Kartoon Studios, Inc. quarterly report, Q3 FY2021

SEC Form 10-Q Summary

Registrant: Genius Brands International, Inc. (now associated with Kartoon Studios, Inc.); Nasdaq ticker GNUS. Reporting period: quarter and nine months ended September 30, 2021. The filing was signed November 15, 2021.

Business Context and Reporting Period

The company develops, licenses, distributes, and markets children’s multimedia content and consumer products. Its two reportable segments were Content Production & Distribution and Media & Advertising Services. The February 2021 acquisition of ChizComm expanded the company into media advisory and advertising services. Key properties included Stan Lee’s Superhero Kindergarten, KC Pop Quiz, Rainbow Rangers, Llama Llama, Kartoon Channel!, and Stan Lee Universe-related intellectual property.

Financial Performance and Liquidity

Metric	Three Months Ended September 30, 2021	Three Months Ended September 30, 2020	Nine Months Ended September 30, 2021	Nine Months Ended September 30, 2020
Total revenue	$1.871 million	$0.274 million	$5.278 million	$1.169 million
Loss from operations	$(9.834) million	$(3.353) million	$(24.137) million	$(7.497) million
Net loss	$(9.253) million	$(2.007) million	$(92.907) million	$(391.101) million
Net loss per share	$(0.03)	$(0.01)	$(0.31)	$(3.63)
Cash used in operating activities	Not separately presented	Not separately presented	$(15.965) million	$(5.476) million

Quarterly revenue increased 583%, primarily from $1.182 million of ChizComm media advisory and advertising revenue and higher television and home entertainment revenue. Nine-month revenue increased 351%.
Quarterly operating loss equaled approximately 526% of revenue; quarterly net loss equaled approximately 494% of revenue. Nine-month operating loss equaled approximately 457% of revenue. Margins were distorted by the company’s very small revenue base and significant operating expenses.
Marketing and sales expense increased 226% to $1.188 million in the quarter and 450% to $3.331 million for the nine months. General and administrative expense increased 225% to $9.884 million in the quarter and 234% to $23.932 million for the nine months.
General and administrative expense included substantial share-based compensation, including $4.637 million of RSU expense in the quarter and $8.284 million for the nine months.
At September 30, 2021, cash and cash equivalents were $4.884 million, marketable securities were $125.340 million, current assets were $143.046 million, and current liabilities were $11.607 million. Reported working capital was $131.439 million.
Cash and cash equivalents declined from $100.456 million at December 31, 2020, while marketable securities increased from zero to $125.340 million. Management stated that cash and available-for-sale securities were sufficient to support operations for at least the next twelve months.
Marketable securities consisted primarily of investment-grade corporate, government, municipal, asset-backed, and commercial paper securities. Their adjusted cost was $125.692 million, producing an unrealized loss of $0.352 million.
Total liabilities were $25.349 million and stockholders’ equity was $167.977 million. Debt was limited, with notes payable of $116,195 and no remaining production facility balance; the PPP loan was repaid in April 2021.

Material Changes Versus Prior Comparable Period

The ChizComm acquisition added $2.907 million of media advisory and advertising services revenue for the nine months and contributed $9.607 million of goodwill and $9.630 million of identifiable intangible assets.
ChizComm consideration totaled $19.237 million, comprising $8.500 million in cash, $3.527 million in equity, and a $7.210 million contingent earn-out liability. The earn-out could require additional shares based on performance over four years.
The company raised approximately $61.6 million gross, or $57.265 million net, through the January 2021 exercise of 39.7405 million warrants. It issued replacement warrants for the same number of shares at a $2.37 exercise price. The transaction generated $69.139 million of warrant incentive expense.
Nine-month net loss improved substantially from the prior year because 2020 included approximately $210.672 million of warrant revaluation loss and $171.836 million of conversion option revaluation expense. The 2021 loss included the $69.139 million warrant incentive expense.
Film and television costs increased to $16.293 million from $11.828 million at year-end 2020, primarily reflecting production of Stan Lee’s Superhero Kindergarten and KC Pop Quiz.
Shares outstanding increased to approximately 300.791 million from 258.439 million at December 31, 2020. The filing reported 300.967 million shares outstanding as of November 12, 2021.
The company identified and corrected a prior-period error that had overstated other comprehensive loss by $352,098 for the three and six months ended June 30, 2021.

Outlook, Risks, Contingencies, and Unusual Items

No specific revenue, earnings, or margin guidance was provided. Management stated that existing cash and marketable securities were expected to support operations for at least twelve months.
Management continued to identify substantial historical losses, negative operating cash flow, dependence on investment liquidity, and the need to achieve higher revenue relative to its cost structure.
COVID-19 continued to affect customers, suppliers, vendors, and the entertainment industry. Management cited potential adverse effects, while noting increased demand for streaming entertainment. Supply-chain issues could affect toy-related sales.
Disclosure controls and procedures were deemed ineffective. Management identified a material weakness in internal control over financial reporting involving the timely accounting evaluation of warrants and unrealized losses on marketable securities. A remediation plan was being developed, including hiring a head of internal control.
The company disclosed a trademark infringement lawsuit with damages scheduled for trial in December 2021, a securities class action and related derivative litigation, and other matters. Management denied wrongdoing and stated that outcomes could not be predicted.
As a subsequent event, the company agreed to acquire Wow Unlimited Media Inc. for $38.4 million in cash and 11 million common shares. The initial purchase accounting and pro forma information had not been completed as of the filing date.
On October 12, 2021, the company funded a $1.250 million loan to POW!, bearing 9% interest and due November 1, 2022.
Contractual obligations at September 30, 2021 totaled approximately $12.117 million, including operating leases, employment contracts, and consulting contracts.

Important Facts for Investors to Verify

Verify the company’s current legal name, ticker, share count, and post-period capitalization following the Wow Unlimited Media transaction and any subsequent corporate actions.
Assess whether ChizComm and other acquired businesses are generating sustainable revenue and positive cash flow, rather than merely increasing reported sales.
Reconcile cash, marketable securities, investment maturities, operating cash burn, and the company’s stated twelve-month liquidity assessment.
Monitor remediation of the material weakness and confirm whether subsequent filings report effective disclosure controls and internal control over financial reporting.
Review the potential dilution from approximately 45.5 million outstanding warrants, approximately 16.8 million unvested RSUs, stock options, the ChizComm earn-out, and the Wow transaction shares.
Evaluate the accounting and economic impact of warrant incentive expense, fair-value remeasurements, share-based compensation, goodwill, and acquired intangible assets.
Follow the trademark, securities class action, derivative litigation, and other contingencies for potential monetary exposure or operational restrictions.