Kartoon Studios, Inc. (formerly Genius Brands International, Inc.) — FY2018 Form 10-K Summary
Business context and reporting period
The filing is an annual Form 10-K for the fiscal year ended December 31, 2018, filed April 1, 2019. The company develops, produces, distributes, licenses, and merchandises children’s multimedia content, including Rainbow Rangers, Llama Llama, Baby Genius, SpacePop, and other properties. The requested “2018 Q4” period is not separately presented; the filing reports full-year 2018 results with quarterly references where relevant.
- 2018 developments: Llama Llama debuted on Netflix and was renewed for a second season; Rainbow Rangers premiered on Nick Jr. in November 2018.
- The company reported more than 60 consumer-product licensees, nearly 300 planned SKUs, and content licensed to more than 40 broadcasters in over 90 territories.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $993,452 | $5,335,728 | Down 81% |
| Loss from operations | $(8,004,171) | $(4,913,790) | Loss increased |
| Net loss | $(9,003,901) | $(4,908,736) | Loss increased 83% |
| Net loss applicable to common shareholders | $(9,357,234) | $(4,908,736) | Loss increased |
| Basic and diluted loss per share | $(1.07) | $(0.81) | More negative |
| Cash used in operating activities | $(8,008,010) | $(7,186,870) | Use increased 11% |
| Cash, cash equivalents, and restricted cash | $3,085,026 | $7,498,072 | Down $4,413,046 |
| Working capital | $971,663 | $8,041,279 | Down materially |
| Total assets | $24,602,141 | $27,712,592 | Down 11% |
| Total liabilities | $11,762,370 | $12,672,746 | Down 7% |
| Accumulated deficit | $(50,702,486) | $(41,551,497) | Deficit increased |
Revenue was approximately 19% of operating expenses, and the company had a substantial operating margin deficit. The filing does not provide a meaningful positive gross margin because the company reports operating expense categories rather than a conventional gross-profit subtotal.
- Revenue mix: Television and home entertainment revenue was $323,709, down 93%; licensing and royalties were $449,385, down 5%; advertising sales were $217,999, up 462%; and product sales were $2,359, down 75%.
- Expense profile: Marketing and sales expense increased 11% to $738,122. Direct operating costs decreased 64% to $1,536,722, and general and administrative expense decreased 7% to $4,982,779.
- Unusual items: The company recorded a $1,740,000 impairment loss on identifiable artistic-related intangible assets and $1,019,376 of interest expense, including debt discount amortization and production-loan interest.
- Balance sheet: Current assets were $5,579,582 versus current liabilities of $4,607,919. Film and television costs increased to $8,166,131 from $2,777,088, primarily due to production of Rainbow Rangers season one and Llama Llama season two.
Material changes versus the prior comparable period
- Revenue declined $4,342,276, primarily because FY2017 included recognition of revenue from delivering the first season of Llama Llama to Netflix; there was no comparable delivery in 2018.
- The operating loss widened by approximately $3.1 million, and net loss widened by approximately $4.1 million.
- Operating cash use increased by approximately $821,000, while year-end cash, cash equivalents, and restricted cash fell by approximately $4.4 million.
- Financing cash inflows fell to $3,637,949 from $11,904,214. FY2018 financing included $1,596,340 from a private placement and $4,186,054 net proceeds from secured convertible notes, partly offset by a $2,144,445 repayment of the production facility.
- The company issued substantial equity for services and conversions, increasing common shares outstanding to 9,457,859 at December 31, 2018 from 7,610,794 at December 31, 2017. It also had 5,899,389 warrants outstanding at year-end.
- ASC 606 was adopted using the modified retrospective method. The adoption reduced 2018 revenue by $188,734 and costs by $52,269 and produced a $206,245 cumulative adjustment to beginning accumulated deficit.
Debt, liquidity, outlook, and risks
- Secured convertible notes: The company issued $4.5 million principal amount of 10% secured convertible notes due August 20, 2019, convertible at $2.50 per share. The notes were secured by company assets and had approximately $1,831,847 net classified as current liabilities at December 31, 2018. Management stated that it did not have enough cash to repay the notes in cash if they were not converted or refinanced.
- Production facility: Net production-facility borrowings were $2,178,198 at December 31, 2018, with a stated maturity of March 31, 2021 and interest rates between 5.53% and 6.14% at year-end.
- Going concern: The auditor reported substantial doubt about the company’s ability to continue as a going concern because of recurring losses, negative operating cash flow, and insufficient cash to fund planned operations and production for one year after issuance of the financial statements. Management expected to pursue additional financing and increased licensing revenue, but the filing states there was no assurance financing would be available.
- Subsequent financing: In February 2019, the company raised $1,757,552 of net proceeds through common stock and warrants and issued additional warrants to holders of the secured convertible notes in connection with an amendment and waiver agreement.
- Controls: Management concluded that internal control over financial reporting and disclosure controls were not effective as of December 31, 2018. The identified material weakness related to timely evaluation of the accounting treatment for warrants issued with convertible notes. The company replaced its controller and hired outside accounting consultants.
- Customer concentration: One customer represented 20% of FY2018 revenue and 8.5% of accounts receivable, compared with one customer representing 84% of FY2017 revenue and 98% of accounts receivable.
- Other risks: Results depend on the timing and commercial success of content releases, license renewals, consumer-product demand, third-party production partners, broadcasters, licensees, intellectual-property protection, children’s-content regulation, and access to capital. The company competes with substantially larger businesses such as Disney, Nickelodeon, PBS, and Sesame Street.
- Contingencies: The company disclosed a pending claim seeking at least $150,000 from a licensee for unpaid royalties. It also reported a disputed $925,000 trade payable that management believes is not owed.
Most important facts for investors to verify
- Whether the company obtained sufficient financing or refinanced the $4.5 million secured convertible notes before or at their August 20, 2019 maturity.
- Actual cash burn, licensing receipts, and revenue recognition from Rainbow Rangers and Llama Llama season two.
- Whether the going-concern uncertainty was resolved and whether operations achieved positive cash flow.
- Remediation status of the material weakness in internal control over financial reporting and any subsequent restatements or accounting changes.
- Dilution from convertible notes, Series A preferred stock, options, and approximately 5.9 million outstanding warrants, including the February 2019 issuances.
- The recoverability of $8.2 million of capitalized film and television costs and $10.4 million of goodwill.
- Resolution of the $150,000 royalty claim, the $925,000 disputed payable, and disclosed related-party amounts owed to the chief executive officer.