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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
from ___________ to ___________
Commission File Number:
000-54389
KARTOON STUDIOS, INC.
(Exact name of registrant as specified in its charter)
Nevada |
20-4118216 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
190 N. Canon Drive, 4th FL
Beverly Hills, CA 90210
(Address of principal executive
offices and zip code)
Registrant’s telephone
number, including area code: 310-273-4222
______________________________
Securities registered pursuant to Section 12(b)
of the Exchange Act:
Title of each class |
Trading Symbol(s) |
Name of Exchange where registered |
Common Stock, par value $0.001 per share |
TOON |
The NYSE American |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No o
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes
x No o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
|
Accelerated filer |
o |
Non-accelerated filer x |
|
Smaller reporting company |
x |
|
|
Emerging growth company |
o |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 13, 2024, the registrant had
39,568,887 shares of common stock outstanding.
Kartoon Studios, Inc.
FORM 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Kartoon Studios, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and par value data)
| |
| | | |
| | |
| |
As of | |
| |
September 30, 2024 | | |
December 31, 2023 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash | |
$ | 4,581 | | |
$ | 4,095 | |
Investments in Marketable Securities (amortized cost of $4,266 and $12,838, respectively) | |
| 4,079 | | |
| 11,950 | |
Accounts Receivable (net of allowance of $241 and $189, respectively) | |
| 11,893 | | |
| 18,072 | |
Tax Credits Receivable (net of allowance of $610 and $527, respectively) | |
| 12,929 | | |
| 20,714 | |
Notes and Accounts Receivable from Related Party | |
| 1,471 | | |
| 1,435 | |
Other Receivable | |
| 1,327 | | |
| 103 | |
Prepaid Expenses and Other Assets | |
| 900 | | |
| 740 | |
Total Current Assets | |
| 37,180 | | |
| 57,109 | |
| |
| | | |
| | |
Noncurrent Assets: | |
| | | |
| | |
Property and Equipment, net | |
| 1,655 | | |
| 1,877 | |
Operating Lease Right-of-Use Assets, net | |
| 6,365 | | |
| 7,076 | |
Finance Lease Right-of-Use Assets, net | |
| 1,026 | | |
| 1,867 | |
Film and Television Costs, net | |
| 1,858 | | |
| 1,295 | |
Investment in Your Family Entertainment AG | |
| 17,965 | | |
| 19,094 | |
Intangible Assets, net | |
| 21,126 | | |
| 22,993 | |
Other Assets | |
| 124 | | |
| 125 | |
Total Assets | |
$ | 87,299 | | |
$ | 111,436 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts Payable | |
$ | 12,043 | | |
$ | 16,864 | |
Participations Payable | |
| 1,188 | | |
| 1,915 | |
Accrued Expenses | |
| 1,132 | | |
| 691 | |
Accrued Salaries and Wages | |
| 1,707 | | |
| 1,926 | |
Deferred Revenue | |
| 5,015 | | |
| 3,127 | |
Margin Loan | |
| 1,069 | | |
| 782 | |
Production Facilities | |
| 8,739 | | |
| 15,336 | |
Bank Indebtedness | |
| 592 | | |
| 2,905 | |
Current Portion of Operating Lease Liabilities | |
| 1,120 | | |
| 908 | |
Current Portion of Finance Lease Liabilities | |
| 923 | | |
| 1,120 | |
Warrant Liability | |
| – | | |
| 63 | |
Due to Related Party | |
| 4 | | |
| 3 | |
Other Current Liabilities | |
| 168 | | |
| – | |
Total Current Liabilities | |
| 33,700 | | |
| 45,640 | |
| |
| | | |
| | |
Noncurrent Liabilities: | |
| | | |
| | |
Deferred Revenue | |
| 3,371 | | |
| 3,458 | |
Operating Lease Liabilities, Net Current Portion | |
| 5,912 | | |
| 6,736 | |
Finance Lease Liabilities, Net Current Portion | |
| 107 | | |
| 928 | |
Deferred Tax Liability, net | |
| 1,402 | | |
| 1,399 | |
Other Noncurrent Liabilities | |
| 7 | | |
| 14 | |
Total Liabilities | |
| 44,499 | | |
| 58,175 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 19) | |
| | | |
| – | |
| |
| | | |
| | |
Stockholders’ Equity: | |
| | | |
| | |
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, as of September 30, 2024 and December 31, 2023 | |
| – | | |
| – | |
0% Series A Convertible Preferred Stock, $0.001 par value, 6,000 shares authorized, 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023 | |
| – | | |
| – | |
Series B Preferred Stock, $0.001 par value, 1 share authorized, 1 share issued and outstanding as of September 30, 2024 and December 31, 2023 | |
| – | | |
| – | |
Series C Preferred Stock, $0.001 par value, 50,000 shares authorized, 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023 | |
| – | | |
| – | |
Common Stock, $0.001 par value, 190,000,000 shares authorized, 39,630,851 and 35,323,217 shares issued and 39,555,161 and 35,247,744 outstanding as of September 30, 2024 and December 31, 2023, respectively | |
| 40 | | |
| 352 | |
Additional Paid-in Capital | |
| 778,438 | | |
| 773,986 | |
Treasury Stock at Cost, 75,690 and 75,473, shares of common stock as of September 30, 2024 and December 31, 2023, respectively | |
| (339 | ) | |
| (339 | ) |
Accumulated Deficit | |
| (733,521 | ) | |
| (718,546 | ) |
Accumulated Other Comprehensive Loss | |
| (3,376 | ) | |
| (3,883 | ) |
Total Kartoon Studios, Inc. Stockholders' Equity | |
| 41,242 | | |
| 51,570 | |
Non-Controlling Interests in Consolidated Subsidiaries | |
| 1,558 | | |
| 1,691 | |
Total Stockholders' Equity | |
| 42,800 | | |
| 53,261 | |
| |
| | | |
| | |
Total Liabilities and Stockholders’ Equity | |
$ | 87,299 | | |
$ | 111,436 | |
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Kartoon Studios, Inc.
