may, as a result, have an impact on the accumulated other comprehensive loss component of stockholders’ equity reported by the Company, and such effect may be material in any individual reporting period. The Company is currently not a party to any market risk sensitive instruments, or any derivative contracts or other arrangements that may reduce such market risk.

Item 8.
Financial Statements and Supplementary Data.

The Report of Independent Registered Public Accounting Firm, the Company’s consolidated financial statements and notes to the Company’s consolidated financial statements appear in a separate section of this Form 10-K (beginning on Page F-1 following Part IV) and are incorporated herein by reference. The index to the Company’s consolidated financial statements is included in Item 15.

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in our filings and submissions under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We completed an evaluation under the supervision and with participation of our management, including our principal executive and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation, our principal executive and principal financial officer has concluded that as of December 31, 2014, such disclosure controls and procedures were effective to provide the reasonable assurance described above.

17

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of our Company's consolidated subsidiaries.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control-Integrated Framework (2013 Framework). Based on this assessment, management believes that, as of December 31, 2014, our internal control over financial reporting was effective based on those criteria.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Item 9B.
Other Information.

None.

18

PART III

Item 10.
Directors, Executive Officers and Corporate Governance.

Information is incorporated by reference from the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the SEC within 120 days after the end of the Company’s 2014 fiscal year.

Item 11.
Executive Compensation.

Information called for by this item is incorporated by reference from the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the SEC within 120 days after the end of the Company’s fiscal year.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information called for by this item is incorporated by reference from the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the SEC within 120 days after the end of the Company’s fiscal year.

Item 13.
Certain Relationships and Related Transactions.

Information called for by this item is incorporated by reference from the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the SEC within 120 days after the end of the Company’s 2014 fiscal year.

Item 14.
Principal Accountant Fees and Services.

Information called for by this item is incorporated by reference from the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the SEC within 120 days after the end of the Company’s 2014 fiscal year.

PART IV

Item 15.
Exhibits and Financial Statement Schedules.

(a)(1) Financial Statements:
The following consolidated financial statements of 4Licensing Corporation and its subsidiaries are included in Item 8:
 
Page Number
Report of Independent Registered Public Accounting Firm
F-1
   
Consolidated Balance Sheets - December 31, 2014 and 2013
F-2
   
Consolidated Statements of Operations - Years Ended December 31, 2014 and 2013
F-3
   
Consolidated Statements of Comprehensive (Loss) Income - Years Ended December 31, 2014 and 2013
F-4
   
Consolidated Statements of Shareholders’ Equity Years Ended December 31, 2014 and 2013
F-5
   
Consolidated Statements of Cash Flows - Years Ended December 31, 2014 and 2013
F-6
   
Notes to Consolidated Financial Statements
F-7 to F-22

(a)(2)  Financial Statement Schedules
All schedules have been omitted because they are inapplicable, not required, or the information is included in the Company’s consolidated financial statements or the notes to the Company’s consolidated financial statements.

(a)(3) and (b) Exhibits.
 See Index of Exhibits annexed hereto.
 
19

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

4LICENSING CORPORATION
 
Date: March 31, 2015
By
/s/ Bruce R. Foster
 
Bruce R. Foster,
 
Chief Executive Officer
 
Executive Vice President
 
and Chief Financial Officer
 
(Principal Executive, Financial and Chief Accounting Officer and Director)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: March 31, 2015
 
/s/ Bruce R. Foster
 
Bruce R. Foster,
 
Chief Executive Officer
 
Executive Vice President
 
and Chief Financial Officer
 
(Principal Executive, Financial and Chief Accounting Officer)

Date: March 31, 2015
 
/s/ Wade Massad
 
Wade Massad
 
(Director)

Date: March 31, 2015
 
/s/ Duminda DeSilva
 
Duminda DeSilva
 
(Director)

Date: March 31, 2015
 
/s/ Kenneth H. Klopp
 
Kenneth H. Klopp
 
(Director)
 
20

Exhibit
Number
Description
   
2.1
Confirmation Order, dated December 13, 2012. (1)
   
2.2
Debtors’ Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code. (1)
   
2.3
Plan Supplement. (1)
   
3.1
Certificate of Incorporation of 4Licensing Corporation. (2)
   
3.2
By-Laws of 4Licensing Corporation. (2)
   
4.1
Form of Common Stock Certificate of 4Licensing Corporation. (3)
   
4.2
Form of Promissory Note. (4)
   
4.3
Form of Warrant. (4)
   
4.4
Warrant, dated as of January 30, 2015. (5)
   
4.5
Form of Warrant. (6)
   
10.1
4Licensing Corporation Equity Incentive Plan. (*) (3)
   
10.2
Employment Agreement dated as of March 21, 2013, between 4Licensing Corporation and Bruce R. Foster.  (*)(7)
   
10.3
Intellectual Property Agreement, dated February 14, 2013, between Pinwrest Development Group, LLC and Mark Dodd (8)
   
10.4
Nonstatutory Stock Option Agreement dated February 27, 2013, between 4Licensing Corporation and Bruce R. Foster.  (*) (9)
   
10.5
Nonstatutory Stock Option Agreement dated February 27, 2013, between 4Licensing Corporation and Wade Massad.  (*) (9)
   
10.6
Nonstatutory Stock Option Agreement dated February 27, 2013, between 4Licensing Corporation and Duminda DeSilva.  (*) (9)
   
10.7
Securities Purchase Agreement, dated as of March 25, 2014, by and among 4Licensing Corporation, the purchasers party thereto and the guarantors party thereto. (4)
   
10.8
Amendment to Securities Purchase Agreement, dated May 5, 2014, among 4Licensing Corporation, Cleveland Capital, L.P. and Prescott Group Aggressive Small Cap Masterfund. (10)
   
10.9
Securities Purchase Agreement, dated as of January 30, 2015, by and among 4Licensing Corporation and the Leslie G. Rudd Living Trust. (5)
   
10.10
Securities Purchase Agreement, dated as of March 4, 2015, by and among 4Licensing Corporation and the purchasers signatory thereto. (6)
   
21.1
List of Subsidiaries of the Registrant. (9)
   
Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm.
   
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS
XBRL Instance Document.
   
101.SCH
XBRL Schema Document.
   
101.CAL
XBRL Calculation Linkbase Document.
   
101.DEF
XBRL Definition Linkbase Document.
 
101.LAB
XBRL Label Linkbase Document.
   
101.PRE
XBRL Presentation Linkbase Document.
 
21


 
* Denotes a management contract or compensatory plan, contract or arrangement.

(1) Incorporated by reference to Current Report on Form 8-K dated December 19, 2012 (File No. 001-16117).

(2) Incorporated by reference to Current Report on Form 8-K dated December 28, 2012 (File No. 001-16117).

(3) Incorporated by reference to Registration Statement on Form S-8 dated March 8, 2013 (Registration No. 333-187121).

(4) Incorporated by reference to Current Report on Form 8-K dated March 28, 2014 (File No. 001-16117).

(5) Incorporated by reference to Current Report on Form 8-K dated February 2, 2015 (File No. 001-16117).

(6) Incorporated by reference to Current Report on Form 8-K dated March 10, 2015 (File No. 001-16117).

(7) Incorporated by reference to Current Report on Form 8-K dated March 28, 2013 (File No. 001-16117).

(8) Incorporated by reference to Current Report on Form 8-K dated March 15, 2013 (File No. 001-16117).

(9) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 001-16117).

(10) Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-16117).
 

