Kartoon Studios, Inc. 2023 Form 10-K Summary
Business context and reporting period
Kartoon Studios, Inc. is a global children’s content and brand-management company operating across content production services, content distribution, licensing and royalties, and media advisory and advertising services. Its portfolio includes Kartoon Channel!, Ameba TV, Frederator, Mainframe Studios, Beacon Media, Stan Lee assets, and an investment in Your Family Entertainment AG.
The filing covers the fiscal year ended December 31, 2023, and compares results with 2022. The 2022 comparison is not fully comparable because Wow and Frederator were consolidated for only nine months in 2022 following their April 1, 2022 acquisition.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $44.1 million | $62.3 million | Down 29% |
| Operating loss | $72.4 million | $43.7 million | Higher loss |
| Net loss attributable to Kartoon Studios | $77.1 million | $45.6 million | Higher loss |
| Loss per diluted share | $2.29 | $1.45 | Higher loss per share |
| Cash used in operating activities | $16.1 million | $25.9 million | Improved by $9.8 million |
| Cash balance | $4.1 million | $7.4 million | Down $3.3 million |
| Working capital | $11.5 million | $28.6 million | Down $17.1 million |
Revenue declined across the principal content-related categories: production services fell 10% to $26.8 million; content distribution fell 52% to $11.9 million; licensing and royalties fell 83% to $0.5 million; and media advisory and advertising services fell 3% to $4.9 million. Four customers represented 74.4% of total revenue, indicating significant customer concentration.
Operating expenses were $116.5 million, including $33.5 million of goodwill impairment, $4.4 million of intangible-asset impairment, $6.9 million of film and television cost impairments included in direct operating costs, and $0.1 million of property and equipment impairment. Based on reported revenue, the operating loss margin was approximately 164% and the net loss margin was approximately 175%.
Investing activities provided $73.9 million, primarily from $72.1 million of marketable-security sales and maturities. Financing activities used $60.8 million, principally reflecting repayment of the margin loan and production facilities. Marketable securities declined to $12.0 million from $83.7 million.
At December 31, 2023, current assets were $57.1 million and current liabilities were $45.6 million. Debt included approximately $15.3 million of production facilities, $2.9 million of bank indebtedness, and a $0.8 million margin loan. The filing also reports $2.0 million of finance-lease liabilities and $7.6 million of operating-lease liabilities on the balance sheet.
Material changes versus the prior comparable period
- Revenue decreased $18.2 million, primarily due to lower production-services activity, reduced Wow and Frederator IP production revenue, lower Frederator YouTube viewership and advertising rates, and the absence of comparable Stan Lee licensing deals.
- General and administrative expense decreased $10.5 million, mainly due to lower stock-based compensation and the absence of 2022 acquisition-related costs.
- Direct operating costs decreased $9.0 million, principally because of lower film amortization and lower Frederator network payments.
- Goodwill was reduced to zero after a $33.5 million impairment charge. Intangible assets were reduced by $4.4 million of impairment charges and ended at $23.0 million.
- The company completed a warrant exercise and exchange transaction involving 2.3 million exercised warrants at a reduced $2.50 exercise price and issued warrants for up to approximately 4.8 million shares. The transaction generated approximately $5.8 million of gross proceeds and resulted in $12.7 million of warrant expense, partly offset by a $10.4 million warrant revaluation gain.
- Authorized common shares increased from 40 million to 190 million after stockholder approval. The Series C preferred stock issued solely to facilitate the vote was subsequently redeemed.
- The company completed a 1-for-10 reverse stock split in February 2023 and transferred its listing from Nasdaq to NYSE American under the symbol TOON in June 2023.
Guidance, outlook, commentary, risks and unusual items
Management expects revenue growth to depend on scaling Kartoon Channel!, Frederator, Ameba and Kartoon Channel! Worldwide, expanding licensed content, and further exploiting Stan Lee, Shaq’s Garage, Rainbow Rangers and other intellectual property. Management also identified artificial intelligence as a potential tool to reduce distribution and production costs, including dubbing, video upscaling, and conversion between 2D and 3D.
Management states that cash and available-for-sale marketable securities are expected to support operations for at least the next twelve months, while also noting the need to generate additional revenue, reduce costs, and potentially use equity or equity-linked instruments. The company has incurred net losses in every fiscal quarter since inception and reported an accumulated deficit of $718.5 million at year-end.
The company was in technical violation of two financial covenants at December 31, 2023, involving minimum fixed-charge coverage and maximum senior funded debt to EBITDA. Certain facilities are payable on demand, and production facilities are secured by substantially all of the company’s tangible and intangible assets, including tax credits and production and licensing agreements. March 2024 amendments revised the covenants and facility terms, but did not affect the separate production facilities.
Material unusual or nonrecurring items included the goodwill and intangible-asset impairments, film-cost impairments, warrant expense and revaluation gains, realized losses on marketable securities of $4.5 million, a $2.3 million gain on the YFE investment, a $0.9 million write-off of an expired liability, and a $0.3 million loss related to early lease termination.
The filing includes a restatement of the 2022 balance sheet and previously reported 2023 interim financial statements for deferred-tax-liability and warrant-modification errors. Management concluded that internal control over financial reporting was ineffective as of December 31, 2023 and identified material weaknesses involving user-access controls, segregation of duties, income-tax expertise, and warrant-modification accounting.
Legal contingencies include securities class-action claims remanded for further proceedings after an appellate decision in April 2024, several stayed shareholder derivative actions, and a separate Section 16(b) action. The company denies wrongdoing and states that it cannot predict the outcome or timing of these matters.
Most important facts for investors to verify
- Whether revenue stabilizes and whether production, distribution, licensing, and media businesses can approach profitability.
- The company’s ability to fund ongoing operating cash burn with only $4.1 million of cash and $12.0 million of marketable securities at year-end.
- Compliance with revised debt covenants and the risk that demand facilities or production facilities could be called.
- The timing and effectiveness of remediation of the material weaknesses and the reliability of future financial reporting.
- The potential dilution from 6.85 million outstanding warrants, 1.18 million options, 1.02 million RSUs, and the company’s expanded authorized-share capacity.
- The sustainability and valuation support for the $19.1 million YFE investment and $23.0 million of remaining intangible assets after significant impairments.
- The outcome and potential cost of the remanded securities litigation and related shareholder actions.
- The extent of customer concentration, as four customers generated 74.4% of 2023 revenue and three customers represented 63.3% of year-end accounts receivable.