Condensed Consolidated Statements
of Operations
(in thousands, except share and per share data)
(Unaudited)
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Revenues: | |
| | |
| | |
| | |
| |
Production Services | |
$ | 4,898 | | |
$ | 6,360 | | |
$ | 12,756 | | |
$ | 23,279 | |
Content Distribution | |
| 2,348 | | |
| 2,562 | | |
| 7,002 | | |
| 8,815 | |
Licensing & Royalties | |
| 37 | | |
| 153 | | |
| 235 | | |
| 362 | |
Media Advisory & Advertising Services | |
| 1,425 | | |
| 997 | | |
| 3,177 | | |
| 2,820 | |
Total Revenues | |
| 8,708 | | |
| 10,072 | | |
| 23,170 | | |
| 35,276 | |
| |
| | | |
| | | |
| | | |
| | |
Operating Expenses: | |
| | | |
| | | |
| | | |
| | |
Marketing and Sales | |
| 290 | | |
| 522 | | |
| 1,026 | | |
| 2,457 | |
Direct Operating Costs | |
| 5,766 | | |
| 13,475 | | |
| 15,936 | | |
| 34,301 | |
General and Administrative | |
| 5,199 | | |
| 8,679 | | |
| 19,710 | | |
| 26,274 | |
Impairment of Property and Equipment | |
| – | | |
| – | | |
| – | | |
| 120 | |
Impairment of Intangible Assets | |
| – | | |
| – | | |
| – | | |
| 4,023 | |
Impairment of Goodwill | |
| – | | |
| – | | |
| – | | |
| 11,287 | |
Total Operating Expenses | |
| 11,255 | | |
| 22,676 | | |
| 36,672 | | |
| 78,462 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from Operations | |
| (2,547 | ) | |
| (12,604 | ) | |
| (13,502 | ) | |
| (43,186 | ) |
| |
| | | |
| | | |
| | | |
| | |
Interest Expense | |
| (176 | ) | |
| (672 | ) | |
| (625 | ) | |
| (2,777 | ) |
Other Income (Expense), net | |
| 602 | | |
| (2,236 | ) | |
| (981 | ) | |
| (6,783 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Income Tax Benefit | |
| – | | |
| – | | |
| – | | |
| 934 | |
| |
| | | |
| | | |
| | | |
| | |
Net Loss | |
| (2,121 | ) | |
| (15,512 | ) | |
| (15,108 | ) | |
| (51,812 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net Loss Attributable to Non-Controlling Interests | |
| 64 | | |
| 36 | | |
| 133 | | |
| 83 | |
| |
| | | |
| | | |
| | | |
| | |
Net Loss Attributable to Kartoon Studios, Inc. | |
$ | (2,057 | ) | |
$ | (15,476 | ) | |
$ | (14,975 | ) | |
$ | (51,729 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net Loss per Share (Basic) | |
$ | (0.05 | ) | |
$ | (0.44 | ) | |
$ | (0.40 | ) | |
$ | (1.56 | ) |
Net Loss per Share (Diluted) | |
$ | (0.05 | ) | |
$ | (0.44 | ) | |
$ | (0.40 | ) | |
$ | (1.56 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares Outstanding (Basic) | |
| 39,499,680 | | |
| 35,088,333 | | |
| 37,734,415 | | |
| 33,160,228 | |
Weighted Average Shares Outstanding (Diluted) | |
| 39,499,680 | | |
| 35,088,333 | | |
| 37,734,415 | | |
| 33,160,228 | |
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Kartoon Studios, Inc.