22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
4Licensing Corporation
 
We have audited the accompanying consolidated balance sheets of 4Licensing Corporation and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income and shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2014.  The financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of 4Licensing Corporation and subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As more fully described in Note 1 to the consolidated financial statements, the Company has a negative working capital at December 31, 2014, experienced recurring losses from operations, has limited liquidity and has a forthcoming loan obligation. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to this matter are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ EisnerAmper LLP

New York, New York
March 30, 2015

F-1

4LICENSING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014 AND 2013
(In thousands of dollars, except share data)
   
December 31, 2014
   
December 31, 2013
 
ASSETS:
       
Current assets:
       
Cash and cash equivalents
 
$
235
   
$
356
 
Accounts receivable – net
   
196
     
308
 
Inventories - net
   
680
     
137
 
Prepaid expenses and other current assets
   
187
     
278
 
Current assets of discontinued operations
   
4
     
1
 
Total current assets
   
1,302
     
1,080
 
 
               
Property and equipment - net
   
38
     
37
 
Accounts receivable - noncurrent, net
   
     
1
 
Intangible assets - net
   
1,839
     
1,979
 
Other assets - net
   
411
     
471
 
Total assets
 
$
3,590
   
$
3,568
 
                 
LIABILITIES AND EQUITY:
               
                 
Current liabilities:
               
Due to licensors
 
$
279
   
$
327
 
Accounts payable and accrued expenses
   
954
     
1,789
 
Current liabilities of discontinued operations
   
114
     
618
 
Deferred revenue
   
     
7
 
Total current liabilities
   
1,347
     
2,741
 
Long-term debt, net of debt discount of $710 at December 31, 2014
   
940
     
 
Long-term payable
   
22
     
23
 
Total liabilities
   
2,309
     
2,764
 
                 
Commitments and contingencies (Note 15)
               
4Licensing Corporation shareholders’ equity
               
Preferred stock, $.01 par value – authorized 3,000,000 shares; none issued
   
     
 
Common stock, $.01 par value - authorized 40,000,000 shares; issued 15,916,308 and 15,838,879 shares; outstanding 13,792,421 and 13,714,992 in 2014 and 2013, respectively
   
159
     
158
 
Additional paid-in capital
   
71,062
     
69,629
 
Accumulated deficit
   
(17,641
)
   
(16,748
)
     
53,580
     
53,039
 
Less cost of 2,123,887 treasury shares in both 2014 and 2013
   
(36,488
)
   
(36,488
)
Total equity of 4Licensing Corporation shareholders
   
17,092
     
16,551
 
Noncontrolling interests, includes discontinued operations of $(16,177) and $(16,203) in 2014 and 2013, respectively
   
(15,811
)
   
(15,747
)
Total equity
   
1,281
     
804
 
Total liabilities and equity
 
$
3,590
   
$
3,568
 

See notes to consolidated financial statements.
F-2

4LICENSING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(In thousands of dollars, except share data)
   
2014
   
2013
 
Net revenues:
       
Service revenue
 
$
834
   
$
1,087
 
Product revenue
   
332
     
127
 
Total net revenues
   
1,166
     
1,214
 
                 
Costs and expenses:
               
Selling, general and administrative
   
4,284
     
5,364
 
Cost of product sales
   
357
     
53
 
Total costs and expenses
   
4,641
     
5,417
 
                 
Loss from operations
   
(3,475
)
   
(4,203
)
Other income (expense):
               
Gain on settlement of claims
   
1,607
     
 
Gain on sale of assets
   
270
     
 
Interest expense
   
(336
)
   
(3
)
Total other income (expense)
   
1,541
     
(3
)
                 
Loss from continuing operations before reorganization and litigation items
   
(1,934
)
   
(4,206
)
Reorganization items
   
(42
)
   
(151
)
Gain on settlement of pre-petition liabilities
   
     
26
 
Loss from continuing operations before income taxes
   
(1,976
)
   
(4,331
)
Benefit from (provision for) income taxes
   
     
 
                 
Loss from continuing operations
   
(1,976
)
   
(4,331
)
Income from discontinued operations
   
389
     
1,170
 
Net loss
   
(1,587
)
   
(3,161
)
Loss attributable to noncontrolling interests, continuing operations
   
721
     
331
 
Income attributable to noncontrolling interests, discontinued operations
   
(27
)
   
(399
)
Net loss attributable to 4Licensing Corporation
 
$
(893
)
 
$
(3,229
)
Per share amounts:
               
Basic and diluted (loss) income per share attributable  to 4Licensing Corporation common shareholders
               
Continuing operations
 
$
(0.09
)
 
$
(0.29
)
Discontinued operations
   
0.03
     
0.06
 
Basic and diluted income (loss) per share attributable  to 4Licensing Corporation common shareholders
 
$
(0.06
)
 
$
(0.23
)
Weighted average common shares outstanding – basic and diluted
   
13,741,338
     
13,714,992
 
Net income (loss) attributable to 4Licensing Corporation:
               
Loss from continuing operations
 
$
(1,976
)
 
$
(4,331
)
Loss attributable to noncontrolling interests, continuing operations
   
721
     
331
 
Net loss from continuing operations
   
(1,255
)
   
(4,000
)
Income from discontinued operations
   
389
     
1,170
 
Income attributable to noncontrolling interests, discontinued operations
   
(27
)
   
(399
)
Net income from discontinued operations
   
362
     
771
 
Net loss attributable to 4Licensing Corporation
 
$
(893
)
 
$
(3,229
)
 
See notes to consolidated financial statements.
F-3

4LICENSING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
YEARS ENDED DECEMBER 31, 2014 AND 2013
 (In thousands of dollars)

   
2014
   
2013
 
         
Net loss
 
$
(1,587
)
 
$
(3,161
)
Other comprehensive income (loss):
               
Reclassification of translation adjustment related to liquidation of foreign subsidiary
   
     
(344
)
Other comprehensive (loss) income
   
     
(344
)
Comprehensive loss
   
(1,587
)
   
(3,505
)
Loss attributable to noncontrolling interests, continuing operations
   
721
     
331
 
Income attributable to noncontrolling interests, discontinued operations
   
(27
)
   
(399
)
Comprehensive loss attributable to  4Licensing Corporation
 
$
(893
)
 
$
(3,573
)

See notes to consolidated financial statements.
F-4

4LICENSING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2014 AND 2013
(In thousands of dollars and shares)

   
4Licensing Corporation Shareholders’
         
   
Common Stock
   
Additional Paid-
In Capital
   
Accumulated Deficit
   
Accumulated Other Comprehensive (Loss) Income
   
Less Treasury Stock
   
Total Equity
of 4Licensing
Corporation
Shareholders
   
Non-controlling Interests
   
Total
Equity
 
   
Shares
   
Amount
 
BALANCE, DECEMBER 31, 2012
   
15,839
   
$
158
   
$
69,524
   
$
(13,519
)
 
$
344
   
$
(36,488
)
 
$
20,019
   
$
(16,602
)
 
$
3,417
 
Capital contribution from noncontrolling interest
   
     
     
     
     
     
     
     
787
     
787
 
Stock based compensation expense
   
     
     
105
     
     
     
     
105
     
     
105
 
Comprehensive net (loss) income
   
     
     
     
(3,229
)
   
(344
)
   
     
(3,573
)
   
68
     
(3,505
)
BALANCE, DECEMBER 31, 2013
   
15,839
   
$
158
   
$
69,629
   
$
(16,748
)
 
$
   
$
(36,488
)
 
$
16,551
   
$
(15,747
)
 
$
804
 
Capital contribution from noncontrolling interest
   
     
     
     
     
     
     
     
630
     
630
 
Stock based compensation expense
   
     
     
432
     
     
     
     
432
     
     
432
 
Exercise of stock options
   
77
     
1
     
22
     
     
     
     
23
     
     
23
 
Warrants issued in connection with debt
   
     
     
979
     
     
     
     
979
     
     
979
 
Comprehensive net (loss) income
   
     
     
     
(893
)
   
     
     
(893
)
   
(694
)
   
(1,587
)
BALANCE, DECEMBER 31, 2014
   
15,916
   
$
159
   
$
71,062
   
$
(17,641
)
 
$
   
$
(36,488
)
 
$
17,092
   
$
(15,811
)
 
$
1,281
 
 
See notes to consolidated financial statements.

