Kartoon Studios, Inc. — Form 10-Q Summary
Business context and reporting period
Form 10-Q for the quarter and six months ended June 30, 2023, filed August 14, 2023. Kartoon Studios is a global children’s content and brand-management company operating in content production and distribution and media advisory and advertising services. The company changed its name from Genius Brands International, Inc. on June 23, 2023 and began trading on NYSE American under “TOON” on June 26, 2023. Wow’s results were included for six months in 2023 but only from April 1, 2022 in the prior-year period, limiting comparability.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $11.0 million, down 50% | $25.2 million, up 7% |
| Loss from operations | $8.6 million | $30.6 million |
| Net loss attributable to Kartoon Studios | $15.2 million, or $0.47 per share | $40.0 million, or $1.24 per share |
| Operating margin | (77.6%) | (121.1%) |
| Net margin attributable to Kartoon Studios | (138.0%) | (158.5%) |
| Cash used in operating activities | Not separately presented | $10.6 million |
Quarterly revenue declines reflected lower production services, content distribution, licensing and media advisory revenue. Six-month revenue growth was driven by a full six months of Wow production-services revenue, partly offset by lower content distribution, licensing and advertising-services revenue.
- Quarterly revenue consisted of production services of $7.0 million, content distribution of $3.0 million, licensing and royalties of $0.1 million, and media advisory and advertising services of $0.9 million.
- Six-month revenue consisted of production services of $16.9 million, content distribution of $6.3 million, licensing and royalties of $0.1 million, and media advisory and advertising services of $1.8 million.
- Six-month operating expenses increased 33% to $55.8 million, primarily because of $15.4 million of property, intangible-asset and goodwill impairments, despite lower general and administrative expense.
- Other expense was $6.4 million for the quarter and $8.1 million for the six months, including interest expense, realized securities losses and warrant-related items.
Balance sheet, debt and liquidity
| Metric | June 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $4.8 million | $7.4 million |
| Marketable securities | $49.5 million | $83.7 million |
| Current assets | $91.6 million | $139.5 million |
| Current liabilities | $77.2 million | $110.9 million |
| Working capital | $14.4 million | $28.6 million |
| Margin loan | $27.6 million | $60.8 million |
| Total liabilities | $90.5 million | $125.0 million |
| Accumulated deficit | $681.4 million | $641.4 million |
Cash decreased by $2.6 million during the first six months. Operating cash use of $10.6 million and financing cash use of $27.9 million were offset primarily by $34.2 million of proceeds from marketable-securities sales and maturities. Management stated that existing cash and available-for-sale securities should support operations for at least the next twelve months, but liquidity depends materially on monetizing investments and managing debt.
- The margin loan is collateralized by marketable securities, bears a variable rate tied to the Federal Funds Rate plus 0.65%, and is payable on demand, creating margin-call risk.
- Outstanding bank indebtedness was $4.8 million and production facilities were $17.8 million at June 30, 2023.
- The company was in technical violation of minimum fixed-charge and maximum senior-funded-debt-to-EBITDA covenants on facilities with aggregate outstanding borrowings of approximately $6.7 million. No formal breach notice had been received as of financial-statement issuance, but certain facilities may be called at any time.
- Contractual obligations totaled approximately $71.9 million, including $50.2 million of debt, leases, employment contracts and consulting commitments. Approximately $38.4 million could become payable within one year if specified borrowings are called.
Material changes versus the prior comparable period
- Quarterly revenue fell 50%, primarily from fewer content deliveries, lower Frederator viewership and revenue per mille, reduced licensing revenue, and lower media commissions.
- Six-month revenue rose 7% because 2023 included a full six months of Wow revenue versus approximately three months in the prior period.
- Six-month net loss attributable to the company increased to $40.0 million from $17.9 million. The increase included $11.3 million of goodwill impairment, $4.0 million of intangible-asset impairment and $0.1 million of property-and-equipment impairment.
- Warrant transactions generated approximately $5.8 million of gross cash proceeds but also produced $16.2 million of warrant incentive expense. New warrants to purchase approximately 4.8 million shares at $2.50 per share were issued and classified as a liability because shareholder approval and additional authorized shares were required.
- Common shares outstanding increased to approximately 35.1 million from 31.9 million at year-end, before considering potential warrant and equity-compensation dilution.
- The company recorded a $0.7 million income-tax benefit from reversing a deferred tax liability associated with impaired Ameba assets.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative revenue, earnings or margin guidance. Management expects to fund near-term requirements with existing cash and marketable securities. The outlook remains exposed to production timing, content-delivery schedules, licensing activity, streaming viewership, advertising demand and the ability to collect Canadian film and television tax credits.
- Liquidity risk: Cash on hand was only $4.8 million, while the company has significant current obligations and a demand margin loan. In July 2023, the company sold securities for $27.0 million, incurred a $1.5 million realized loss and used the proceeds to repay $27.0 million of the margin loan.
- Potential dilution: The company is seeking shareholder approval to increase authorized common shares from 40 million to 190 million and permit issuance exceeding 19.99% of outstanding shares. Approval would enable exercise of the new warrants for up to approximately 4.8 million shares, subject to their terms.
- Asset impairment: The first-quarter impairment review materially reduced goodwill and intangible assets. Further impairments could result from adverse market conditions or weaker forecasts.
- Customer concentration: Four customers represented 81.2% of quarterly revenue, and three customers represented 71.4% of six-month revenue. Four customers represented 70.4% of accounts receivable at June 30, 2023.
- Internal controls: Management concluded that internal control over financial reporting was not effective because of material weaknesses involving segregation of duties, staffing and expertise, risk assessment, review controls, documentation and information technology controls. Disclosure controls were deemed effective.
- Accounting correction: The company recorded a $0.7 million out-of-period adjustment related to an overstated deferred tax liability and net loss in the March 31, 2023 financial statements.
- Litigation: A previously dismissed securities class action remains subject to appeal, and related derivative actions are stayed. The company also faces a shareholder action involving alleged short-swing profits; the company is a nominal defendant and disputes potential indemnification obligations.
- Subsequent lease item: Beacon terminated a New Jersey lease effective August 1, 2023, with a required payment of approximately $98,000 and an expected loss of approximately $105,000, plus a fixed-asset write-down.
Most important facts for investors to verify
- Whether the company can sustain operations without continued sales of marketable securities or additional equity-linked financing.
- Status of covenant waivers, lender demands and potential margin calls.
- Results of the August 25, 2023 shareholder votes on authorized shares and warrant issuance, and the resulting dilution.
- Progress and effectiveness of remediation for the disclosed material weaknesses in internal control over financial reporting.
- Whether production-services revenue normalizes after project completions and whether streaming, licensing and advertising revenue recover.
- Potential additional impairment charges, realized investment losses and volatility in the fair value of the YFE investment and warrant liabilities.
- Outcome and timing of the securities-litigation appeal and related derivative and indemnification matters.