Condensed Consolidated Statements of Comprehensive
Loss
(in thousands)
(Unaudited)
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Net Loss | |
$ | (2,121 | ) | |
$ | (15,512 | ) | |
$ | (15,108 | ) | |
$ | (51,812 | ) |
Change in Accumulated Other Comprehensive Income (Loss): | |
| | | |
| | | |
| | | |
| | |
Change in Unrealized Gain on Marketable Securities | |
| 134 | | |
| 164 | | |
| 197 | | |
| 907 | |
Realized Losses on Marketable Securities Reclassified from AOCI into Earnings | |
| 148 | | |
| 1,897 | | |
| 505 | | |
| 4,154 | |
Foreign Currency Translation Adjustments | |
| 41 | | |
| (550 | ) | |
| (195 | ) | |
| 157 | |
Total Change in Accumulated Other Comprehensive Loss | |
| 323 | | |
| 1,511 | | |
| 507 | | |
| 5,218 | |
Total Comprehensive Net Loss | |
| (1,798 | ) | |
| (14,001 | ) | |
| (14,601 | ) | |
| (46,594 | ) |
Net Loss Attributable to Non-Controlling Interests | |
| 64 | | |
| 36 | | |
| 133 | | |
| 83 | |
Total Comprehensive Net Loss Attributable to Kartoon Studios, Inc. | |
$ | (1,734 | ) | |
$ | (13,965 | ) | |
$ | (14,468 | ) | |
$ | (46,511 | ) |
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Kartoon Studios, Inc.
Condensed Consolidated Statements of Stockholders'
Equity
(Unaudited)
(in thousands, except share data)
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Common Stock | | |
Preferred Stock | | |
Additional Paid-In | | |
Treasury Stock | | |
Accumulated | | |
Accumulated Other Comprehensive | | |
Non- Controlling | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Shares | | |
Amount | | |
Deficit | | |
Loss | | |
Interest | | |
Total | |
Balance, December 31, 2023 | |
35,247,744 | | |
$ | 352 | | |
1 | | |
$ | – | | |
$ | 773,986 | | |
75,473 | | |
$ | (339 | ) | |
$ | (718,546 | ) | |
$ | (3,883 | ) | |
$ | 1,691 | | |
$ | 53,261 | |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Common Stock for Services | |
53,497 | | |
| – | | |
– | | |
| – | | |
| 74 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 74 | |
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | |
49,949 | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
Share Based Compensation | |
– | | |
| – | | |
– | | |
| – | | |
| 226 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 226 | |
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 161 | | |
| – | | |
| 161 | |
Currency Translation Adjustment | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| (184 | ) | |
| – | | |
| (184 | ) |
Net Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| (7,045 | ) | |
| – | | |
| (19 | ) | |
| (7,064 | ) |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, March 31, 2024 | |
35,351,190 | | |
$ | 352 | | |
1 | | |
$ | – | | |
$ | 774,286 | | |
75,473 | | |
$ | (339 | ) | |
$ | (725,591 | ) | |
$ | (3,906 | ) | |
$ | 1,672 | | |
$ | 46,474 | |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Common Stock for Services | |
73,745 | | |
| – | | |
– | | |
| – | | |
| 83 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 83 | |
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | |
38,582 | | |
| – | | |
– | | |
| – | | |
| 25 | | |
217 | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 25 | |
Proceeds from Securities Purchase Agreement, Net | |
4,000,000 | | |
| 4 | | |
– | | |
| – | | |
| 3,325 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 3,329 | |
Share Based Compensation | |
– | | |
| – | | |
– | | |
| – | | |
| 164 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 164 | |
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 259 | | |
| – | | |
| 259 | |
Currency Translation Adjustment | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| (52 | ) | |
| – | | |
| (52 | ) |
Net Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| (5,873 | ) | |
| – | | |
| (50 | ) | |
| (5,923 | ) |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2024 | |
39,463,517 | | |
$ | 356 | | |
1 | | |
$ | – | | |
$ | 777,883 | | |
75,690 | | |
$ | (339 | ) | |
$ | (731,464 | ) | |
$ | (3,699 | ) | |
$ | 1,622 | | |
$ | 44,359 | |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Common Stock for Services | |
91,644 | | |
| – | | |
– | | |
| – | | |
| 84 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 84 | |
Reclassification Related to Reverse Stock Split | |
– | | |
| (316 | ) | |
– | | |
| – | | |
| 316 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
Share Based Compensation | |
– | | |
| – | | |
– | | |
| – | | |
| 155 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 155 | |
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 282 | | |
| – | | |
| 282 | |
Currency Translation Adjustment | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 41 | | |
| – | | |
| 41 | |
Net Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| (2,057 | ) | |
| – | | |
| (64 | ) | |
| (2,121 | ) |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, September 30, 2024 | |
39,555,161 | | |
$ | 40 | | |
1 | | |
$ | – | | |
$ | 778,438 | | |
75,690 | | |
$ | (339 | ) | |
$ | (733,521 | ) | |
$ | (3,376 | ) | |
$ | 1,558 | | |
$ | 42,800 | |
Kartoon Studios, Inc.
