Kartoon Studios, Inc. (formerly Genius Brands International, Inc.) — Form 10-Q Summary
Business context and reporting period
The filing is Genius Brands International, Inc.’s unaudited quarterly report for the three and six months ended June 30, 2022. The company operates children’s content production, distribution, licensing, streaming and media-advertising businesses under brands including Kartoon Channel!, Kartoon Channel! Kidaverse, Ameba TV, Frederator, Beacon Media and Stan Lee Universe. The company completed the Ameba acquisition in January 2022 and the Wow Unlimited Media acquisition on April 6, 2022; Wow added Mainframe Studios and Frederator.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $22.1 million | $2.3 million | $23.6 million | $3.4 million |
| Operating loss | $8.6 million | $7.6 million | $18.5 million | $14.3 million |
| Net loss attributable to the company | $13.3 million | $7.4 million | $17.9 million | $83.7 million |
| Loss per diluted share | $0.04 | $0.02 | $0.06 | $0.28 |
| Cash used in operating activities | Not separately provided | Not separately provided | $17.7 million | $8.8 million |
- Q2 revenue increased 845%, primarily because of Wow, Ameba and Frederator. Production services contributed $10.0 million, content distribution contributed $8.5 million, licensing and royalties contributed $2.5 million, and media advisory and advertising services contributed $1.1 million.
- Six-month revenue increased 592%. Production services contributed $10.0 million, content distribution $8.9 million, licensing and royalties $2.5 million, and media advisory and advertising services $2.1 million.
- Calculated operating margin was approximately (38.9%) in Q2 2022 and (78.6%) for the six-month period. Calculated net margin attributable to the company was approximately (60.3%) and (75.9%), respectively.
- Q2 operating expenses were $30.7 million, including $14.6 million of direct operating costs and $15.1 million of general and administrative expense. General and administrative expense included substantial acquisition-related costs, increased compensation and Wow-related expenses.
- Other income was $1.8 million for the six months, compared with other expense of $69.4 million in the prior-year period. The prior-year amount included a $69.1 million warrant incentive expense.
- Share-based compensation expense was $8.7 million for the first six months, compared with $5.6 million in the prior-year period.
Balance sheet, cash flow, debt and liquidity
- At June 30, 2022, cash and cash equivalents were $7.8 million, marketable securities were $97.4 million, current assets were $150.3 million and current liabilities were $112.7 million.
- Working capital was $37.6 million, down from $115.1 million at December 31, 2021, primarily because of the increase in the margin loan and debt assumed in the Wow acquisition.
- The company used $17.7 million in operating activities and $41.2 million in investing activities during the first six months. Investing cash uses included $37.3 million for Wow, $3.9 million for Ameba and $9.5 million for additional YFE investment, partially offset by marketable-security proceeds.
- Financing activities provided $56.6 million, primarily from $59.0 million of margin-loan borrowings, partially offset by $4.5 million of repayments and other debt-related payments.
- The margin loan was $61.1 million at June 30, 2022, compared with $6.4 million at year-end 2021. It is payable on demand and is secured by marketable securities; the custodian may issue a margin call at any time.
- Other current obligations included $19.1 million of production facilities, $2.7 million of bank indebtedness, $3.1 million of current lease liabilities and $13.4 million of current deferred revenue.
- The company reported approximately $108.5 million of future minimum contractual obligations, including $82.3 million of debt, $17.4 million of lease obligations, $6.7 million of employment contracts and $2.2 million of consulting contracts. Approximately $80.0 million could become payable within one year if the margin loan and interim production facilities are called.
- Management stated that cash, cash equivalents and available-for-sale marketable securities were sufficient to support operations for at least the next twelve months; however, the filing also identifies demand debt and continuing operating cash use.
Material changes versus the prior comparable period
- The company’s scale changed materially through the Ameba and Wow acquisitions and increased ownership in YFE to 49.2%. Assets increased to $272.3 million from $174.1 million at December 31, 2021, while goodwill increased to $36.7 million from $15.2 million.
- Wow was acquired for total preliminary consideration of $52.7 million, including $38.3 million in cash, common and exchangeable shares, replacement options, severance and bonuses. The purchase-price allocation remained preliminary.
- Revenue growth was accompanied by higher direct operating costs and corporate expenses. Q2 operating expenses increased 210%, while revenue increased 845%.
- The company issued approximately 13.9 million additional common shares during the first six months, including shares issued in connection with the Wow acquisition and employee, consultant and production-service compensation. Shares outstanding increased to 317.2 million from 303.4 million at year-end 2021.
- Marketable securities declined from $112.5 million to $97.4 million, with $5.7 million of unrealized losses recorded in accumulated other comprehensive loss.
- Customer concentration increased in absolute terms: five customers represented 81.25% of Q2 revenue and 76.3% of six-month revenue. Four customers represented 65.04% of accounts receivable at June 30, 2022.
Guidance, outlook, commentary and risks
- No quantitative revenue, earnings or cash-flow guidance is provided. Management highlighted growth opportunities from Wow, Ameba, Frederator, YFE, Kartoon Channel! Kidaverse and the planned fourth-quarter 2022 debut of Shaq’s Garage.
- Management expects the Wow acquisition to provide production capacity, distribution reach, potential cost synergies and access to Frederator’s YouTube network. The filing cautions that integration costs, delays or failure to achieve synergies could offset anticipated benefits.
- Tax-credit receivables were $25.9 million. The company relies on Canadian refundable production tax credits, which may take 18 to 24 months to collect and remain subject to government review and eligibility determinations.
- The company reported that disclosure controls and procedures were not effective for the six months ended June 30, 2022 and continued remediation activities, including hiring additional accounting personnel.
- Nasdaq notified the company in March 2022 that its stock had traded below the $1.00 minimum bid-price requirement for 30 consecutive business days. The initial compliance deadline was August 31, 2022, subject to potential additional time if other listing requirements were met.
- The company faces securities and derivative litigation, a Section 16(b) action and employment-related litigation and arbitration. Outcomes and any potential indemnification obligations could not be predicted from the filing.
- The filing identifies risks from margin calls, demand repayment of production and bank facilities, foreign-currency volatility, customer concentration, acquisition integration, continued losses, liquidity needs, impairment of goodwill or intangible assets, COVID-19 effects and Nasdaq delisting.
Most important facts for investors to verify
- Whether the company can reduce operating cash burn and fund approximately $80.0 million of potentially near-term demand debt and margin-loan obligations.
- The collateral requirements, borrowing-base limits and margin-call exposure associated with the $61.1 million margin loan.
- Final purchase-price allocations and post-acquisition operating results for Wow and Ameba, including goodwill and intangible-asset impairment risk.
- Whether management achieves the anticipated Wow and Ameba revenue growth, integration benefits and cost synergies.
- The timing and collectability of the $25.9 million of tax-credit receivables and the company’s ability to finance production while awaiting collection.
- Remediation of ineffective disclosure controls and any subsequent material weaknesses or restatements.
- Resolution of the Nasdaq minimum-bid-price deficiency and the status and potential financial impact of pending litigation and arbitration.