Business Context and Reporting Period
Genius Brands International, Inc. (the filing predates the company’s current Kartoon Studios name) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company develops, licenses, distributes, and manages multimedia brands and children’s content, including SpacePop, Rainbow Rangers, Llama Llama, Baby Genius, and Thomas Edison’s Secret Lab.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $198,091 | $351,893 | Down 44% |
| Operating expenses | $1,513,498 | $2,003,609 | Down 24% |
| Loss from operations | $(1,315,407) | $(1,651,716) | Improved $336,309 |
| Net loss | $(1,316,234) | $(1,649,310) | Improved $333,076 |
| Basic and diluted loss per share | $(0.26) | $(0.44) | Improved |
| Cash used in operating activities | $(2,346,210) | $707,111 provided | Declined $3,053,321 |
Licensing and royalties increased 4% to $153,213. Television and home entertainment revenue fell 79% to $43,373, primarily because the prior-year period included multiple Thomas Edison’s Secret Lab licenses. Advertising revenue was $1,505 versus none in the prior year.
Operating loss as a percentage of revenue was approximately 664% in Q1 2017, compared with approximately 469% in Q1 2016. A conventional gross margin was not clearly provided because the filing presents direct operating costs within operating expenses rather than a separate gross-profit subtotal.
At March 31, 2017, cash and cash equivalents were $4.23 million, restricted cash was $1.00 million, and total cash, cash equivalents, and restricted cash were $5.23 million. Working capital was $3.69 million, compared with a $0.48 million deficit at December 31, 2016. Total assets were $21.61 million and total liabilities were $9.15 million.
Gross borrowings under the Bank Leumi production facility were $2.81 million, presented net of financing costs as $2.65 million. The facility supports production of Llama Llama, bears interest at Prime plus 1% or LIBOR plus 3.25%, and is secured by related Netflix license fees and copyrights. The company was in compliance with the facility’s covenants.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $153,802, driven by lower television and home entertainment revenue, partially offset by higher licensing and royalty revenue.
- Operating expenses declined $490,111, including lower marketing and sales costs, direct operating costs, and share-based compensation.
- Despite the lower net loss, operating cash flow shifted from a $707,111 inflow to a $2.35 million outflow. The change reflected operating losses, increased receivables, and $937,535 of investment in film and television costs for SpacePop, Llama Llama, and Rainbow Rangers.
- Film and television costs increased to $3.23 million from $2.26 million at year-end 2016.
- Cash increased by $2.34 million during the quarter, primarily from financing proceeds rather than operations.
- Common shares outstanding increased to 5,652,091 from 4,010,649 at December 31, 2016, principally from warrant exercises, the Sony transaction, consultant issuances, and preferred-stock conversions.
Guidance, Outlook, Risks, and Unusual Items
Management stated that anticipated cash balances, working capital, the production facility, and the deal pipeline were expected to fund operations for the next twelve months. However, the company cautioned that it might need additional funding, reduced development or production plans, or reduced operations if it cannot achieve profitability and positive operating cash flow.
- In January 2017, Sony agreed to pay $1.49 million owed to Sony DADC for the company’s disk manufacturing and replication obligations. In exchange, the company issued Sony 301,231 shares, expanded Sony’s distribution territory worldwide, and increased advances recoverable from future royalties.
- In February 2017, warrant holders exercised warrants for gross proceeds of $3.87 million. The company issued replacement and market-price warrants, resulting in dilution and additional potential dilution.
- Deferred revenue increased to $4.83 million from $3.11 million, including Sony-related advances and the amount associated with expanded distribution rights. These balances are subject to future revenue-recognition requirements and royalty recoupment.
- The company reported a disputed trade payable of $925,000 and believes the related claim is barred by the statute of limitations, although it was still recorded as a liability.
- Goodwill of $10.37 million and indefinite-lived intangible assets remained subject to impairment testing; no impairment was recorded through March 31, 2017.
- The company had an accumulated deficit of $37.96 million and a history of operating losses and negative operating cash flow.
- Management reported no material pending legal proceedings, no changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2017.
Important Facts for Investors to Verify
- Whether the company can convert its content pipeline and deferred revenue into recurring revenue and positive operating cash flow.
- The timing, cost, and commercial performance of Llama Llama, SpacePop, and Rainbow Rangers.
- The remaining balance and repayment or royalty-recoupment terms of the Bank Leumi facility and Sony-related advances.
- The potential impact of 5.65 million shares outstanding, 1.77 million outstanding warrants, stock options, and convertible preferred stock on future dilution.
- The collectability and ultimate resolution of the $925,000 disputed trade payable.
- Whether the company’s substantial goodwill, intangible assets, and capitalized film and television costs remain recoverable.
- The filing’s stated cash runway assumptions, given the $2.35 million quarterly operating cash outflow and continuing dependence on external financing.