F-5

4LICENSING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(In thousands of dollars)
   
2014
   
2013
 
Cash flows from operating activities:
       
Net loss
 
$
(1,587
)
 
$
(3,161
)
Income from discontinued operations
   
(389
)
   
(1,170
)
Loss from continuing operations
   
(1,976
)
   
(4,331
)
Adjustments to reconcile net (loss) income to net cash  (used in) provided by operating activities:
               
Depreciation and amortization
   
160
     
195
 
Gain on settlement of pre-petition liabilities
   
     
(26
)
Gain on sale of certain assets
   
(270
)
   
 
Loss on disposal of property and equipment
   
1
     
 
Provision for doubtful accounts
   
     
6
 
Provision for returns and allowances
   
219
     
 
Amortization of discount on notes payable
   
269
     
 
Share-based compensation
   
432
     
105
 
Inventory writedown
   
171
     
 
Changes in operating assets and liabilities:
               
Inventories
   
(714
)
   
(137
)
Accounts receivable
   
106
     
200
 
Prepaid expenses and other current assets
   
91
     
(187
)
Acccounts receivable – noncurrent, net
   
1
     
 
Other assets – net
   
60
     
99
 
Due to licensors
   
(48
)
   
(130
)
Accounts payable and accrued expenses
   
(1,048
)
   
(3,051
)
Liabilities subject to compromise
   
     
(932
)
Deferred revenue
   
(7
)
   
(2
)
Long-term payable
   
(1
)
   
23
 
Net cash used in continuing operating activities
   
(2,554
)
   
(8,168
)
Net cash used in discontinued operating activities
   
(118
)
   
(148
)
Net cash used in operating activities
   
(2,672
)
   
(8,316
)
                 
Cash flows from investing activities:
               
Proceeds from sale of certain assets
   
270
     
1,000
 
Acquisition of assets
   
     
(2,100
)
Purchase of property and equipment
   
(21
)
   
(26
)
Net cash provided by (used in) investing activities
   
249
     
(1,126
)
                 
Cash flows from financing activities:
               
Capital contribution from noncontrolling interests
   
630
     
787
 
Proceeds from long-term debt
   
1,650
     
 
Proceeds from exercise of stock options
   
22
     
 
Net cash provided by financing activities
   
2,302
     
787
 
                 
Net decrease in cash and cash equivalents
   
(121
)
   
(8,655
)
Cash and cash equivalents, beginning of period
   
356
     
9,011
 
Cash and cash equivalents, end of period
 
$
235
   
$
356
 
                 
Supplemental schedule of non-cash investing and financing activities
               
Warrants issued in connection with debt
 
$
979
   
$
 
 
See notes to consolidated financial statements.

F-6

4LICENSING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 and 2013
(In thousands of dollars, except share and per share data)

1. DESCRIPTION OF BUSINESS

General Development and Narrative Description of Business - 4Licensing Corporation (“4LC”), formerly known as 4Kids Entertainment, Inc. (“4Kids”), together with the subsidiaries through which its business is conducted (collectively, the “Company”), is a licensing and technology company specializing in the sports and specialty brands. The Company was originally organized as a New York corporation in 1970, and in December 2012 was reincorporated in Delaware.

Emerging from Chapter 11 Bankruptcy Proceedings >– On April 6, 2011 (the “Petition Date”), the Company and all of its domestic wholly owned subsidiaries (the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Cases”) under Title 11 of Chapter 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”), which Bankruptcy Cases were jointly administered under Case No. 11-11607.  After filing the Bankruptcy Cases, the Company and its subsidiaries continued to operate as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  As debtors-in-possession, we were authorized under Chapter 11 of the Bankruptcy Code to continue to operate as an ongoing business.

The Company emerged from bankruptcy and commenced paying creditors in full in respect of each such creditor’s allowed claims.  As of December 31, 2013, all of the allowed claims have been paid.  In accordance with the Plan, 4Kids reincorporated in Delaware under the name “4Licensing Corporation.” On the effective date of the Plan, 4Kids’ common stock was cancelled and holders of 4Kids’ common stock were issued one (1) share of common stock of 4LC in exchange for each share of 4Kids’ common stock held by them.

On July 23, 2014, the Bankruptcy Court issued a final decree closing the Chapter 11 case of the Company.

Financial Reporting Considerations - The Company’s emergence from bankruptcy did not qualify for fresh start accounting as holders of existing shares immediately before confirmation of the Plan did not receive less than fifty percent of the voting shares of the Company after emergence from bankruptcy.

Liquidity and Going Concern - In recent years, the Company has incurred substantial net losses and has used substantial amounts of cash in its operating activities.  In the past, sales by the Company of certain assets have significantly contributed to the funding of these operating losses.  While the timing of these sales was not primarily motivated by then current cash needs, without these sales the Company would not have had sufficient cash to fund its operations. In 2014 and continuing into 2015 the Company issued debt and equity securities to fund its operations.  There is no assurance the Company will be able to sell additional securities at terms acceptable to the Company.

As discussed above, on December 21, 2012, the Company emerged from Chapter 11 bankruptcy proceedings and commenced paying creditors in full in respect of each such creditor’s allowed claims.  The Company was obliged to pay all allowed administrative claims, priority and unsecured claims.  As of December 31, 2013, the Company had paid all allowed claims and filed an objection to the remaining disputed claim.  During 2014, the Company entered into a settlement with the remaining disputed claimant and the Bankruptcy Court issued a final decree closing the Chapter 11 case of the Company.

As a result of the bankruptcy proceedings, and despite the $1,650 proceeds of loan from certain shareholders during 2014, the Company’s overall cash position as of December 31, 2014 provides only limited liquidity to fund the Company’s day-to-day operations

The Company will consider all alternatives available to generate additional cash to fund its operations, including, but not limited to sales of assets, issuance of equity or debt securities, and other third party arrangements.  There can be no assurance that any of these alternatives will generate additional cash.

The Company’s consolidated financial statements have been prepared assuming that it will be able to continue to operate as a going concern.  The substantial loss from operations incurred in recent years, the Company’s limited liquidity as of December 31, 2014, the costs associated with the further development and launch of products, which could be substantial, and the loan obligation maturing in March 2016, taken together, raise substantial doubt about the Company’s ability to continue as a going concern.
F-7

The Company’s business consists of the following two segments:

IsoBLOX™ and Sports Licensing/Distribution - The IsoBLOX™ and Sports Licensing/Distribution business segment consists of the following wholly owned subsidiaries of the Company: 4LC Sports & Entertainment, Inc. (“4LC Sports”), formerly known as 4Kids Ad Sales, Inc., and 4LC Technology, Inc. (“4LC Technology”), which, in February 2013, acquired, through Pinwrest Development Group, LLC (“Pinwrest”), of which 70% of the membership interests are owned by 4LC Technology, a patent for the IsoBLOX™ technology (the “Patent”) from The Dodd Group, LLC (“TDG”), a Texas limited liability company. The Patent covers a protective shin guard for use in products in the athletic, recreational, police/military, medical and industrial sectors consisting of an elastomeric sleeve within which is deposited protective plastic material consisting of rigid plates joined together by living hinges. The protective plastic material is solid enough to provide protection, flexible enough to better fit the wearer of the shin guard and is lightweight.

In November 2014, Pinwrest filed a patent application (the “Patent”) with the U.S. Patent Office covering its newly developed body protection systems and devices that can be used to prevent or limit serious injuries from impacts or collisions during an activity.  The products covered by this Patent provide body protection systems and devices that can be incorporated into articles of clothing, materials or articles such as seats, linings, or walls of vehicles to reduce the effects of impact.  These body protection devices can form part of headgear, gear, or clothing that is designed to cover and protect one or more parts of a person, such as a military or law enforcement individual, or a professional or recreational athlete.

The protective material uses a combination of energy dispersion and absorption to diffuse impact on the wearer of the protective gear. The technology covered by the Patent is hereinafter referred to as “IsoBLOX™” technology.

After further development, Pinwrest intends to license and distribute the IsoBLOX™ technology in protective gear within the youth, teen and adult markets.  During 2014, Pinwrest began selling IsoBLOX™ products to two sporting goods retailers.

4LC Sports is engaged in the business of licensing and distributing sports related brands.

The operations of Pinwrest, 4LC Sports, and 4LC Technology constitute the IsoBLOX™ and Sports Licensing/Distribution business segment of the Company. The Company reports its financial operations from these entities under the new IsoBLOX™ and Sports Licensing/Distribution business segment in its consolidated financial statements.

