Kartoon Studios, Inc. (formerly Genius Brands International, Inc.) — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 30, 2020. The source describes annual results rather than a standalone 2019 fourth-quarter filing.
Business context
The Company creates, produces, distributes and licenses children’s multimedia content and related consumer products. Key properties included Rainbow Rangers, Llama Llama, Baby Genius, Thomas Edison’s Secret Lab and Warren Buffett’s Secret Millionaires Club. The Company also operated the Genius Brands Network across television, VOD, SVOD and digital platforms.
- Llama Llama Season 2 was delivered to Netflix in September 2019.
- Rainbow Rangers Season 1 was delivered to Nickelodeon and Shanghai Senyu Media; Season 2 remained in production.
- Two customers represented 65% of 2019 revenue and 95% of accounts receivable.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $5.908 million | $0.993 million | +$4.914 million, +495% |
| Operating loss | $6.506 million | $8.004 million | Improved by $1.498 million |
| Net loss | $11.481 million | $9.004 million | Loss increased $2.477 million |
| Net loss attributable to common shareholders | $14.862 million | $9.357 million | Loss increased $5.504 million |
| Basic and diluted loss per share | $1.25 | $1.07 | Loss per share increased |
| Cash used in operating activities | $6.251 million | $8.008 million | Use decreased $1.757 million |
| Cash, cash equivalents and restricted cash | $0.305 million | $3.085 million | Decreased $2.780 million |
- Revenue growth was concentrated in Television & Home Entertainment, which increased to $4.817 million from $0.324 million, primarily from deliveries to Netflix and Nickelodeon. Licensing and royalties increased 92% to $0.864 million. Advertising sales were $0.224 million, while product sales were immaterial at $2,963.
- Total operating expenses increased 32% to $12.414 million. Direct operating costs rose 197% to $4.568 million, including $2.230 million of film and television amortization and $1.691 million of participation expense. General and administrative expense increased 43% to $7.116 million.
- Approximate operating margin was negative 110%, compared with negative 806% in 2018. Approximate net margin was negative 194%, compared with negative 906% in 2018; the improvement in these ratios was driven primarily by the sharp increase in revenue, despite the larger absolute net loss.
- Current assets were $4.646 million versus current liabilities of $8.296 million, producing negative working capital of $3.650 million. Stockholders’ equity was $9.087 million and accumulated deficit was $66.047 million.
- Recorded current and long-term production and secured convertible debt totaled approximately $5.466 million, excluding lease liabilities. Lease liabilities totaled approximately $4.168 million. The production facility had $3.092 million of gross borrowings at year-end and matured March 31, 2021.
- Film and television costs, net, increased to $9.907 million from $8.166 million, primarily reflecting production and development of Rainbow Rangers Season 2 and Llama Llama Season 2.
Material changes versus 2018
- Revenue increased substantially because major content deliveries occurred in 2019; however, the Company remained structurally unprofitable.
- The net loss increased because of $4.433 million of loss on extinguishment of debt and higher operating expenses. A $1.740 million impairment charge recorded in 2018 did not recur.
- Cash used in operations improved but remained significant, while year-end cash fell to $0.305 million from $3.085 million.
- Common shares outstanding increased to 21.878 million at December 31, 2019 from 9.458 million, reflecting equity offerings, preferred-stock conversions, warrant exercises and shares issued for services.
- Warrants outstanding increased to 11.124 million from 5.899 million, creating substantial potential dilution.
- The Company adopted the new lease standard in 2019, recognizing right-of-use assets of $4.010 million and lease liabilities of $4.168 million at year-end.
Outlook, risks and unusual items
- The auditor reported substantial doubt about the Company’s ability to continue as a going concern because of recurring losses, negative operating cash flow, accumulated deficit and insufficient cash to fund planned operations for one year after issuance of the financial statements.
- Management expected additional financing and increased licensing revenue, but stated that additional capital was necessary and not assured. Potential actions included further funding, scaling back production or reducing operations.
- COVID-19 was identified as a material developing risk; the Company could not estimate its effect, and no COVID-19 provision was recorded in the 2019 financial statements.
- Revenue timing is volatile because it depends on content delivery, license-period commencement, audience acceptance, retail launches and production schedules.
- Customer concentration, dependence on third-party production studios, competition from larger media companies, intellectual-property claims, technology and cybersecurity risks, and product-safety regulation were identified as significant risks.
- Nasdaq notified the Company in September 2019 that its bid price had remained below $1.00. In March 2020, Nasdaq granted an additional compliance period through August 31, 2020, with a reverse stock split identified as a possible remedy.
- Subsequent to year-end, the Company completed or announced significant financing transactions, including $13.750 million principal amount of senior secured convertible notes with an $11.000 million funding amount, warrants for 65.476 million shares, and a March 2020 registered offering of 4.000 million shares for approximately $1.0 million gross proceeds. These transactions carry significant repayment, covenant, conversion and dilution risks.
- The March 2020 notes were initially convertible at $1.375 per share and, subject to stockholder approval, at $0.21 per share; the notes require monthly amortization beginning October 2020 and may require cash repayment under certain conditions.
Most important facts to verify
- Whether post-year-end financings provided sufficient liquidity and whether the Company can meet scheduled debt, lease and production obligations.
- The status and ultimate terms of stockholder approval, conversions and warrant exercises related to the March 2020 financing.
- The potential dilution from convertible notes, preferred stock, options and more than 11 million outstanding warrants at December 31, 2019.
- Whether revenue concentration in Netflix, Nickelodeon and other major customers is sustainable and whether additional content deliveries generate recurring licensing and royalty revenue.
- The status of Nasdaq’s minimum-bid-price compliance and any reverse-stock-split action.
- The recoverability of $9.907 million of capitalized film and television costs and the carrying value of $10.366 million of goodwill.
- The effect of COVID-19 on production schedules, licensing agreements, advertising, consumer-product launches and collections of the $4.102 million accounts receivable balance.