Business Context and Reporting Period
Genius Brands International, Inc. (now associated with Kartoon Studios, Inc.) filed this Form 10-Q for the quarter and nine months ended September 30, 2020. The company develops, licenses, and distributes children’s multimedia content and related consumer products, including Rainbow Rangers, Llama Llama, Baby Genius, and Stan Lee’s Superhero Kindergarten. Its distribution activities include television, streaming, home entertainment, licensing, advertising, and the Kartoon Channel! platform.
Financial Highlights
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $274,000, down 92% from $3.469 million | $1.169 million, down 77% from $5.154 million |
| Loss from operations | $3.353 million, versus $1.563 million | $7.497 million, versus $4.480 million |
| Net loss | $2.007 million, versus $2.555 million | $391.101 million, versus $9.278 million |
| Net loss per share | $0.01 | $3.63 |
| Cash used in operating activities | Not separately provided for the quarter | $5.317 million, versus $4.636 million |
Revenue decline was driven primarily by the absence of comparable delivery-based television and home entertainment revenue recognized in 2019, including the delivery of Llama Llama Season 2 to Netflix. Licensing and royalty revenue increased 15% in the quarter but declined 16% for the nine-month period. Advertising revenue declined 71% in the quarter but increased 4% for the nine-month period.
Approximate margins were highly negative: third-quarter operating margin was approximately negative 1,224% and net margin approximately negative 733%; nine-month operating margin was approximately negative 641% and net margin approximately negative 33,448%. The nine-month loss included approximately $382.5 million of warrant and conversion-option revaluation expense, which was largely non-cash.
Financial Position, Debt, and Liquidity
- Cash and cash equivalents were $50.462 million at September 30, 2020, compared with $305,000 at December 31, 2019.
- Working capital was $47.874 million, compared with negative working capital of $3.650 million at year-end 2019.
- Total assets were $79.199 million and total liabilities were $16.062 million. Stockholders’ equity was $63.137 million, compared with $9.087 million at December 31, 2019.
- Current liabilities included a $366,000 Paycheck Protection Program loan and a $1.623 million warrant derivative liability. Secured convertible notes were no longer outstanding at September 30, 2020 after conversion into common stock.
- Production-facility debt was $1.507 million, down from $3.092 million at December 31, 2019, with maturity of the related facility stated as March 31, 2021. The PPP loan bears interest at 1% and matures April 19, 2021, subject to potential forgiveness.
- Nine-month financing cash inflows were $56.028 million, principally from common-stock offerings, warrant exercises, convertible-note proceeds, and collection of investor notes.
- Approximately $49.460 million of cash was uninsured by the FDIC at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue fell sharply because 2019 included significant content-delivery revenue that did not recur in 2020.
- General and administrative expense increased 45% in the quarter and 35% for the nine months, primarily due to higher stock-based compensation, consulting, and professional fees.
- Marketing and sales expense increased 274% in the quarter and 49% for the nine months, largely to promote Rainbow Rangers.
- Direct operating costs declined 92% in the quarter and 77% for the nine months, reflecting lower film amortization and participation expenses associated with lower content-delivery revenue.
- Common shares outstanding increased to 219.0 million at September 30, 2020 from 21.9 million at December 31, 2019, reflecting financing transactions, note conversions, warrant exercises, and preferred-stock conversions.
- The company recognized substantial non-cash derivative revaluation expenses during the first half of 2020, including $210.672 million for warrants and $171.836 million for conversion options. Third-quarter warrant revaluation produced a $1.557 million gain.
- The company terminated certain office leases in September 2020, recording losses related to lease and deposit surrender. The filing separately reports a $342,000 loss on lease termination in the nine-month statement of operations.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management identified streaming-demand growth as a potential benefit from COVID-19, but reported adverse effects on consumer products, toy releases, physical retail activity, and supply chains. Management stated that the ultimate COVID-19 impact could be material and could not yet be estimated.
- In July 2020, the company formed or agreed to form Stan Lee Universe, LLC with POW! to exploit Stan Lee-related intellectual property. The company had contributed $500,000 by September 30, 2020 and agreed to contribute up to $2.0 million in cash for a 50% ownership interest, subject to final operating agreements.
- Film and television costs increased to $11.301 million from $9.907 million at year-end, primarily reflecting production of Rainbow Rangers Season 2 and development of Stan Lee’s Superhero Kindergarten.
- The company disclosed customer and receivable concentration: one customer represented 70% of accounts receivable at September 30, 2020, and two customers represented 24% of third-quarter revenue.
- The company and its CEO were defendants in putative securities class actions concerning alleged statements during March 17 through July 5, 2020. Directors were also named in a related derivative action. Defendants denied wrongdoing; the derivative action was stayed pending developments in the securities litigation.
- Subsequent to quarter-end, the company completed or announced a registered direct offering of 37.4 million shares and warrants for gross proceeds of approximately $57.9 million before expenses.
- In November 2020, the company signed a letter of intent to acquire ChizComm for an expected $12 million consisting of $8.5 million cash and $3.5 million of stock, plus potential additional consideration of up to $8 million tied to milestones.
Investor Verification Items
- Verify the sustainability and timing of revenue from new and existing content, especially given the large decline from 2019 delivery-related revenue.
- Reconcile the company’s substantial cash balance with ongoing operating cash burn, production commitments, lease and employment obligations, and planned acquisitions.
- Assess dilution from the significant increase in shares outstanding and from remaining warrants, options, and subsequent financing securities.
- Review the accounting and valuation assumptions for warrant and conversion-option derivative liabilities, which materially affected reported earnings.
- Confirm the status, terms, and potential financial exposure of the securities class actions and related derivative litigation.
- Evaluate the final terms and funding requirements of Stan Lee Universe and the proposed ChizComm acquisition.
- Assess customer concentration, uninsured cash balances, COVID-19 effects on consumer products, and the recoverability of capitalized film and television costs.