Genius Brands International, Inc. (now Kartoon Studios, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2016. The company creates, produces, licenses, and distributes multimedia content and consumer products, primarily for children. Key properties included SpacePOP, Llama Llama, Baby Genius, Thomas Edison’s Secret Lab, and Secret Millionaires Club.
The company reported 11,938,133 common shares outstanding at June 30, 2016 and 11,963,133 as of August 12, 2016. The filing identifies the company as a smaller reporting company and not a shell company.
Financial condition and key metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 |
|---|---|---|
| Revenue | $176,332 | $133,615 |
| Gross profit | $125,383 | $118,184 |
| Gross margin | 71.1% | 88.5% |
| Loss from operations | $(1,430,821) | $(952,201) |
| Net loss | $(1,182,952) | $(987,855) |
| Net loss applicable to common stockholders | $(1,432,952) | $(987,855) |
| Basic and diluted loss per share | $(0.12) | $(0.15) |
| Metric | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | $528,225 | $430,249 |
| Gross profit | $454,914 | $407,677 |
| Gross margin | 86.1% | 94.8% |
| Loss from operations | $(3,082,538) | $(1,720,303) |
| Net loss | $(2,832,669) | $(1,624,117) |
| Net loss applicable to common stockholders | $(3,167,669) | $(1,624,117) |
| Basic and diluted loss per share | $(0.28) | $(0.25) |
- Revenue mix for the six-month period was licensing and royalties of $261,468, television and home entertainment of $250,607, and product sales of $16,150.
- Cash and cash equivalents were $4,938,720 at June 30, 2016, compared with $5,187,620 at December 31, 2015.
- Current assets were $5,496,506 and current liabilities were $3,679,324, producing reported working capital of $1,817,182.
- Total liabilities were $6,426,559, including $3,099,979 of deferred revenue, a $925,000 disputed trade payable, and a $1,489,583 current service advance obligation. No short-term related-party debt remained after settlement through stock issuance.
- Stockholders’ equity was $12,689,220, compared with $14,121,584 at December 31, 2015. Accumulated deficit was $30,213,445.
- Net cash used in operating activities was $324,208 for the first six months of 2016, compared with $1,896,298 in the prior-year period. Investing activities used $7,192, and financing activities provided $82,500.
Material changes versus the prior comparable period
- Second-quarter revenue increased 32%, while first-half revenue increased 23%, primarily because of higher television and home entertainment revenue from deliveries of Thomas Edison’s Secret Lab.
- Licensing and royalty revenue declined 6% in the quarter and 5% year to date, which management attributed to a transition between distribution partners.
- Operating losses widened substantially as operating expenses increased 48% in the quarter and 68% year to date. Major increases included stock-based compensation of $312,977 in the quarter and $877,962 year to date, higher marketing expenses, and $135,157 of film and television cost amortization year to date.
- Net loss applicable to common stockholders increased to $3.17 million year to date from $1.62 million, despite higher revenue and improved operating cash flow.
- Net other income included a $248,593 second-quarter gain and a $258,103 year-to-date gain from settlement of distribution contracts. The prior-year periods included foreign-currency translation losses.
- Film and television costs increased to $1,250,352 from $1,003,546 at year-end 2015, reflecting production and development of SpacePOP, Llama Llama, and Stan Lee’s Cosmic Crusaders.
- The company issued 238,683 common shares valued at $410,535 to its CEO in satisfaction of short-term related-party advances. It also issued shares upon preferred-stock conversions, warrant exercises, and a service-provider settlement.
Guidance, outlook, risks, contingencies, and unusual items
- No quantified financial guidance was provided. Management stated that existing cash was expected to fund operations for the next twelve months, but cautioned that continued improvement in operating cash flow was not assured.
- Management indicated that failure to achieve profitable operations and positive operating cash flow could require additional financing, reduced development plans, or reduced operations.
- On August 8, 2016, after quarter-end, the company closed a $5.275 million secured, non-revolving, multiple-draw credit facility with Bank Leumi USA to fund production of Llama Llama. The facility has a 40-month term and bears interest at either Prime plus 1% or applicable LIBOR plus 3.25%; it is secured by Netflix license fees and the series copyright.
- The company expected Llama Llama to comprise fifteen half-hour episodes, or thirty 11-minute programs, for delivery to Netflix in fall 2017.
- The company received a $2.0 million advance under a February 2016 distribution agreement with Sony Pictures Home Entertainment and $275,000 from settlement of a distribution agreement during the first six months.
- The company disputed a $925,000 trade-payable claim assumed in the A Squared merger and believed the applicable statute of limitations had expired.
- The company had $4.98 million of outstanding warrants and 4.06 million outstanding stock options at June 30, 2016, creating potential future dilution.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether the post-quarter-end Bank Leumi facility was drawn, the resulting debt balance, collateral restrictions, and repayment obligations.
- Whether Netflix delivery and license-fee assumptions for Llama Llama remain achievable and sufficient to support production financing.
- The collectability and ultimate resolution of the $925,000 disputed payable and the repayment exposure related to the $1.5 million Sony DADC service advance.
- Whether revenue growth can continue without the one-time Sony advance and distribution-contract settlement gains.
- The effect of rising salaries, marketing costs, production spending, stock compensation, options, warrants, and preferred-stock conversions on future losses and dilution.
- The recoverability of capitalized film and television costs, goodwill of $10.37 million, and other intangible assets, particularly if projected content revenue underperforms.
- The filing contains an inconsistent MD&A reference to June 30 cash of $4,934,720; the consolidated balance sheet reports $4,938,720, which should be confirmed against the filed financial statements.