Business Context and Reporting Period
This Form 10-Q was filed by Genius Brands International, Inc. (now associated with Kartoon Studios, Inc.) for the quarter and nine months ended September 30, 2019. The company develops, licenses, and distributes children’s multimedia content and related consumer products, including Llama Llama, Rainbow Rangers, Baby Genius, and other library properties. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Highlights
| Metric | Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 |
|---|---|---|---|---|
| Total revenue | $3.469 million | $0.523 million | $5.154 million | $0.693 million |
| Operating loss | $(1.563) million | $(1.254) million | $(4.480) million | $(4.706) million |
| Net loss | $(2.555) million | $(1.822) million | $(9.278) million | $(5.275) million |
| Net loss applicable to common shareholders | $(4.242) million | $(2.175) million | $(11.287) million | $(5.628) million |
| Basic and diluted loss per share | $(0.38) | $(0.24) | $(1.07) | $(0.66) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(4.636) million | $(5.487) million |
- Revenue mix: Third-quarter television and home entertainment revenue was $3.147 million, primarily reflecting delivery of Llama Llama Season 2 to Netflix. Nine-month television and home entertainment revenue was $4.293 million, compared with $0.234 million in the prior-year period.
- Margins: The operating margin was approximately negative 45.0% in the third quarter and negative 86.9% for the nine months, compared with approximately negative 239.7% and negative 679.3%, respectively, in the comparable 2018 periods. The improvement reflects higher revenue but continued operating losses.
- Cash and liquidity: Cash and cash equivalents were $633,561 at September 30, 2019, compared with $2.684 million at December 31, 2018. Current assets were $5.011 million versus current liabilities of $8.859 million, producing negative working capital of $3.847 million.
- Debt: Senior secured convertible notes had a net carrying value of $3.050 million. The notes bear 10% annual interest and are secured by substantially important company assets. Production facility borrowings were $3.050 million net.
- Balance sheet: Total assets were $29.446 million and total liabilities were $20.711 million. Stockholders’ equity was $8.735 million, compared with $12.840 million at December 31, 2018. Accumulated deficit was $62.175 million.
- Content investment: Net film and television costs increased to $9.450 million from $8.166 million at year-end 2018, primarily due to production and development of Rainbow Rangers Season 2 and Llama Llama Season 2.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 563% and nine-month revenue increased 644%, driven primarily by deliveries of Llama Llama Season 2, Rainbow Rangers Season 1, and international content.
- Direct operating costs increased 497% in the third quarter and 226% for the nine months, reflecting higher film amortization, participation expense, and approximately $523,000 of foreign-language dubbing costs for Llama Llama Season 2.
- General and administrative expense increased 73% in the quarter and 37% for the nine months, primarily due to higher salaries, legal, rent, consulting, and investor-relations costs.
- The company recorded a $4.433 million loss on extinguishment of debt for the nine months, including debt modifications and warrants issued to noteholders.
- Common shares outstanding increased to 11,933,365 at September 30, 2019 from 9,457,859 at December 31, 2018. Warrants outstanding increased to 10.345 million from 5.899 million, creating substantial potential dilution.
- The company adopted lease accounting under ASC 842 in 2019, recognizing right-of-use assets of $4.116 million and lease liabilities totaling approximately $4.201 million at September 30, 2019.
Outlook, Risks, Contingencies, and Unusual Items
- Going-concern uncertainty: Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern because current assets are insufficient to repay debt and fund planned operations.
- Debt maturities: The secured convertible notes originally matured August 20, 2019. Holders extended $1.958 million of notes to January 31, 2020 and $687,500 to August 20, 2021. The remaining $883,332 was scheduled for four monthly principal installments of approximately $220,883; September and October payments, including interest, had been made.
- Financing dependence: The company disclosed that it did not have enough cash to repay the notes in full and would need additional financing or refinancing. Failure to meet obligations could result in default, acceleration, bankruptcy, or liquidation.
- Nasdaq compliance: Nasdaq notified the company that its stock had traded below the $1.00 minimum bid requirement for 30 consecutive business days. The company had until March 2, 2020, to regain compliance, subject to potential additional procedures.
- Customer concentration: Two customers represented 94% of third-quarter revenue and 78% of nine-month revenue. One customer represented 85% of accounts receivable at September 30, 2019.
- Subsequent financing and dilution: After quarter-end, the CEO agreed to purchase 1.0 million shares for $760,000. The company also announced a registered offering of 663,158 shares for approximately $504,000 gross and warrants for up to 477,474 shares.
- Related-party matters: The CEO purchased $500,000 of secured convertible notes from another holder, and amounts owed to related parties included executive-producer fees, reimbursable expenses, and accrued interest.
- Content and execution risk: Results depend on audience acceptance, distributor renewals, delivery timing, licensing arrangements, and recovery of capitalized film and television costs.
Important Facts for Investors to Verify
- Whether the company obtained sufficient financing or refinancing to satisfy secured convertible note obligations after September 30, 2019.
- The status of the going-concern assessment, debt defaults, principal payments, and any further maturity extensions.
- Whether Nasdaq listing compliance was restored and whether any reverse split, additional equity issuance, or other corrective action occurred.
- The collectability of the concentrated accounts receivable balance and the sustainability of revenue generated by major content deliveries.
- The recoverability and impairment risk of $9.450 million in capitalized film and television costs and $10.366 million in goodwill.
- The fully diluted share count, including 10.345 million outstanding warrants, convertible preferred stock, convertible notes, stock options, and subsequent issuances.
- The company’s ability to convert increased revenue into positive operating cash flow rather than continuing to rely on equity, warrant, or debt financing.