Condensed Consolidated Statements of Stockholders'
Equity (Continued)
(Unaudited)
(in thousands, except share data)
| |
Common Stock | | |
Preferred Stock | | |
Additional Paid-In | | |
Treasury Stock | | |
Accumulated | | |
Accumulated Other Comprehensive | | |
Non- Controlling | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Shares | | |
Amount | | |
Deficit | | |
Loss | | |
Interest | | |
Total | |
Balance, December 31, 2022 | |
31,918,552 | | |
$ | 319 | | |
1 | | |
$ | – | | |
$ | 762,418 | | |
42,633 | | |
$ | (290 | ) | |
$ | (641,443 | ) | |
$ | (9,925 | ) | |
$ | 1,790 | | |
$ | 112,869 | |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | |
78,088 | | |
| 1 | | |
– | | |
| – | | |
| (1 | ) | |
3,700 | | |
| (9 | ) | |
| – | | |
| – | | |
| – | | |
| (9 | ) |
Fractional Shares Issued Upon Reverse Stock Split | |
117,144 | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
Share Based Compensation | |
– | | |
| – | | |
– | | |
| – | | |
| 910 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 910 | |
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 2,367 | | |
| – | | |
| 2,367 | |
Currency Translation Adjustment | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 3 | | |
| – | | |
| 3 | |
Net Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| (23,828 | ) | |
| – | | |
| (31 | ) | |
| (23,859 | ) |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, March 31. 2023 | |
32,113,784 | | |
$ | 320 | | |
1 | | |
$ | – | | |
$ | 763,327 | | |
46,333 | | |
$ | (299 | ) | |
$ | (665,271 | ) | |
$ | (7,555 | ) | |
$ | 1,759 | | |
$ | 92,281 | |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Common Stock for Services | |
404,251 | | |
| – | | |
– | | |
| – | | |
| 997 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 997 | |
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | |
224,988 | | |
| 29 | | |
– | | |
| – | | |
| (29 | ) | |
2,165 | | |
| (6 | ) | |
| – | | |
| – | | |
| – | | |
| (6 | ) |
Proceeds From Warrant Exchange, net | |
2,311,550 | | |
| 2 | | |
– | | |
| – | | |
| 4,855 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 4,857 | |
Share Based Compensation | |
– | | |
| – | | |
– | | |
| – | | |
| 717 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 717 | |
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 633 | | |
| – | | |
| 633 | |
Currency Translation Adjustment | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 704 | | |
| – | | |
| 704 | |
Net Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| (12,425 | ) | |
| – | | |
| (16 | ) | |
| (12,441 | ) |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2023 | |
35,054,573 | | |
$ | 351 | | |
1 | | |
$ | – | | |
$ | 769,867 | | |
48,498 | | |
$ | (305 | ) | |
$ | (677,696 | ) | |
$ | (6,218 | ) | |
$ | 1,743 | | |
$ | 87,742 | |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Common Stock for Services | |
26,152 | | |
| – | | |
– | | |
| – | | |
| 43 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 43 | |
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | |
64,756 | | |
| – | | |
– | | |
| – | | |
| – | | |
2,441 | | |
| (9 | ) | |
| – | | |
| – | | |
| – | | |
| (9 | ) |
Share Based Compensation | |
– | | |
| – | | |
– | | |
| – | | |
| 465 | | |
– | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 465 | |
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| 2,061 | | |
| – | | |
| 2,061 | |
Currency Translation Adjustment | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| – | | |
| (550 | ) | |
| – | | |
| (550 | ) |
Net Loss | |
– | | |
| – | | |
– | | |
| – | | |
| – | | |
– | | |
| – | | |
| (15,476 | ) | |
| – | | |
| (36 | ) | |
| (15,512 | ) |
| |
| | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, September 30, 2023 | |
35,145,481 | | |
$ | 351 | | |
1 | | |
$ | – | | |
$ | 770,375 | | |
50,939 | | |
$ | (314 | ) | |
$ | (693,172 | ) | |
$ | (4,707 | ) | |
$ | 1,707 | | |
$ | 74,240 | |
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Kartoon Studios, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| |
| | | |
| | |
| |
Nine Months Ended September 30, | |
| |
2024 | | |
2023 | |
Cash Flows from Operating Activities: | |
| | | |
| | |
Net Loss | |
$ | (15,108 | ) | |
$ | (51,812 | ) |
| |
| | | |
| | |
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | |
| | | |
| | |
Amortization of Film and Television Costs | |
| 176 | | |
| 612 | |
Depreciation and Amortization of Property, Equipment & Intangible Assets | |
| 1,791 | | |
| 1,943 | |
Amortization of Right-of-Use Asset | |
| 1,400 | | |
| 2,179 | |
Amortization of Premium on Marketable Securities | |
| 59 | | |
| 369 | |
Share-Based Compensation Expense | |
| 545 | | |
| 2,091 | |
Impairment of Film and Television Costs | |
