Genius Brands International, Inc. (now identified in the request as Kartoon Studios, Inc.) — Q2 2018 Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2018, compared with the corresponding 2017 periods. The filing was signed August 14, 2018. The filing registrant is named Genius Brands International, Inc.; the source text does not explain the Kartoon Studios name reference.
Business Context
The company develops, produces, distributes, and licenses multimedia content and related consumer products, primarily for children. Key properties included Baby Genius, Rainbow Rangers, Llama Llama, SpacePop, Thomas Edison’s Secret Lab, Warren Buffett’s Secret Millionaires Club, and Stan Lee-related programs. Rainbow Rangers was scheduled to debut on Nickelodeon on November 5, 2018, and Llama Llama had debuted on Netflix in December 2017 with a second season picked up.
Financial Performance and Liquidity
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $76,411 | $196,132 | $169,624 | $394,221 |
| Operating loss | $(2,188,963) | $(1,255,930) | $(3,452,433) | $(2,571,339) |
| Net loss | $(2,189,783) | $(1,251,543) | $(3,453,247) | $(2,567,779) |
| Loss per basic and diluted share | $(0.26) | $(0.22) | $(0.42) | $(0.47) |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(3,365,437) | $(3,558,638) |
Reported revenue declined 61% in the quarter and 57% for the six-month period. Operating expenses increased 56% in the quarter and 22% for the six-month period. Reported operating margins were approximately negative 2,865% for the quarter and negative 2,035% for the six-month period; these percentages reflect the company’s very small revenue base.
- Quarterly revenue consisted of licensing and royalties of $24,653, television and home entertainment of $34,201, advertising sales of $16,926, and product sales of $631.
- Six-month revenue consisted of licensing and royalties of $91,465, television and home entertainment of $37,955, advertising sales of $38,935, and product sales of $1,269.
- Cash and cash equivalents were $3,525,433 at June 30, 2018, compared with $6,929,399 at December 31, 2017. No restricted cash remained at June 30, 2018.
- Working capital was $2,930,297, down from $7,116,279 at December 31, 2017.
- Total assets were $24.1 million and total liabilities were $9.9 million at June 30, 2018. Accumulated deficit was $44.8 million.
- Net borrowings under the Llama Llama production facility were $2,149,513, down from $4,322,643 at December 31, 2017. The facility carried variable interest based on Prime or LIBOR plus applicable spreads, and the company reported compliance with its covenants.
Material Changes Versus Prior Comparable Period
- Licensing and royalty revenue fell 79% in the quarter and 66% year to date, partly due to adoption of ASC 606, lower SpacePop revenue, and non-renewal of the Celessence agency agreement.
- Television and home entertainment revenue fell 47% in the quarter and 65% year to date, reflecting ASC 606 effects and lower international television revenue.
- Advertising revenue increased 275% in the quarter and 547% year to date, driven by more impressions, campaigns, distribution channels, and partners.
- Product sales declined 93% in the quarter and 85% year to date, primarily because of lower sales associated with the Berkshire Hathaway annual shareholder meeting.
- Direct operating costs increased substantially, primarily because of film and television amortization, adjustments to film ultimates, and a $549,117 write-down of the SpacePop property.
- Film and television costs increased to $4,697,660 from $2,777,088 at year-end 2017, primarily due to Rainbow Rangers production and development.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, recording a $206,247 reduction to beginning accumulated deficit. The adoption reduced reported six-month revenue by $136,367 and related costs by $28,634.
- The company completed a January 2018 private placement generating approximately $1.6 million of net proceeds and issued warrants for approximately 685,000 shares. Common shares outstanding increased to 8,950,303 from 7,610,794 at year-end 2017.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that cash, working capital, the production facility, and the deal pipeline were expected to fund operations for the next twelve months, but cautioned that operating cash flows might not improve. If profitability and positive operating cash flow are not achieved, the company may need additional financing, reduced development or production plans, or scaled-back operations.
- The company had two customers representing more than 10% of revenue during the reported periods, and one customer represented 95% of accounts receivable at June 30, 2018.
- Three bank accounts held $3,025,433 of uninsured cash at June 30, 2018.
- The company disputed a $925,000 trade payable assumed in the A Squared merger and believed the related claim was barred by the statute of limitations.
- The company entered into a 91-month Beverly Hills office lease beginning June 22, 2018. Total future operating lease and employment agreement commitments were reported at $3,792,180.
- Goodwill of $10,365,805 and certain intangible assets had not been impaired through June 30, 2018, but remain subject to future impairment testing.
- No material legal proceedings, material changes to previously disclosed risk factors, or significant subsequent events were reported.
- No formal revenue, earnings, or cash-flow guidance was provided. Management’s outlook remained dependent on content launches, licensing activity, financing availability, and improved operating cash flow.
Investor Verification Checklist
- Verify the registrant’s corporate name and ticker, because the filing identifies the company as Genius Brands International, Inc., while the request identifies Kartoon Studios, Inc.
- Assess whether the company can convert Rainbow Rangers, Llama Llama, and other content investments into recurring licensing, advertising, and distribution revenue.
- Reconcile the sharp revenue decline with the ASC 606 adoption effects, property-specific declines, and timing of license deliveries.
- Monitor cash burn, working capital, remaining production-facility obligations, and the need for additional equity or debt financing.
- Evaluate customer concentration, the disputed $925,000 payable, uninsured cash balances, lease commitments, and potential impairment of film, television, goodwill, and intangible assets.
- Consider dilution from 4,099,389 outstanding warrants, 1,237,210 outstanding options, and Series A convertible preferred stock.