Entertainment and Brand Licensing - The Entertainment and Brand Licensing business segment consists of the operations of the following wholly-owned subsidiaries of the Company: 4Kids Entertainment Licensing, Inc. (“4Kids Licensing”) and 4Sight Licensing Solutions, Inc. (“4Sight Licensing”).  4Kids Licensing is engaged in the business of licensing the merchandising rights to popular children’s television series, properties and product concepts (individually, the “Property” or collectively the “Properties”). 4Kids Licensing typically acts as exclusive merchandise licensing agent in connection with the grant to third parties of licenses to manufacture and sell all types of merchandise, including toys, videogames, trading cards, apparel, housewares, footwear, books and other published materials, based on such Properties. 4Sight Licensing is engaged in the business of licensing properties and product concepts to adults, teens and “tweens”.  4Sight Licensing focuses on brand building through licensing.

Discontinued Operations - On August 16, 2012, the Company’s Board of Directors determined to discontinue the operations of its United Kingdom Subsidiary, 4Kids International, effective September 30, 2012.  The results of operations for the international segment is reported as a discontinued operation.

Due to the Company’s sale of certain of its assets in July 2012, and the continued lack of profitability, effective June 30, 2012, the Company terminated the operations of 4Kids Ad Sales, Inc. (“4Kids Ad Sales”), 4Kids Productions, Inc. (“4Kids Productions”), 4Kids Entertainment Music, Inc. (“4Kids Music”) and 4Kids Entertainment Home Video, Inc. (“4Kids Home Video”).  Additionally, effective September 30, 2010, the Company terminated the operations of TC Digital and TC Websites.  The results of operations attributable to these discontinued companies are reported in the Company’s consolidated financial statements as discontinued operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation The accompanying consolidated financial statements include the accounts of 4Licensing Corporation and its wholly-owned subsidiaries and investments of more than 50% in subsidiaries in which it has a controlling financial interest after elimination of significant intercompany transactions and balances.


F-8

Revenue Recognition

Service revenues, which consists of licensing revenues: Licensing revenues, net of licensor participations, are recognized when the underlying royalties from the sales of the related products are earned and determinable. The Company recognizes guaranteed royalties, net of licensor participations at the time the arrangement becomes effective if the Company has met all of the following: (1) no significant direct continuing involvement with the underlying Property or obligation to the licensee, (2) the license period has commenced; and (3) collectability is reasonably assured.  Licensing advances and guaranteed payments collected but not yet earned by the Company are classified as deferred revenue in the accompanying consolidated balance sheets.

Product revenues: Product revenues are recognized when delivery has occurred and the risk of loss has passed to the customer. This generally occurs upon shipment of goods to customers, except when shipping terms dictate otherwise, when estimates of the promotional arrangements, returns and other potential adjustments are reasonably determinable, collection is reasonably assured and the Company has no further performance obligation. The Company records shipping and handling billed to a customer in a sales transaction as revenue, while the costs incurred for shipping and handling are recorded in cost of product sales in the accompanying consolidated statement of operations. Product revenues are typically subject to agreement with customers which may allow for certain rights of return, promotional arrangements and other potential adjustments. These adjustments are calculated when we recognize revenues and are generally recorded as a reduction of the revenues and accounts receivable, unless the receivable has been collected and the liability still exist, at which point it is recorded as an accrued expense.  At December 31, 2014, we had approximately $213 of customer’s allowance included in Accounts payable and accrued expenses.

Property and Equipment - Property and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation is calculated on the straight-line method based on the estimated useful lives of the assets, which range from three to ten years. Costs associated with the repair and maintenance of property are expensed as incurred.

Impairment Of Long-Lived And Intangible Assets - The Company assesses the recoverability of long-lived assets for which an indication of impairment exists. The recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Fair value of long-lived assets is determined using the expected cash flows discounted at a rate commensurate with the risk involved.  At December 31, 2014, the Company believes that the future cash flows to be received from the remaining long-lived assets will exceed the respective assets’ carrying value, and accordingly has not recorded any additional impairment losses.

Cash and Cash Equivalents - The Company considers all highly liquid assets, having an original maturity of less than three months, to be cash equivalents.  Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits.  The Company believes it is not exposed to any significant credit risk of cash and cash equivalents.  All of the Company’s non-interest bearing cash balances are insured at December 31, 2014 up to $250 per depositor at each financial institution, and our non-interest bearing cash balances may exceed federally insured limits.

Fair Value Measurements - The fair values of the Company’s financial instruments reflect the estimates of amounts that would be received from selling an asset in an orderly transaction between market participants at the measurement date.  The fair value estimates presented in this report are based on information available to the Company as of December 31, 2014 and December 31, 2013.

Due to their short-term nature, the carrying values of cash and cash equivalents, accounts receivable, due to licensors, accounts payable, accrued expenses and deferred revenue approximate fair value. The authoritative guidance issued by the FASB includes a fair value hierarchy based on three levels of inputs, the first two of which are considered observable and the last of which is considered unobservable, that may be used to measure fair value. The three levels are the following:

· Level 1 - Quoted prices in active markets for identical assets or liabilities.

· Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
F-9


Stock-based Compensation - The Company accounts for all share-based payments to employees and directors based on their grant date fair values. The fair value of the Company’s stock option awards is expensed over the vesting life of the underlying stock options using the straight-line method. Compensation for share-based payments to non-employees is based on the fair value at the measurement date, which is generally the performance completion date. The fair value is initially measured at the grant date and subsequently measured at each reporting period until the final measurement date.

Participation Advances> – Participation advances, which primarily consist of contractual costs incurred by the Company for which it will receive reimbursement from the licensor, were $287 as of December 31, 2014 and December 31, 2013 and were included in “other assets” on the balance sheet.

Reorganization Items> - The Company’s costs related to professional, consulting and trustee fees, as the case may be, in conjunction with the Bankruptcy Cases were expensed as incurred and reported as reorganization items in the accompanying consolidated statements of operations.

Operating Leases - The Company accounts for all operating leases on a straight-line basis over the term of the lease.  As such, any incentives or rent escalations are recorded as deferred rent and are included as a component of rent expense over the respective lease term.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the years reported. Actual results could materially differ from those estimates.

Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the assessment of the impairment of long-lived assets, allowance for returns and other customer credits, allowance for doubtful accounts, consideration of inventory obsolescence, valuation allowances for deferred tax assets, and determination of stock-based compensation.

Concentration Of Credit Risk - Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of accounts receivable. The majority of the cash and cash equivalents are maintained with major financial institutions in the United States of America. The Company’s cash deposits at these institutions often exceed the federally insured limits.  Credit risk on accounts receivable is minimized by the Company by performing ongoing credit evaluations of its customers’ financial condition and monitoring its exposure for credit losses and maintaining allowances for anticipated losses.

Income Taxes - Income tax expense (benefit) is provided for using the asset and liability method. Deferred income taxes are recognized at currently enacted tax rates for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial reporting purposes. Deferred taxes are provided for the undistributed earnings as if they were to be distributed. The Company regularly reviews its deferred tax assets for recoverability taking into consideration such factors as recurring operating losses, projected future taxable income and the expected timing of the reversals of existing temporary differences.  The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our assessment of the valuation allowance on the deferred tax assets could change in the future based on our levels of pre-tax income and other tax-related adjustments. A change in estimate of the valuation allowance, in whole or in part, would result in a non-cash reduction in income tax expense during the period of the change. Due to the continued losses incurred by the Company in 2014 and prior years, the Company believes that it is more likely than not that the deferred tax asset related to these net operating losses will not be realized and therefore recorded a full valuation allowance.  If, in the future, the Company determines that the utilization of these net operating losses becomes more likely than not, the Company will reduce the valuation allowance at that time.

Pinwrest is a limited liability company and has elected to be treated as a partnership for income tax purposes. As such, U.S. federal and state income taxes (in the states which tax limited liability companies as partnerships) are the direct responsibility of its members. The Company owns 70% of the membership interests of Pinwrest. Thus, the Company’s respective portion of its activity is reported in the consolidated tax returns of the Company.
 
The discontinued operations of TC Digital and TC Websites are limited liability companies and have elected to be treated as partnerships for income tax purposes. As such, U.S. federal and state income taxes (in the states which tax limited liability companies as partnerships) are the direct responsibility of its members. We own 55% of the membership interests in both entities. Thus, our respective portion of their activity is reported in our consolidated tax returns.

Recently Adopted Accounting Standards – The Company did not adopt any new accounting standards in 2014.