| – | | |
| 6,172 | |
Impairment of Intangible Assets | |
| – | | |
| 4,023 | |
Impairment of Goodwill | |
| – | | |
| 11,287 | |
Impairment of Property and Equipment | |
| – | | |
| 120 | |
Deferred Income Taxes | |
| – | | |
| (934 | ) |
Loss on Early Lease Termination | |
| – | | |
| 232 | |
Marketing Expenses in Exchange for Stock | |
| – | | |
| 1,195 | |
(Gain) Loss on Revaluation of Equity Investments in Your Family Entertainment AG | |
| 1,342 | | |
| (1,102 | ) |
Unrealized (Gain) Loss on Foreign Currency of Equity Investments in Your Family Entertainment AG | |
| (212 | ) | |
| 205 | |
Gain on Revaluation of Warrants | |
| (63 | ) | |
| (8,999 | ) |
Realized Loss on Marketable Securities | |
| 505 | | |
| 4,154 | |
Warrant Incentive Expense | |
| – | | |
| 12,664 | |
Stock Issued for Services | |
| 242 | | |
| 1,040 | |
Credit Loss Expense | |
| 144 | | |
| 351 | |
Other Non-Cash Items | |
| (10 | ) | |
| 2 | |
| |
| | | |
| | |
Decrease (Increase) in Operating Assets: | |
| | | |
| | |
Accounts Receivable | |
| 6,127 | | |
| 3,481 | |
Other Receivable | |
| (1,229 | ) | |
| 909 | |
Tax Credits Earned (less capitalized) | |
| (6,468 | ) | |
| (12,327 | ) |
Tax Credits Received | |
| 13,760 | | |
| 12,247 | |
Film and Television Costs, net | |
| (744 | ) | |
| (778 | ) |
Prepaid Expenses and Other Assets | |
| (169 | ) | |
| (178 | ) |
| |
| | | |
| | |
Increase (Decrease) in Operating Liabilities: | |
| | | |
| | |
Accounts Payable | |
| (4,816 | ) | |
| (1,875 | ) |
Accrued Salaries & Wages | |
| (190 | ) | |
| (358 | ) |
Accrued Expenses | |
| 439 | | |
| (71 | ) |
Accrued Production Costs | |
| 491 | | |
| 806 | |
Participations Payable | |
| (709 | ) | |
| (942 | ) |
Deferred Revenue | |
| 1,840 | | |
| (6,208 | ) |
Lease Liability | |
| (429 | ) | |
| (695 | ) |
Due to Related Party | |
| (3 | ) | |
| 55 | |
Other Liabilities | |
| 162 | | |
| (26 | ) |
Net Cash Used in Operating Activities | |
| (1,127 | ) | |
| (20,168 | ) |
| |
| | | |
| | |
Cash Flows from Investing Activities: | |
| | | |
| | |
Repayments from/(Loans to) Related Party for Note Receivables | |
| (37 | ) | |
| 1,393 | |
Proceeds from Principal Collections on Marketable Securities | |
| – | | |
| 460 | |
Proceeds from Sales and Maturities of Marketable Securities | |
| 8,009 | | |
| 67,633 | |
Purchase of Property & Equipment | |
| (70 | ) | |
| (68 | ) |
Net Cash Provided by Investing Activities | |
| 7,902 | | |
| 69,418 | |
| |
| | | |
| | |
Cash Flows from Financing Activities: | |
| | | |
| | |
Proceeds from Margin Loan | |
| 9,054 | | |
| 17,619 | |
Repayments of Margin Loan | |
| (8,767 | ) | |
| (76,182 | ) |
Proceeds from Production Facilities | |
| 6,492 | | |
| 11,161 | |
Repayment of Production Facilities | |
| (13,168 | ) | |
| (9,451 | ) |
(Repayments of )/Proceeds from Bank Indebtedness, net | |
| (2,253 | ) | |
| 573 | |
Proceeds from Securities Purchase Agreement | |
| 3,329 | | |
| 5,299 | |
Principal Payments on Finance Lease Obligations | |
| (1,040 | ) | |
| (1,555 | ) |
Debt Issuance Costs | |
| (116 | ) | |
| (18 | ) |
Shares Withheld for Taxes on Vested Restricted Shares | |
| 25 | | |
| (25 | ) |
Payment for Warrant Put Option Exercise | |
| – | | |
| (250 | ) |
Net Cash Used in Financing Activities | |
| (6,444 | ) | |
| (52,829 | ) |
| |
| | | |
| | |
Effect of Exchange Rate Changes on Cash | |
| 155 | | |
| 34 | |
| |
| | | |
| | |
Net Increase (Decrease) in Cash | |
| 486 | | |
| (3,545 | ) |
Beginning Cash | |
| 4,095 | | |
| 7,432 | |
Ending Cash | |
$ | 4,581 | | |
$ | 3,887 | |
| |
| | | |
| | |
Supplemental Disclosures of Cash Flow Information | |
| | | |
| | |
Cash Paid for Interest | |
$ | 145 | | |
$ | 285 | |
| |
| | | |
| | |
Non-Cash Financing and Investing Activities | |
| | | |
| | |
Leased Assets Obtained in Exchange for New Finance Lease Liabilities | |
$ | – | | |
$ | 1,432 | |
Warrants Issued for Services | |
$ | – | | |
$ | 443 | |
Warrant Modification | |
$ | – | | |
$ | 3,510 | |
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Kartoon Studios, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
Note 1: Organization and Business
Organization and Nature of Business
Kartoon Studios, Inc. (formerly
known as Genius Brands International, Inc.; the “Company”) is a global content and brand management company that creates,
produces, licenses, and broadcasts timeless and educational, multimedia animated content for children. Led by experienced industry personnel,
the Company distributes its content primarily on streaming platforms and television, and licenses properties for a broad range of consumer
products based on the Company’s characters. The Company is a “work for hire” producer for many of the streaming outlets
