Genius Brands International, Inc. (now associated with Kartoon Studios) — Q2 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2020, and was filed August 14, 2020. The company develops, licenses and distributes children’s multimedia content and related consumer products, including Rainbow Rangers, Llama Llama, Baby Genius and the Kartoon Channel. The filing identifies the registrant as Genius Brands International, Inc. and trades under GNUS.
Financial performance and liquidity
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 | Comparable prior period |
|---|---|---|---|
| Total revenue | $560,679 | $895,418 | $464,263 and $1,685,194, respectively |
| Loss from operations | $(2,376,726) | $(4,144,775) | $(1,666,859) and $(2,916,974), respectively |
| Net loss | $(383,258,002) | $(389,093,946) | $(1,715,152) and $(6,722,632), respectively |
| Loss per share | $(4.88) | $(15.76) | $(0.16) and $(0.69), respectively |
| Cash used in operating activities | Not separately provided | $(2,331,260) | $(2,550,140) |
- Second-quarter revenue increased 21% year over year, led by higher licensing and television/home entertainment revenue and a 302% increase in advertising sales.
- Six-month revenue declined 47%, primarily because the prior-year period included significant Rainbow Rangers deliveries to Viacom and international territories that did not recur in 2020.
- Second-quarter operating expenses were $2.94 million, including $2.37 million of general and administrative expense. The implied operating margin was approximately negative 424%; the six-month implied operating margin was approximately negative 463%.
- Net loss included noncash derivative remeasurement charges of $208.76 million for warrants and $171.84 million for conversion options. These charges were the principal reason reported losses increased sharply and are not representative of operating cash usage.
- Cash and cash equivalents were $54.38 million at June 30, 2020, compared with $305,121 at December 31, 2019. Current assets were $58.46 million and current liabilities were $8.78 million, producing working capital of $49.67 million versus negative working capital of $3.65 million at year-end 2019.
- Financing activities generated $56.41 million of cash during the first six months, primarily from equity offerings, convertible-note proceeds, warrant exercises and collection of investor notes. Investing cash usage was only $500.
- Total assets were $83.05 million and stockholders’ equity was $63.22 million at June 30, 2020. Accumulated deficit was $456.98 million.
Material changes versus the prior comparable period
- Quarterly revenue rose $96,416, or 21%, while six-month revenue fell $789,776, or 47%.
- Quarterly operating loss widened by $709,867, and six-month operating loss widened by $1.23 million. General and administrative expense increased 52% in the quarter and 29% for the six-month period.
- Marketing and sales expense declined 43% in the quarter and 22% for the six-month period, partly because COVID-19 caused cancellation of trade shows.
- Common shares outstanding increased from 21.88 million at December 31, 2019 to 218.86 million at June 30, 2020; 219.03 million shares were outstanding as of August 14, 2020. The increase resulted from equity offerings, note conversions, warrant exercises and preferred-stock conversions.
- The $13.75 million principal amount of 2020 convertible notes was converted into 65.48 million common shares during June 2020. The company also repaid its prior secured convertible notes and reduced production-facility borrowings to $1.89 million from $3.09 million at year-end.
- Outstanding warrants declined to 5.27 million from 11.12 million at December 31, 2019, but a warrant derivative liability of $3.18 million remained at June 30, 2020.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management noted increased demand for streaming entertainment during the first half of 2020 but stated that the future impact of COVID-19 could not be estimated.
- COVID-19 caused employees to work primarily remotely and affected trade shows and office operations. Management reported no supply-chain or production-partner disruption through the filing date, but warned that prolonged economic and entertainment-industry disruption could materially affect results.
- The company received a $366,267 Paycheck Protection Program loan at 1% interest. The filing states that the loan may be eligible for forgiveness, but its disclosed maturity date appears inconsistent because it states April 19, 2020 despite receipt on April 30, 2020.
- The company had $5.58 million of future operating-lease obligations, $1.34 million of employment-contract obligations and $738,333 of consulting-contract obligations, totaling $7.65 million. A subtenant stopped paying rent around April 2020, and the company was negotiating with the subtenant and landlord. The company also deferred rent on its principal office during the pandemic.
- A disputed trade payable of $925,000 remained recorded. Management believes the liability is not owed and that the applicable statute of limitations has expired.
- Cash concentration was significant: $53.37 million of cash was uninsured by the FDIC at June 30, 2020. Customer concentration was also material, with one customer representing 46% of second-quarter revenue and one customer representing 56% of accounts receivable.
- Subsequent events included a proposed joint venture with POW! involving Stan Lee intellectual property and a proposed increase in authorized common shares from 233.33 million to 400 million, subject to stockholder approval.
Most important facts for investors to verify
- Whether the substantial cash balance and financing proceeds provide sufficient funding for ongoing content production, operating losses and contractual obligations.
- The expected dilution from 218.86 million shares outstanding, remaining warrants, stock options and any proposed increase in authorized shares.
- The accounting and cash implications of the $380.60 million of warrant and conversion-option remeasurement losses recognized in the quarter.
- The status, forgiveness eligibility and actual maturity terms of the PPP loan.
- The status of the subtenant rent default, office rent deferrals and the $925,000 disputed trade payable.
- Whether streaming demand, the Kartoon Channel, new content releases and the proposed Stan Lee joint venture translate into recurring revenue rather than primarily financing-driven growth.