Kartoon Studios, Inc. annual report, FY2021

Business Context and Reporting Period

This Form 10-K was filed by Genius Brands International, Inc. (ticker: GNUS), the company identified in the request as Kartoon Studios, Inc. It covers the fiscal year ended December 31, 2021, with comparisons to fiscal 2020. The company creates, distributes, and licenses children’s multimedia content and operates the Kartoon Channel! AVOD platform. It also provides media advisory and advertising services through the ChizComm acquisition.

Key properties include Stan Lee’s Superhero Kindergarten, KC! Pop Quiz, Rainbow Rangers, Llama Llama, Baby Genius, and Warren Buffett’s Secret Millionaires Club. The company had 67 full-time employees and 16 independent contractors at year-end.

Financial Performance and Position

Metric	FY 2021	FY 2020	Change
Total revenue	$7.873 million	$2.483 million	Up 217%
Operating loss	$63.753 million	$17.882 million	Loss increased
Net loss attributable to the company	$126.291 million	$401.670 million	Loss decreased
Net loss per share	$0.42	$2.82	Improved
Cash used in operations	$23.743 million	$8.054 million	Use increased
Cash used in investing	$127.456 million	$1.403 million	Use increased substantially
Cash provided by financing	$60.819 million	$109.608 million	Down 44.5%

Revenue growth was primarily driven by $5.166 million of media advisory and advertising services revenue from ChizComm, acquired in February 2021. Licensing and royalties increased to $1.605 million from $0.765 million. Television and home entertainment revenue declined 44% to $0.825 million because 2020 included Rainbow Rangers Season 2 deliveries. Advertising sales increased 9% to $0.277 million.

Operating expenses were $71.626 million, including $21.987 million of direct operating costs, $35.967 million of general and administrative expense, $4.778 million of goodwill impairment, and $3.452 million of intangible-asset impairment. Direct operating costs included an $18.2 million impairment of film and television production costs. General and administrative expense increased 106%, partly due to ChizComm costs, higher share-based compensation, and increased legal fees.

Reported net loss improved from 2020 largely because 2020 included substantial non-cash losses on warrant and conversion-option revaluations. FY 2021 nevertheless included $69.139 million of warrant incentive expense, partially offset by a $5.846 million gain from revaluation of the ChizComm contingent consideration liability.

At December 31, 2021, current assets were $136.185 million and current liabilities were $21.131 million, producing working capital of $115.1 million. Cash and cash equivalents were $2.058 million, restricted cash was $8.002 million, and available-for-sale marketable securities were $112.523 million, with an unrealized loss of approximately $1.255 million. Total stockholders’ equity was $144.653 million, while accumulated deficit was $595.848 million.

The company held a $6.392 million margin loan at year-end, secured by marketable securities, bearing interest at the Federal Funds Rate plus 0.65% and payable on demand. Other debt was limited, including approximately $0.110 million of assumed notes payable. The company stated that existing cash and marketable securities were sufficient to support operations for at least the next twelve months, but it also reported a history of operating losses and continuing operating cash burn.

Material Changes Versus the Prior Comparable Period

• Revenue increased 217%, primarily because the ChizComm acquisition added a new media advisory and advertising services segment.
• ChizComm contributed $5.166 million of reported revenue but generated a segment net loss of $3.347 million. The company discontinued the ChizComm trade name and recorded a $3.452 million impairment of the related intangible asset and a $4.778 million goodwill impairment.
• Film and television costs declined to $2.940 million from $11.828 million after $18.2 million of production-cost impairments and substantially higher amortization.
• The company invested $112.5 million in marketable securities and ended the year with only $2.1 million of unrestricted cash.
• The company invested $2.0 million in Stan Lee Universe, LLC, obtained a 50% interest, and consolidated the variable-interest entity.
• The company invested $6.8 million in Your Family Entertainment AG, consisting of $3.4 million cash and $3.4 million of common stock, obtaining a 29% economic interest at year-end.
• In January 2021, warrant exercises generated approximately $61.6 million of gross proceeds, while new warrants covering 39.7405 million shares were issued at an exercise price of $2.37 per share.
• Common shares outstanding increased to 303.4 million from 258.4 million, excluding additional dilution from outstanding warrants, options, and restricted stock units.
• Cash, cash equivalents, and restricted cash decreased to $10.060 million from $100.456 million, reflecting investment purchases, acquisitions, operating losses, and other uses of cash.

Guidance, Outlook, Commentary, and Risks

Management expects Shaq’s Garage to debut during the fourth quarter of 2022 and Rainbow Rangers Season 3 to launch on the Kartoon Channel! on April 15, 2022. The company acquired Ameba TV in January 2022 for $3.5 million in cash plus $0.3 million for software and plans to launch the subscription-based Kartoon Channel! Kidaverse.

The company agreed to acquire WOW Unlimited Media for $38.4 million in cash and 11 million shares of common stock, with closing expected during the second quarter of 2022. The filing states that the transaction had not yet been completed or initially accounted for as of the filing date.

Following the YFE investment, the company acquired additional YFE shares and temporarily increased its ownership to 53.9%; subsequent conversions diluted ownership to 45.6% as of March 2022. The company also committed to provide YFE between €4.0 million and €7.0 million through additional equity or shareholder loans.

During the first quarter of 2022, the company borrowed an additional $51.4 million, net of pay-downs, from its investment margin account. This materially increases leverage and collateral-call exposure relative to the December 31, 2021 balance.

• The company has incurred net losses in every fiscal quarter since inception and requires increased revenue and/or lower costs to achieve profitability.
• COVID-19 effects, toy-industry supply-chain disruptions, inflation, economic weakness, and geopolitical tensions could reduce demand and increase costs.
• Content performance, release timing, audience acceptance, distributor renewals, and consumer-product licensing remain difficult to predict.
• The company relies on third-party production and animation studios and faces intense competition from larger media companies.
• Investment portfolios are exposed to interest-rate, credit-spread, liquidity, foreign-currency, and market-value risk.
• The company faces securities class-action and shareholder derivative litigation, as well as other legal matters. The filing does not provide a clear estimate of potential loss.
• Management concluded that internal control over financial reporting was not effective as of December 31, 2021 because of material weaknesses involving segregation of duties, limited accounting resources, risk assessment, and documentation. Disclosure controls and procedures were concluded to be effective.
• On March 4, 2022, Nasdaq notified the company that its stock had failed to maintain the $1.00 minimum closing bid price. The initial compliance period ran through August 31, 2022, subject to possible additional time.

Most Important Facts for Investors to Verify

• Whether ChizComm, the Kartoon Channel!, and subsequent acquisitions can produce sustainable revenue and positive cash flow rather than primarily increasing operating costs.
• The company’s updated margin-loan balance, collateral coverage, interest expense, and exposure to margin calls after the additional 2022 borrowings.
• The funding requirements and final accounting for the WOW acquisition, Ameba TV acquisition, and additional YFE investment commitments.
• Whether the $18.2 million production-cost impairment and other 2021 impairments signal weaker-than-expected content economics or additional impairment risk.
• The extent of dilution from 45.5 million outstanding warrants, 10.2 million options, 15.4 million unvested RSUs, and other share commitments.
• Progress in remediating the material weaknesses in internal control over financial reporting.
• The status and potential financial impact of the securities class action, derivative lawsuits, Chizick litigation, and other legal proceedings.
• Actual audience, subscriber, advertising, licensing, and distribution metrics for Kartoon Channel! and the planned Kidaverse platform, which are not clearly quantified in the filing.