and animated content intellectual property (“IP”) holders. In the children’s media sector, the Company’s portfolio
features “content with a purpose” for toddlers to tweens, providing enrichment as well as entertainment. With the exception
of selected WOW Unlimited Media Inc. (“Wow”) titles, the Company’s programs, along with licensed programs, are being
broadcast in the United States on the Company’s wholly-owned advertisement supported video on demand (“AVOD”) service,
its free ad supported TV (“FAST”) channels and subscription
video on demand (“SVOD”) outlets, Kartoon Channel! and Ameba
TV, as well as linear streaming platforms. These streaming platforms include Comcast,
Cox, DISH, Sling TV, Amazon Prime Video, Amazon Fire, Roku, Apple TV, Apple iOS, Android TV, Android mobile, Pluto TV, Xumo, Tubi, YouTube,
YouTube Kids and KartoonChannel.com, as well as Samsung and LG smart TVs. The Company's in-house owned and produced animated shows include
Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama starring Jennifer Garner, and Rainbow
Rangers, KC Pop Quiz and Shaq’s Garage starring Shaquille O’Neal. The Company’s library titles include the
award-winning Baby Genius, adventure comedy Thomas Edison’s Secret Lab®, and Warren Buffett’s Secret
Millionaires Club, created with and starring iconic investor Warren Buffett, Team Zenko Go!, Reboot, Bee & PuppyCat:
Lazy in Space and Castlevania.
The Company also licenses
its programs to other services worldwide, in addition to the operation of its own channels, including, but not limited to, Netflix, Paramount+,
Max, Samsung TV Plus, LG Smart TVs, Amazon, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.
Through the Company’s
investments in Germany’s Your Family Entertainment AG (“YFE”), a publicly traded company on the Frankfurt Stock Exchange
(RTV-Frankfurt), it has gained access to a leading producer and distributor of high-quality children’s and family programming. YFE
owns and operates one of Europe’s largest channel-independent libraries of around 150 titles and 3,500 half-hour episodes.
Through the ownership of Wow,
the Company established an affiliate relationship with Mainframe Studios, which is one of the largest animation producers in the world.
In addition, Wow owns Frederator Networks Inc. (“Frederator”), the largest animation focused creator network on YouTube with
over 2,500 channels. Frederator also owns Frederator Studios, focused on developing and producing shorts and series for and with partners.
Over the past 20 years, Frederator Studios has partnered with Cartoon Network, Nickelodeon, Nick Jr., Netflix, Sony Pictures Animation
and Amazon.
The Company has rights to
a select amount of valuable IP, including among them a controlling interest in Stan Lee Universe, LLC (“SLU”), through which
it controls the name, likeness, signature, and all consumer product and IP rights to Stan Lee (the “Stan Lee Assets”). Known
by his signature phrase “Excelsior!”, Stan Lee is one of the most prolific and legendary creators of all time. As Marvel's
editor-in-chief, Stan "The Man" Lee helped build a universe of interlocking continuity, one where fans felt as if they could
turn a street corner and run into a superhero from Spider-Man to the Fantastic Four, Thor, Iron Man, the Hulk, the X-Men, and more. Stan
went on to become Marvel’s editorial director and publisher in 1972 and was eventually named chairman emeritus. He was the co-creator
of characters appearing in 3 of the top 10 box office movies of all time, which featured Spider-Man, Iron Man, the Hulk, Thor, Guardians
of the Galaxy, Black Panther, and of course the Avengers, accounting for billions of dollars of revenue for Marvel and the Walt Disney
Company.
The Company also owns The
Beacon Media Group, LLC (“Beacon Media”) and The Beacon Communications Group, Ltd. (“Beacon Communications”) (collectively,
“Beacon”), a North American marketing and media agency specializing in creating impactful connections between consumers and
brands across various industries. With a focus on in-depth research and analysis the agency equips brands with a deep understanding of
media landscapes, trends, and platform patterns across generations along with developing highly effective media strategies that deliver
results for clients. Beacon represents over 20 kids and family clients including Bandai Namco, Moose Toys, Bazooka Candy Brands, Goliath
Games, Playmates Toys, Cepia LLC, Cra-Z-Art, and Zebra Pens.
In addition, the Company owns
the Canadian company Ameba Inc. (“Ameba”), which distributes SVOD service for kids and has become a focal point of revenue
for TOON Media Networks’ subscription offering.
