Business Context and Reporting Period
Genius Brands International, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company creates, licenses and distributes children’s multimedia content and operates a media and advertising services business. The filing predates the company’s later Kartoon Studios name.
Operations were reported in two segments: content production and distribution, and media and advertising services. The company’s portfolio included Kartoon Channel!, Stan Lee’s Superhero Kindergarten, Rainbow Rangers, Llama Llama and other licensed properties.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $2.34 million | $0.56 million | $3.41 million | $0.90 million |
| Loss from operations | $(7.57) million | $(2.38) million | $(14.29) million | $(4.14) million |
| Net loss | $(7.38) million | $(383.26) million | $(83.64) million | $(389.09) million |
| Net loss per share | $(0.02) | $(4.88) | $(0.28) | $(15.76) |
| Cash flow from operations | Not separately provided | Not separately provided | $(8.97) million | $(2.33) million |
- Second-quarter revenue increased 318%, primarily from a $971,324 contribution from ChizComm media and advertising services and higher licensing and royalty revenue. Six-month revenue increased approximately 280%.
- Licensing and royalties were $1.24 million in the quarter and $1.41 million for the six months, partly reflecting proceeds associated with the termination of certain licensing rights.
- Media advisory and advertising services generated $971,324 in the quarter and $1.72 million for the six months, following the February 2021 ChizComm acquisition.
- Operating expenses increased to $9.92 million in the quarter and $17.70 million for the six months. General and administrative expense included acquisition costs, higher professional fees, compensation, rent and insurance; marketing expense increased to promote Stan Lee’s Superhero Kindergarten and Kartoon Channel!.
- Reported losses in the prior-year periods were heavily affected by large noncash warrant and conversion-option revaluation expenses. The 2021 six-month loss included $69.14 million of warrant inducement expense and $316,814 of warrant revaluation expense.
- As of June 30, 2021, cash and cash equivalents were $58.37 million, marketable securities were $80.39 million, and total current assets were $152.52 million. Working capital was $137.01 million, compared with $101.39 million at December 31, 2020.
- Cash used in investing activities was $89.32 million, including $80.90 million invested in marketable securities and $7.79 million paid for the ChizComm acquisition, net of cash acquired.
- Financing activities provided $56.20 million, primarily from January 2021 warrant exercises. Cash declined by $42.08 million during the six months, ending at $58.37 million.
- The company reported total liabilities of $29.60 million and stockholders’ equity of $171.62 million. Its accumulated deficit was $553.20 million.
- Outstanding production facility borrowings were $274,365 at June 30, 2021 and were repaid on July 14, 2021. The filing states that the 2020 senior secured convertible notes had been converted or repaid in 2020. Lease liabilities totaled approximately $2.72 million.
Material Changes and Unusual Items
- The company completed the ChizComm acquisition on February 1, 2021 for total consideration of $19.24 million, consisting of $8.50 million cash, $3.53 million of equity and a $7.21 million contingent earn-out liability. The acquisition added media and advertising services and increased goodwill by $9.61 million.
- On January 28, 2021, warrant holders exercised warrants for approximately $61.6 million of gross proceeds. Net proceeds from warrant exercises reported in financing activities were $57.26 million after transaction costs.
- Common shares outstanding increased to 300.79 million at June 30, 2021 from 258.44 million at December 31, 2020. The company also had 45.51 million warrants outstanding and 9.34 million unvested restricted stock units.
- The company entered into the Stan Lee Universe joint venture effective June 1, 2021 and invested an additional $500,000 during the six months.
- Film and television costs increased to $14.97 million from $11.83 million at year-end, primarily from development costs for Stan Lee’s Superhero Kindergarten.
Guidance, Outlook, Risks and Contingencies
- Management stated that existing cash and available-for-sale marketable securities were sufficient to support operations for at least the next twelve months and that no material capital expenditure commitments existed. No formal revenue or earnings guidance was provided.
- Management identified continuing operating losses, negative operating cash flow, dependence on licensing and content delivery timing, customer concentration, execution of acquisitions and investments, and the need to develop successful new content and advertising platforms as important business risks.
- COVID-19 had not caused a material negative impact through the filing date, but management warned that prolonged disruption could affect entertainment demand, shipping, consumer products partners, advertising revenue and office operations.
- Three accounts held uninsured cash balances totaling $56.60 million. One customer represented 34% of six-month revenue, and two customers represented 62% of accounts receivable at June 30, 2021.
- The company disclosed a $925,000 disputed trade payable, a $7.21 million contingent ChizComm earn-out, future operating lease, employment and consulting commitments totaling $12.09 million, and litigation involving trademark claims, securities allegations, shareholder derivative claims and an arbitration concerning Stan Lee-related rights.
- Management concluded that disclosure controls and procedures were not effective for the six months ended June 30, 2021. No material changes to internal control over financial reporting were reported during the quarter.
Investor Verification Points
- Verify the sustainability and recurring nature of the revenue increase, particularly the licensing termination proceeds and ChizComm-generated media and advertising revenue.
- Reconcile cash, marketable securities, acquisition payments and warrant-exercise proceeds to assess liquidity after ongoing operating cash burn.
- Review the dilution implications of outstanding warrants, options, restricted stock units and the ChizComm earn-out.
- Assess the valuation and recoverability of goodwill, acquired intangible assets and capitalized film and television costs.
- Monitor the effectiveness remediation plan for disclosure controls and the status and potential exposure of disclosed litigation and arbitration matters.
- Confirm the post-quarter repayment of the production facility and any subsequent changes to debt, lease obligations or contingent consideration.