Recently Issued Accounting Standards> – In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-8, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The standard changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has a major effect on an entity’s operations and financial results. This accounting guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale. The guidance is effective for the Company on a prospective basis beginning in the first quarter of fiscal 2015.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes the most current revenue recognition requirements. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption not permitted. We are currently evaluating the standard to determine the impact of its adoption on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern", which establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. ASU 2014-15 also provides guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. This update is effective for interim and annual reporting periods beginning after December 15, 2016; early adoption is permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

3. FAIR VALUE OF FINANCIAL ASSETS

The carrying values and estimated fair values of the Company’s financial instruments for the periods presented are as follows:

   
Estimated Fair Value Measurements
 
   
Carrying Value
   
Quoted Prices in
Active Markets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
December 31, 2014:
               
Financial Assets
               
Cash and cash equivalents
 
$
235
   
$
235
   
$
   
$
 
Total Financial Assets
 
$
235
   
$
235
   
$
   
$
 
                                 
December 31, 2013:
                               
Financial Assets
                               
Cash and cash equivalents
 
$
356
   
$
356
   
$
   
$
 
Total Financial Assets
 
$
356
   
$
356
   
$
   
$
 

4. ACCOUNTS RECEIVABLE/DUE TO LICENSORS

Generally, licensing contracts provide for the Company to collect royalties from the licensees on behalf of the licensors.  The Company records as accounts receivable only its proportionate share of such earned royalties.

Due to licensors represents amounts collected by the Company on behalf of licensors, which are generally payable to such licensors after the close of each calendar quarter.
 
Gross accounts receivable consists of $58 related to product sales and $148 related to licensing revenue as of December 31, 2014.  Gross accounts receivable consists of $40 related to product sales and $276 related to licensing revenue as of December 31, 2013.

Accounts receivable consisted of the following as of:
 
   
December 31,
 
   
2014
   
2013
 
Gross accounts receivable
 
$
206
   
$
316
 
Allowance for doubtful accounts
   
(4
)
   
(7
)
Allowance for returns
   
(6
)
   
 
     
196
     
309
 
Less: long-term portion
   
     
(1
)
   
$
196
   
$
308
 

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

   
December 31,
 
   
2014
   
2013
 
Computer equipment and software
 
$
1,388
   
$
1,386
 
Machinery and equipment
   
19
     
 
Website development
   
87
     
87
 
Office furniture and fixtures
   
247
     
247
 
     
1,741
     
1,720
 
Less: accumulated depreciation and amortization
   
(1,703
)
   
(1,683
)
   
$
38
   
$
37
 

The depreciation expense amounted to $20 and $74 for the years ended December 31, 2014 and 2013, respectively.

6. INTANGIBLE ASSETS

Intangible assets primarily consist of a patent for the IsoBLOX™ technology, which was acquired in February 2013 for a purchase price of $2,100.  The intangible asset is being amortized over a fifteen year period on a straight line basis.  For the years ended December 31, 2014 and December 31, 2013, $140 and $121 of amortization expense, respectively, has been recorded in Selling, general and administrative expenses. The net carrying value of the intangible assets as of December 31, 2014 and December 31, 2013 was $1,839 and $1,979, respectively.

7. LONG-TERM DEBT

Promissory Notes, Related Parties – On March 25, 2014, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Cleveland Capital, L.P. (“Cleveland Capital”) and Prescott Group Aggressive Small Cap Masterfund, GP (“Prescott Group”, and together with Cleveland Capital, the “Purchasers”), and the guarantors party thereto, each of which is a wholly-owned subsidiary of the Company (each a “Guarantor” and collectively, the “Guarantors”), pursuant to which the Company agreed to issue to the Purchasers (i) an aggregate principal amount of $1,650 of promissory notes (each a “Note” and collectively, the “Notes”), to be guaranteed by the Guarantors, and (ii) warrants (each a “Warrant” and collectively, the “Warrants”) to purchase up to an aggregate of 1,683,673 shares (the “Warrant Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”), for an aggregate purchase price of approximately $1,650 (the “Offering”).

On March 25, 2014, the Offering closed and the Company (i) issued and sold to Cleveland Capital a Note in the principal amount of $150 and a Warrant to purchase up to 153,061 Warrant Shares and received $150, and (ii) issued and sold to Prescott Group a Note in the principal amount of $1,500 and a Warrant to purchase up to 1,530,612 Warrant Shares and received $1,500.

The 1,683,673 detachable Warrants issued with the Notes were valued at approximately $1.43 per warrant using the Black-Scholes model at March 25, 2014. The relative fair value of the detachable Warrants of $979 was recorded as a component of stockholders’ equity with the offset recorded as a discount on the Notes and included as a component of long-term debt in the accompanying consolidated balance sheet as of December 31, 2014. The fair value of the Warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 2.75%, volatility – 100.00%, expected term – 10 years, expected dividends – 0%. The debt discount related to the Warrants is being amortized over a two-year period (through maturity) using the effective interest method.  Interest expense related to the amortization of the debt discount for the year ended December 31, 2014 was approximately $269.
 
F-12

The Notes accrue interest at a rate of 5.0% per year from and after the date of issuance of such Note, payable quarterly.  The interest paid to related parties under this agreement were $63 for the year ended December 31, 2014.  The Notes provide for customary events of default, including nonpayment, certain events of bankruptcy or failure to comply with covenants or other agreements.  The Notes will mature on March 25, 2016.  The Warrants have an initial exercise price of $0.98 per Warrant Share. The Warrants are exercisable immediately and expire ten years from the date of issuance.

As part of the Purchase Agreement, as long as the Notes are outstanding, the Company may issue additional warrants if certain events were to occur. The number and term of the new warrants that would then be issuable would only be known upon such an occurrence (see Note 18).

Under the terms of the Notes, the Company was required to use any proceeds received in connection with the general unsecured creditor claim against Lehman Brothers, Inc. to repay principal and accrued but unpaid interest outstanding under the Notes.  In May 2014, the Company sold the claim against Lehman Brothers, Inc. to a third party for $1,607.  See Note 15 for a discussion of the claim against Lehman Brothers, Inc.  The Purchasers have waived the obligation to repay principal outstanding under the Notes with the proceeds that were received in connection with the claim.

Wade Massad, one of the Company’s directors, is the Co-Founder and Co-Managing Member of Cleveland Capital Management, L.L.C., which is the General Partner of Cleveland Capital. Cleveland Capital beneficially owns more than 5% of the Common Stock of the Company.  Duminda DeSilva, one of the Company’s directors, was previously the Managing Director at Prescott Group Capital Management, L.L.C., an affiliate of Prescott Group, which beneficially owns more than 5% of the Common Stock of the Company. Effective November 10, 2014, Mr. DeSilva is no longer employed with the Prescott Group.

8. STOCK-BASED EMPLOYEE COMPENSATION

On February 27, 2013, the Board of Directors authorized the Company’s 2013 Equity Incentive Plan (the “Incentive Plan”), which provides for the grant of non-statutory stock options and restricted shares to eligible employees and directors of the Company.  The Incentive Plan authorizes the Company to issue up to 2,600,000 shares of Company’s common stock.  The Company issues new shares upon the exercise of stock options.  Options granted under the Plan generally expire no later than 10 years from the date of grant.  The exercise price of any option granted to a 10% stockholder may be no less than 110% of the fair value of the Company’s common stock on the date of grant. As of December 31, 2014, 1,019,334 shares of the Company were available for issuance under the Incentive Plan.

Stock Options

The Company granted stock options to purchase approximately 850,000 shares of its common stock on February 27, 2013 under the Incentive Plan.   The stock options were granted to an executive officer and members of the Board of Directors, at an exercise price of $0.26 per share (determined by the Board of Directors based upon the range of bid prices for the Company’s common stock on the grant date), and a grant date fair value of $151.  These options become fully exercisable over a two year period (1/3 exercisable on the grant date, 1/3 exercisable 1 year after the grant date and the remaining 1/3 exercisable 2 years after the grant date, respectively) and expire on February 27, 2023.