Recent Transactions
The Company announced the
initial closing of its registered direct offering of up to $7,000,000 (the “Offering”) on April 23, 2024. In the initial
closing, the Company sold 3,900,000 shares of its common stock, par value $0.001 per share (the “Common Stock”), and pre-funded
warrants to purchase up to 100,000 shares of Common Stock (the “Pre-funded Warrants”) to an institutional investor (the "Investor"),
at $1.00 per share of Common Stock and $0.99 per Pre-funded Warrant, for aggregate gross proceeds of approximately $4,000,000, prior to
deducting placement agent fees and other offering expenses, pursuant to a securities purchase agreement, dated April 18, 2024 (the
“SPA”). Pursuant to the terms of the SPA, the Investor had the sole option to purchase up to an additional 3,000,000 shares
of Common Stock and/or Pre-funded Warrants as part of the Offering, at $1.00 per share of Common Stock and $0.99 per Pre-Funded Warrant,
which has since expired. Additionally, the Company has 4,784,909 warrants with a reprice option that was triggered by the registered direct
offering which reduced the exercise price from $2.50 per share to $1.00 per share.
On June 21, 2024, the Company
announced the launch of “Winnie-the-Pooh” on the Kartoon Channel through a $30.0 million joint venture with Catalyst
Venture Partners (the “JV”). The JV stipulates after Catalyst Venture Partners recoup their investment, the ownership and
profit split between the partners is 60% to Kartoon Studios and 40% to Catalyst Venture Partners. “Winnie-the-Pooh” is based
on the designs and stories of one of the most successful brands of all time, A.A. Milne’s “Winnie-the-Pooh,” a property
that has generated over $80 billion in sales over the last four decades and is estimated to currently generate $3-$6 billion
per year. Catalyst Venture Partners will provide the full amount of the production finance with the plan to include an animated holiday
movie, five holiday specials and 4 seasons of episodic series.
Liquidity, Going Concern, and Capital Resources
As of September 30, 2024,
the Company had cash of $4.6 million, which increased by $0.5 million as compared to December 31, 2023. The increase was primarily
due to cash provided by investing activities of $7.9 million, offset by cash used in financing activities of $6.4 million and cash used
for operating activities of $1.1 million. The cash provided by investing activities was primarily due to sales of marketable securities
of $8.0 million. The cash used in financing activities was primarily due to repayments of the production facilities, finance lease obligations,
and bank indebtedness, net of proceeds from each, resulting in net cash used of $10.0 million, offset by net proceeds from the Offering
of $3.3 million and margin loan of $0.3 million.
As of September 30, 2024,
the Company held available-for-sale marketable securities with a fair value of $4.1 million, a decrease of $7.9 million as compared to
December 31, 2023 due to sales and maturities during the nine months ended September 30, 2024. The available-for-sale securities
consist principally of corporate and government debt securities and are also available as a source of liquidity.
As of September 30, 2024
and December 31, 2023, the Company’s margin loan balance was $1.1 million and $0.8 million, respectively. During the nine months
ended September 30, 2024, the Company borrowed an additional $9.1 million from its investment margin account and repaid $8.8 million
primarily with cash received from sales and maturities of marketable securities. The borrowed amounts were primarily used for operational
costs. The interest rates for the borrowings fluctuate based on the Fed Funds Upper Target plus 0.60%. The weighted average interest rates
were 0.46% and 0.98%, respectively, on average margin loan balances of $1.0 million and $27.4 million as of September 30, 2024 and
December 31, 2023, respectively.
For the three months ended
September 30, 2024 and September 30, 2023, the Company incurred interest expense on the margin loan of $11,070 and $0.2 million, respectively.
The Company incurred interest expense on the margin loan of $42,131 and $1.5 million during the nine months ended September 30, 2024
and September 30, 2023, respectively. The investment margin account borrowings do not mature but are collateralized by the marketable
securities held by the same custodian and the custodian can issue a margin call at any time, effecting a payable on demand loan. Due
to the call option, the margin loan is recorded as a current liability on the Company’s condensed consolidated balance sheets.
The
Company is subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility and equipment
lease agreements that have an aggregate total outstanding balance of $1.2 million U.S. dollars (“USD”) or $1.6 million
of Canadian dollars (“CAD”).
During
March 2024, the Company amended the revolving demand facility, equipment lease line, and treasury risk management facility. As a result
of the amendment, the revolving demand facility allows for draws of up to $0.7 million (CAD 1.0 million)
to be made by way of CAD prime rate loans, CAD overdrafts, USD base rate loans or letters of credit up to a maximum of $200,000 in either
CAD or USD and having a term of up to 1 year. The CAD prime borrowings and overdrafts bear interest at a rate equal to bank prime plus
2.00% per annum. The USD base rate borrowings bear interest at a rate equal to bank base rate plus
2.00% per annum. In addition, the equipment lease line was terminated, however, the Company has and
will continue to make the regular principal and interest payments under the specific financing terms of the existing equipment lease agreements.
The amendment removed the treasury risk management facility that allowed for advances of up to $0.4 million (CAD 0.5 million).
