Business Context and Reporting Period
Genius Brands International, Inc. (now associated with Kartoon Studios, Inc.) filed this Form 10-Q for the quarter ended March 31, 2020. The company develops, licenses, distributes, and monetizes children’s multimedia content and related consumer products, including Rainbow Rangers, Llama Llama, Baby Genius, and other branded properties. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $334,739 | $1,220,931 | Down 73% |
| Loss from operations | $(1,768,050) | $(1,250,115) | Loss increased 41% |
| Net loss | $(5,835,944) | $(5,007,482) | Loss increased 17% |
| Net loss attributable to common shareholders | $(5,835,944) | $(5,329,722) | Loss increased 10% |
| Basic and diluted loss per share | $(0.23) | $(0.54) | Improved due primarily to higher share count |
| Cash used in operating activities | $(995,517) | $(1,213,240) | Use decreased 18% |
Revenue declined primarily because Q1 2019 included Rainbow Rangers delivery revenue to Viacom and a Psycho Bunny settlement; neither had a comparable contribution in Q1 2020. Advertising revenue increased 290% to $78,657, driven by additional distribution partners, impressions, and campaigns. Licensing and royalty revenue declined 42% to $203,365, while television and home entertainment revenue declined 94% to $52,217.
Total operating expenses were $2,102,789, including $1,762,583 of general and administrative expense, $227,506 of direct operating costs, and $112,700 of marketing and sales expense. Approximate operating margin was negative 528% of revenue and net loss margin was negative 1,743%; the percentages reflect the very low revenue base and significant fixed and non-cash expenses.
At March 31, 2020, cash and cash equivalents were $2,760,048, compared with $305,121 at December 31, 2019. Total assets were $34,690,529, including $9,870,922 of net film and television costs and $10,365,806 of goodwill. Current liabilities were $19,290,900 against current assets of $10,092,077, producing negative working capital of approximately $9.2 million. Total liabilities were $30,302,661 and stockholders’ equity was $4,387,868.
Cash increased by $2,454,927 during the quarter. Financing activities provided $3,450,444, principally from $6,098,000 of net proceeds from senior secured convertible notes, approximately $915,296 from a registered common-stock offering, and $170,000 from a warrant exercise. These proceeds were partly offset by repayment of approximately $2,866,664 of secured convertible notes and $797,609 of production-facility borrowings.
Material Changes Versus the Prior Comparable Period
- Total revenue decreased by $886,192, or 73%.
- Operating loss increased by $517,935, despite a 15% decrease in total operating expenses, because the revenue decline exceeded the expense reduction.
- Interest expense increased 36% to $721,003, primarily from expensing the debt discount associated with the 2020 senior secured convertible notes.
- The company recorded $3,467,961 of warrant revaluation expense in Q1 2020. Q1 2019 instead included a $3,352,155 loss on extinguishment of debt.
- Common shares outstanding increased from 21,877,724 at December 31, 2019 to 29,592,229 at March 31, 2020. Weighted-average shares increased to 25,466,121 from 9,903,088.
- Outstanding warrants increased from 11,124,405 to 82,698,215, substantially increasing potential dilution.
- The August 2018 secured convertible notes were repaid in full on March 16, 2020, while the company entered into new senior secured convertible financing.
Financing, Outlook, Risks, and Unusual Items
On March 17, 2020, the company issued senior secured convertible notes with aggregate principal of $13.75 million and an $11.0 million funding amount, together with warrants initially exercisable for approximately 65.5 million common shares at $0.26 per share. The company received $7.0 million in cash and $4.0 million in investor notes. The notes mature September 30, 2021 and require equal monthly principal installments beginning October 31, 2020, subject to provisions permitting payment in cash or common shares.
On May 15, 2020, after the reporting date, stockholder approval reduced the note conversion price and related warrant exercise price to $0.21 per share. The financing includes full-ratchet anti-dilution provisions, most-favored-nation rights, redemption requirements for certain subsequent financings, and restrictions on future equity-linked issuances. These terms may materially increase future dilution and financing constraints.
Subsequent to quarter-end, the company completed registered offerings of 8.0 million shares for gross proceeds of $2.8 million and 12.0 million shares for gross proceeds of $5.448 million. These offerings closed May 8 and May 12, 2020, respectively, before offering costs.
Management stated that existing cash and cash equivalents were sufficient to support operations for at least the next twelve months, but the company has a history of recurring losses, negative working capital, an accumulated deficit of $71,883,079, and continuing operating cash usage. The filing does not provide a formal revenue or earnings forecast.
COVID-19 was identified as a potentially material risk to the entertainment industry and the company’s business. Management stated that the impact could not be estimated and that no COVID-19 provision was recorded. Other risks include customer concentration, reliance on licensing and content-delivery milestones, potential impairment of goodwill and capitalized film costs, substantial lease and employment commitments, and an uninsured cash balance of $2,478,995. The company also carries a disputed trade payable of $925,000.
Key Facts Investors Should Verify
- Whether the post-quarter-end financings and stockholder approval materially improved liquidity and how much cash remained after related costs.
- The outstanding principal, repayment schedule, conversion activity, and default provisions of the 2020 senior secured convertible notes.
- The potential dilution from approximately 82.7 million warrants, convertible notes, subsequent equity offerings, and other equity-linked instruments.
- Whether advertising growth can offset the loss of large, non-recurring licensing and television delivery revenues.
- The recoverability of $9.9 million of capitalized film and television costs and $10.4 million of goodwill.
- The company’s ability to fund ongoing operating losses, monthly note installments, lease obligations, and other contractual commitments.
- The actual financial impact of COVID-19 and the concentration of revenue and accounts receivable among a limited number of customers.