The Company granted stock options to purchase approximately 69,000 shares of its common stock on August 29, 2013 under the Incentive Plan.  These stock options were granted to certain employees, at an exercise price of $0.54 per share and a grant date fair value of $26.  These stock options become fully exercisable over a two year period (1/3 exercisable on the grant date, 1/3 exercisable 1 year after the grant date and the remaining 1/3 exercisable 2 years after the grant date, respectively) and expire on August 29, 2023.

The Company granted stock options to purchase approximately 840,000 shares of its common stock on April 30, 2014 under the Incentive Plan.   The stock options were granted to certain employees including an executive officer and members of the Board of Directors, at an exercise price of $1.44 per share, and a grant date fair value of $736.  These options become fully exercisable over a two-year period (1/3 exercisable on the grant date, 1/3 exercisable one year after the grant date and the remaining 1/3 exercisable two years after the grant date, respectively) and expire on April 30, 2024.
 
The Company granted stock options to purchase approximately 25,000 shares of its common stock on May 12, 2014 under the Incentive Plan.   The stock options were granted to a non-employee independent contractor at an exercise price of $1.24 per share, and a grant date fair value of $24.  These options become fully exercisable over a two-year period (1/3 exercisable on the grant date, 1/3 exercisable one year after the grant date and the remaining 1/3 exercisable two years after the grant date, respectively) and expire on May 12, 2024.
 
F-13

The fair values of options granted were estimated on the date of grant using the Black-Scholes Merton option pricing model based on the assumptions included in the table below. The fair value of the Company’s stock option awards is charged to expense over the vesting life of the underlying stock options using the straight line method. Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield of U.S. Treasury bonds on the grant date with a maturity equal to the expected term of the stock option. The expected life of stock option awards granted to employees and non-employee directors is based upon the “simplified” method for “plain vanilla” options described in SEC Staff Accounting Bulletin No. 107, as amended by SEC Staff Accounting Bulletin No. 110. Forfeiture rates are based on management’s estimates.

   
Year ended
December 31, 2014
   
Year ended
December 31, 2013
 
Expected volatility
   
79%
   
84%
Expected dividend yield
   
0.00%
   
0.00%
Weighted average risk-free interest rate
   
1.81%
   
1.05%
Expected life
 
5.50 years
   
5.50 years
 
Forfeiture rate
   
0%
   
0%

The following table summarizes activity under the Company’s stock option plans for the years ended December 31, 2014 and, 2013:

   
Shares
(In thousands)
   
Weighted
Average
Exercise
Price
   
Remaining
Contractual Life
(in years)
   
Aggregate
Intrinsic
Value
(in thousands)
 
Outstanding at December 31, 2012
   
   
$
         
Granted
   
919
     
0.28
         
Exercised
   
     
         
Forfeited, cancelled or expired
   
(14
)
   
(0.54
)
       
                         
Outstanding at December 31, 2013
   
905
   
$
0.28
         
Granted
   
865
     
1.44
         
Exercised
   
(78
)
   
(0.30
)
       
Forfeited, cancelled or expired
   
(189
)
   
(1.01
)
       
Outstanding at December 31, 2014
   
1,503
   
$
0.85
     
8.0
   
$
338
 
                                 
Exercisable at December 31, 2014
   
817
   
$
0.68
     
7.2
   
$
236
 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of our common stock on the date of determination for those awards that have an exercise price currently below the closing price.

During the year ended December 31, 2014, 77,428 shares of common stock were issued pursuant to the exercise of stock options for an aggregate exercise price of $23.  The intrinsic value of the options exercised was $49.

Total stock-based compensation recorded for the years ended December 31, 2014 and December 31, 2013 were $432 and $105, respectively, and are included in selling, general and administrative expenses.   As of December 31, 2014, the Company has approximately $276 of unrecognized stock compensation expense which will be recognized over a period of approximately 1.3 years.
 

F-14

9. REVENUES/MAJOR CUSTOMERS

Net revenues included in the accompanying consolidated statements of operations are net of licensor participations of $1,306, and $1,174 during fiscal years 2014 and 2013, respectively. The percentages of revenue from major Properties and customers/licensees are as follows:
 
   
December 31,
 
   
2014
   
2013
 
Percentage of revenue derived from major Properties (revenue in excess of 10 percent of total revenue)
   
52
%
   
45
%
Number of major Properties
   
2
     
3
 
Percentage of revenue derived from major customers/licensees  (revenue in excess of 10 percent of total revenue)
   
48
%
   
37
%
Number of major customers/licensees
   
3
     
3
 
 
Two licensing Properties represented more than 10% of consolidated net revenue for fiscal 2014; “American Kennel Club” and “Cabbage Patch” represented 33% and 19%, respectively, for a total of 52% of consolidated net revenues for fiscal 2014. Three Properties represented more than 10% of consolidated net revenue for fiscal 2013; “American Kennel Club”, “Dinosaur King” and “Huntik” represented 21%, 14% and 10%, respectively, for a total of 45% of consolidated net revenues for fiscal 2013.   One Pinwrest customer, Dick’s Sporting Goods, represented 14% and two licensees represented 34% of consolidated net revenues for fiscal 2014 for a total of 48% of consolidated net revenues. Three licensees represented 37% of consolidated net revenues for fiscal 2013.  As of December 31, 2014 and 2013, accounts receivable due from three major customer/licensees represented 70% and four major customers/licensees represented 63%, respectively, of the Company’s gross accounts receivable for each such year.

10. INCOME TAXES

The Company is no longer subject to examinations by income tax authorities in most jurisdictions for years prior to 2011.

Due to its losses and the valuation allowance recorded against it deferred tax assets related to its net operating losses carryforwards, the Company has not recorded any income tax benefit or expense for the years ended December 31, 2014 and 2013.

The components of pre-tax loss, including discontinued operations, are as follows:

 
Years Ended December 31,
 
 
2014
 
2013
 
Pre-tax loss
 
$
(1,587
)
 
$
(3,161
)

       
Years Ended December 31,
 
   
2014
   
% of Pretax
   
2013
   
% of Pretax
 
                 
Tax at Federal statutory rate
 
$
(556
)
   
(35.0
)%
 
$
(1,106
)
   
(35.0
)%
Increase in: Valuation allowances
   
552
     
34.8
     
1,281
     
40.5
 
Permanent differences
   
97
     
6.1
     
8
     
0.3
 
State and local taxes - net
   
(93
)
   
(5.9
)
   
(183
)
   
(5.8
)
Income tax (benefit) provision
 
$
     
%
 
$
     
%
 
F-15

The components of the net deferred tax assets are as follows:

   
December 31,
 
   
2014
   
2013
 
Deferred Tax Assets:
       
Accounts receivable allowances
 
$
90
   
$
91
 
Net operating loss carryforwards
   
44,322
     
44,926
 
Inventory
   
68
     
 
Restricted stock/Stock options
   
206
     
42
 
Contributions
   
101
     
102
 
Deferred rent
   
9
     
17
 
Property and equipment
   
49
     
59
 
Gross deferred tax assets
 
$
44,845
   
$
45,237
 
                 
Valuation allowance
 
$
(44,845
)
 
$
(45,237
)
                 
Net deferred tax asset
 
$
   
$
 

A reconciliation of activity for the Company’s deferred tax asset valuation allowance is provided as follows:

   
Years Ended December 31,
 
   
2014
   
2013
 
         
Beginning balance
 
$
45,237
   
$
50,711
 
Reductions to provision
   
(392
)
   
(5,474
)
Ending balance
 
$
44,845
   
$
45,237
 

The expiration terms and amounts for which an allowance has been provided with respect to the loss and credit carryforwards reflected in the gross deferred tax assets above are comprised as follows:

Loss Carryforwards
 
Expiration
   
Gross
Amount
 
         
Federal
 
2033
   
$
114,819
 
State and local
   
2016-2033
     
69,891
 

The Company has no unrecognized tax benefits recorded for the years ended December 31, 2014 and 2013.

When and if the Company were to recognize interest or penalties related to unrecognized tax benefits, they would be reported net of federal tax benefit in tax expense.

It is difficult to predict what would occur to change the Company’s unrecognized tax benefits over the next twelve months.  The Company believes, however, that there should be no change during the next twelve months.

11. EARNINGS (LOSS) PER SHARE

The Company computes basic Earnings (Loss) Per Share (“EPS”) based solely on the weighted average number of its common shares outstanding during the period. Diluted EPS reflects all potential dilution of common stock.  For the years ended December 31, 2014 and December 31, 2013, 3,186,911 shares attributable to outstanding options and warrants and 905,000 shares attributable to outstanding options, respectively, were excluded from the calculation of diluted EPS because the effect was antidilutive.

12. GAIN ON SALE

During the year ended December 31, 2014, the Company realized a gain on sale of $270, primarily from the sale of its rights to the copyright and trademark to the “Charlie Chan” live action television series.

F-16

13. DISCONTINUED OPERATIONS

Discontinued operations includes the international operations discontinued in September 2012, the advertising media and broadcast operations and  television and film production/distribution operations  discontinued in June 2012 upon the sale of most of their assets during the Bankruptcy Proceedings, and the trading card and game distribution operations.

The following are the summarized results of discontinued operations for the years ended December 31, 2014 and 2013:

     Years Ended December 31,  
   
2014
   
2013
 
Total net revenues
 
$
   
$
 
Total income
   
389
     
1,170
 
Income from discontinued operations
 
$
389
   
$
1,170
 

The income from discontinued operations for the years ended December 31, 2014 and 2013 was primarily the result of the reversal of liabilities upon the settlement of claims.

The major classes of assets and liabilities of the discontinued operations on the balance sheet are as follows:

   
December 31, 2014
   
December 31, 2013
 
ASSETS
       
Accounts receivable – net
 
$
4
   
$
1
 
Current assets of discontinued operations
 
$
4
   
$
1
 
                 
LIABILITIES
               
Accounts payable and accrued expenses
 
$
114
   
$
618
 
Current liabilities of discontinued operations
 
$
114
   
$
618
 
 
Exit costs

A summary of the actions taken for severance and other exit costs have been recorded in loss from discontinued operations and the estimated remaining liability associated with such costs are as follows:

   
Total Expenses (Income)
   
Remaining Liability as of
 December 31, 2014
 
Termination of contracts and leases
 
$
(60
)
 
$
 
Total
 
$
(60
)
 
$
 

Noncontrolling interest from discontinued operations

The trading card and game distribution operations were conducted through entities that included noncontrolling interests.

As of January 1, 2009, all earnings and losses of a subsidiary are attributed to both the parent and the noncontrolling interest, even if the losses attributable to the noncontrolling interest result in a deficit noncontrolling interest balance.  Previously, any losses exceeding the noncontrolling interest’s investment in the subsidiaries were attributed to the parent.

a) TC Digital Games LLC - Noncontrolling interest of membership units in TC Digital represents the noncontrolling members’ proportionate share of the equity in the entity. Income is allocated to the membership units’ noncontrolling interest based on the ownership percentage throughout the year. As of December 31, 2014, the noncontrolling member continued to hold 45% of the equity in the entity.  The following table summarizes the noncontrolling interest’s loss attributable to the noncontrolling equity interest in TC Digital:
 
    Year Ended December 31,  
   
2014
   
2013
 
TC Digital net income before common units noncontrolling interest
 
$
25
   
$
888
 
Noncontrolling interest percentage
   
45
%
   
45
%
Income attributable to noncontrolling interest
 
$
11
   
$
399
 
 
F-17

No interest expense was charged for the years ended December 31, 2014 and 2013.

As of December 31, 2014, the loss in excess of noncontrolling interest for TC Digital absorbed by 4Kids Digital, in the aggregate, since the formation of such entity is $21,534.

b) TC Websites LLC - As of December 31, 2014, the noncontrolling member held 45% of the equity in the entity.  The following table summarizes the noncontrolling interest’s loss attributable to the noncontrolling equity interest in TC Websites:
 
   
Year Ended December 31,
 
   
2014
   
2013
 
TC Websites net income before common units noncontrolling interest
 
$
35
   
$
 
Noncontrolling interest percentage
   
45
%
   
45
%
Income attributable to noncontrolling interest
 
$
16
   
$
 
 
As of December 31, 2014, the loss in excess of noncontrolling interest for TC Websites absorbed by 4Kids Websites in the aggregate since the formation of such entity is $6,019.

14. DEFINED CONTRIBUTION PLAN

The Company sponsors a 401(k) plan covering substantially all employees. Company contributions vest based on number of years of service. The Company’s policy is to match 25% of the first 6% of the covered employee’s annual salary, as defined by the plan. Contributions to the plan by the Company amounted to $10 and $27 for the years ended December 31, 2014 and 2013, respectively.

15. COMMITMENTS AND CONTINGENCIES

Commitments

a. Leases - On January 2, 2013, the Company entered into a sublease agreement for certain office and administrative space expiring October 31, 2015.  Commitments for minimum rentals, not including common charges, under this non-cancelable lease at the end of 2014 are as follows:

Year Ending
December 31,
 
Amount
 
2015
 
$
211
 
2016 and after
   
 
Total
 
$
211
 

Rent expense for all operating leases charged against earnings amounted to $266 and $242 for the fiscal years 2014 and 2013, respectively.

b. Employment Contracts - As of December 31, 2014, one executive officer had agreed to enter into an employment agreement with the Company. The agreement was formally executed on March 21, 2013, with an effective date of December 21, 2012.  The agreement generally continues until terminated by the employee or the Company, and provides for severance payments under certain circumstances.  The agreement includes a covenant against competition with the Company which extends for a period of time after termination for any reason. As of December 31, 2014, if the employee under contract were terminated by the Company without good cause, under these contracts, the Company’s liability would be approximately $150.

c. Contractual Arrangements - During the normal course of business, the Company may enter into various agreements with third parties to license, acquire, distribute, broadcast, develop and/or promote Properties. The terms of these agreements will vary based on the services and/or Properties included within the agreements, as each of these agreements also have specific provisions relating to rights granted, territory and contractual term.

Contingencies

TCD International, Ltd. - On February 12, 2010, Home Focus Development, Ltd., a British Virgin Islands corporation, (“Home Focus”) filed suit against the Company in the United States District Court for the Southern District of New York. Home Focus alleged that the Company owed Home Focus $1,075 under an Interest Purchase Agreement among the Company, Home Focus and TC Digital entered into on March 2, 2009, pursuant to which the Company acquired a 25% ownership interest in TCD International, Ltd. (“TDI”).
 
F-18

On April 26, 2010, the Company filed an answer and asserted various counterclaims against Home Focus and its owners, in their individual capacities. In its counterclaims, the Company has alleged that Home Focus failed to make its contractually required initial capital contribution of $250 to TDI necessary to acquire the 25% ownership interest in TDI it purported to sell to the Company and also failed to contribute its 50% share of the expenses. The Company has further asserted counterclaims of fraud and misrepresentation.

On May 7, 2014, the Company entered into a settlement agreement with Home Focus, which was approved by the Bankruptcy Court on July 23, 2014.  Under the terms of the agreement, the Company was required to pay Home Focus $750, which the Company paid on August 8, 2014.

Lehman Brothers, Inc. Claim - The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased auction rate securities on behalf of the Company violated its legal obligations to the Company.  As a result, the Company took various measures to obtain appropriate legal relief, including initiating an arbitration on April 3, 2008 against Lehman Brothers, Inc. and the brokers who had serviced the Company’s Lehman account with the Financial Industry Regulatory Authority.  On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy.  The Company’s arbitration proceeding was stayed by the Lehman Brothers Holdings, Inc. bankruptcy.  On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc.  The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008.  On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”).  SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC.  In late September, 2009, the Company filed a proof of claim against Lehman Brothers, Inc. in the United States Bankruptcy Court for the Southern District of New York. The principal amount of the claim was approximately $31,500 plus interest. In addition, the proof of claim requested treble damages. The proof of claim is a general unsecured claim. On October 18, 2011, the Company entered into a settlement agreement and general release with the brokers who had serviced the Company’s account with Lehman Brothers, Inc. in exchange for a payment to the Company of approximately $489. On May 5, 2014, the Company entered into a stipulation with the Trustee for the liquidation of Lehman Brothers, Inc., regarding its proof of claim.  As part of the stipulation the Company will have an allowed, general unsecured creditor claim against the general estate of Lehman Brothers, Inc. of $3,653, which represents the Company’s final settlement of all claims against Lehman Brothers, Inc.

On May 9, 2014, the Company sold its $3,653 general unsecured creditor claim against the Lehman Brothers, Inc. estate to a third party for $1,607.

Cornerstone Patent Technologies, LLC – On April 25, 2011, Cornerstone Patent Technologies, LLC (“Cornerstone”) filed proof of claim No. 20 (the “Cornerstone Claim”) in the Bankruptcy Court against the Debtors in the Bankruptcy Cases in the amount of $3,300.  Other than filing the Cornerstone Claim, Cornerstone has not commenced litigation against the Debtors.  The Cornerstone Claim alleges (i) breach of a Patent License Agreement dated September 10, 2007 by non-Debtors TC Digital and TC Websites; (ii) breach of Patent Purchase Agreement dated by September 7, 2007, by 4Kids Technology for failing to notify Cornerstone of alleged wrongdoing by TC Digital and TC Websites; (iii) unfair competition; (iv) tortious interference with contract; (v) unjust enrichment; and (vi) piercing the corporate veil.  The Company disputes the Cornerstone Claim in its entirety.  On November 12, 2012, the Company filed a motion with the Bankruptcy Court to estimate the Cornerstone Claim at $0 or in the alternative disallow the claim.  On December 5, 2012, the Bankruptcy Court entered an agreed order between the Company and Cornerstone providing that on the effective date of the Plan, the Debtors would establish a disputed claims reserve on account of the Cornerstone Claim in the amount of $228, without prejudice to (i) Cornerstone’s rights to pursue an allowed claim or judgment against the Debtors in an amount greater than the reserve, with such allowed claim or judgment to be paid pursuant to the Plan and (ii) the Debtors’ rights to defend, contest or otherwise oppose on any grounds, the Cornerstone Claim or any other claims or litigation asserted by or on behalf of Cornerstone or any other party.  On August 29, 2013, the Bankruptcy Court entered an order disallowing and expunging the Cornerstone Claim.  As a result, a gain of $443 from the reversal of a liability was recognized during the year ended December 31, 2013 in the income from discontinued operations.

The Bankruptcy CasesThe Bankruptcy Cases were initially filed by the Debtors with the Bankruptcy Court on April 6, 2011.  On October 5, 2012, the Company filed the Plan and Disclosure Statement.    On October 29, 2012, the Debtors filed an amended version of the Plan and Disclosure Statement.  On October 31, 2012, the Bankruptcy Court entered a solicitation procedures order permitting the Debtors to send the Plan and Disclosure Statement to the parties entitled to vote on the Plan.  On December 13, 2012, the Bankruptcy Court held a confirmation hearing with respect to the Plan. After a hearing and consideration by the Bankruptcy Court of the provisions of the Plan, including consideration of support for the Plan by a vote of approximately 99.93% of shareholders who voted their shares, and there being only one objector to the Plan, the Bankruptcy Court issued an order confirming the Plan.  The Plan became effective on December 21, 2012.
 
F-19

On the effective date of the Plan, the Company commenced paying creditors holding undisputed, allowed claims the full amount of such allowed claims. The Company and its counsel have also negotiated various settlement agreements with creditors holding disputed claims.  As of December 31, 2014, the Company has paid all allowed claims and, on May 7, 2014, the Company entered into a settlement agreement with the remaining disputed claimant which requires final Bankruptcy Court approval. On July 23, 2014, the Bankruptcy Court approved the settlement agreement with the remaining claimant and issued a final decree closing the Chapter 11 case of the Company.

The Company, from time to time, is involved in litigation, contract disputes and claims arising in the ordinary course of its business. The Company does not believe that it is currently subject to any litigation or claims that will, individually or in the aggregate, have a material adverse effect on the Company’s financial position or the results of its operations or cash flows.

16. NONCONTROLLING INTEREST

On January 17, 2013, 4LC Technology and certain other investors entered into an operating agreement of Pinwrest, with 4LC Technology owning 70% of Pinwrest’s membership interests and the minority members owning 30% of Pinwrest’s membership interests.  Pinwrest is treated as a consolidated subsidiary of the Company as a result of its majority ownership.
 
Noncontrolling interest of membership units in Pinwrest represents the minority members’ proportionate share of the equity in the entity. Income is allocated to the membership units’ minority interest based on the ownership percentage throughout the year.  The following table summarizes the noncontrolling interest’s loss attributable to the noncontrolling equity interest in Pinwrest:
 
 
Year Ended December 31,
 
   
2014
 
2013
 
Pinwrest net loss before common units’ noncontrolling interest
 
$
(2,404
)
 
$
(1,105
)
Noncontrolling interest percentage
   
30
%
   
30
%
Loss attributable to noncontrolling interest
 
$
(721
)
 
$
(331
)
 
As of December 31, 2014, the loss in excess of noncontrolling interest for Pinwrest absorbed by 4LC Technology, in the aggregate, since the formation of such entity is $2,457.

17. RELATED PARTY TRANSACTIONS

Pinwrest Development Group, LLC (“Pinwrest”) – 4LC Technology, Inc., wholly owned subsidiary of 4Licensing Corporation, loaned approximately $337 to Pinwrest during 2014.  The loan accrues interest at 10% per annum and is payable on demand.  The loan and related interest, totaling approximately $337 as of December 31, 2014, are eliminated in consolidation.

18. SUBSEQUENT EVENTS

On January 30, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the Leslie G. Rudd Living Trust (the “Trust”), pursuant to which the Company (i) agreed to issue to Buyer (a) 769,381 shares (the “Initial Shares”) of its Common Stock, and (b) warrants (the “Initial Warrants”) to purchase up to an additional 1,538,462 shares of Common Stock at an exercise price of $0.72 per share (the “Exercise Price”) for an aggregate purchase price of $500 (the “Initial Offering”) and (ii) granted the Trust an option, which expires on January 30, 2025, to purchase in one or more transactions up to an additional (a) 6,923,077 shares (the “Option Shares”) of Common Stock and (ii) warrants (the “Option Warrants” to purchase up to an additional 6,923,077 shares of Common Stock at the Exercise Price for an aggregate purchase price of $4,500 in one or more transactions.

On January 30, 2015, the Initial Offering closed and the Company issued and sold to Buyer the Initial Shares and the Initial Warrants and received $500.

The Initial Warrants are, and upon issuance the Option Warrants will be, exercisable immediately and expire ten years from the date of issuance.

Additionally, in connection with the Initial Offering, the Company issued warrants to purchase an aggregate of 854,789 shares of Common Stock to Cleveland Capital and Prescott Group, in accordance with its obligations under the Purchase Agreement and for no further consideration.
 
F-20

On March 4, 2015, the Company entered into a Securities Purchase Agreement with certain purchasers (“Buyers”), pursuant to which the Company (i) agreed to issue to Buyers, in the aggregate, (a) 342,467 shares (the “March 2015 Shares”) of its Common Stock, par value $0.01 per share (the “Common Stock”), and (b) warrants (the “March 2015 Warrants”) to purchase up to an additional 684,934 shares of Common Stock at an exercise price of $0.82 per share for an aggregate purchase price of $250.
 
On March 4, 2015, the offering closed and the Company issued and sold to Buyers the March 2015 Shares and the March 2015 Warrants and received $250.

The March 2015 Warrants are exercisable immediately and expire ten years from the date of issuance.

Additionally, in connection with the offering, the Company issued warrants to purchase an aggregate of 576,600 shares of Common Stock to Cleveland Capital and Prescott, in accordance with its obligations under the Purchase Agreement and for no further consideration.

19. SEGMENT AND RELATED INFORMATION

The Company has two reportable segments: (i) Entertainment and Brand Licensing and (ii) IsoBLOX™ and Sports Licensing/Distribution.  The Company’s reportable segments are strategic business units, which, while managed separately, work together as a vertically integrated entertainment company.  The Company’s management regularly evaluates the performance of each segment based on its net revenues, profit and loss after all expenses, including interest income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.  All inter-segment transactions have been eliminated in consolidation.

Years Ended December 31,
 
Entertainment and Brand Licensing
   
IsoBLOX™
and Sports Licensing/
Distribution
   
Total
 
2014:
           
Net revenues from external customers
 
$
799
 </