As of the date of the amendment and December 31, 2023, there were no outstanding amounts drawn under the treasury risk management facility.
The amendment also introduced revised financial covenants that are effective as of March 15, 2024. As of September 30, 2024,
the Company was not in compliance with a financial covenant to maintain a minimum liquidity threshold. Due to financial covenant violations
in the second quarter of 2024, the Company’s remaining equipment lease agreements with the lender of $0.6 million (CAD
0.8 million) as of September 30, 2024, are subject to early repayment. During the three months ended September 30, 2024, the
lender and the Company agreed to a repayment plan for the equipment leases under the equipment lease line to be completed prior to the
end of the fourth quarter of 2024. On August 30, 2024, the Company paid $0.1 million (CAD 0.1 million)
to the lender as part of its early repayment plan for the existing equipment lease line agreements. Subsequent to September 30, 2024,
the Company paid $0.3 million (CAD 0.4 million) to the lender as part of its repayment plan
for the equipment lease line. The amendment and covenant violation did not have any impact on the Company’s production facilities
that are separate from the revolving demand facility and are used for financing specific productions.
In accordance with Accounting
Standards Codification (“ASC”), Presentation of Financial Statements – Going Concern (Subtopic 205-40), the Company
has evaluated whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a
going concern for at least one year after the date the condensed consolidated financial statements are issued.
Historically,
the Company has incurred net losses. For the three months ended September 30, 2024 and September 30, 2023, the Company reported
net losses of $2.1 million and $15.5 million, respectively. For the nine months ended September 30, 2024 and September 30, 2023, the Company
reported net losses of $15.1 million and $51.8 million, respectively. The Company reported net cash used in operating activities of $1.1
million and net cash used in operating activities of $20.2 million for the nine months ended September 30, 2024 and September 30, 2023,
respectively. As of September 30, 2024, the Company had an accumulated deficit of $733.5 million primarily due to approximately $450 million
of expenses related to non-operational warrant and stock option expense recorded in 2020 and 2021, and total stockholders’ equity
of $42.8 million. As of September 30, 2024, the Company had total current assets of $37.2 million, including cash of $4.6 million
and marketable securities of $4.1 million, and total current liabilities of $33.7 million. The Company had working capital of $3.5 million
as of September 30, 2024, compared to working capital of $11.5 million as of December 31, 2023. Based on our current expected
level of operating expenditures and the cash and cash equivalents on hand at September 30, 2024, management concludes that there is substantial
doubt about our ability to continue as a going concern for a period of at least 12 months subsequent to the issuance of the accompanying
condensed consolidated financial statements. Historically, the Company has financed its operations primarily through revenue generated
from operations, loans and sales of its securities, and the Company expects to continue to seek and obtain additional capital in a similar
manner. The Company has filed a registration statement on Form S-3 on December 22, 2023, as amended, registering the sale of up to $75 million
of the Company’s securities pursuant to a shelf registration statement, and a registration statement on Form S-1 on September 27,
2024, as amended, in connection with a best efforts public offering of up to $8 million of the Company’s securities. However,
the Company does not have any committed sources of financing at this time, and it is uncertain whether any additional funding will be
available when it needs it on terms that will be acceptable to it, or at all. The Company’s ability to sell securities registered
on its registration statement on From S-3 is limited until such time that the market value of its voting securities held by non-affiliates
is $75 million or more. In addition, the number of shares of common stock and securities convertible or exercisable for common stock
that the Company can sell, under certain circumstances, will be limited by NYSE American rules and regulations. There can be no assurance
that the Company will be able to raise funds by selling additional shares of common stock or other securities convertible into common
stock, the ownership interest of its existing shareholders will be diluted. The issuance of debt can result in restrictive covenants that
limit operations. If funding is not available or not available at terms acceptable to the Company, the Company will seek to reduce overhead
costs and reduce its weekly cash obligations in the short term as needed. In addition, the Company can look to divest or bring in equity
partners for our various divisions and bring in near term capital.
Note 2: Basis of Presentation and Summary of Significant Accounting
Policies
The accompanying interim condensed
consolidated financial statements of the Company have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“U.S.
GAAP”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on April 9, 2024. The preparation
of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the condensed
consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current
events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed
to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results
may differ from these estimates.
Prior Periods and Reclassifications
Certain prior year amounts
have been reclassified to conform to the current year presentation. Such reclassifications had no impact on the Company’s reported
total revenues, expenses, net loss, current assets, total assets, current liabilities, total liabilities, stockholders’ equity,
non-controlling interests or cash flows. No reclassifications of prior period balances were material to the unaudited condensed consolidated
financial statements.
Interim results are not necessarily
indicative of financial results for a full year or any other period. The information included in this Form 10-Q should be read in conjunction
with the Company’s 2023 Annual Report on Form 10-K.
The following is provided
to update the Company’s significant accounting policies previously described in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2023.
Foreign Currency Forward Contracts
As
of September 30, 2024, the gross amounts of foreign currency (“FX”) forward contracts
in an asset and liability position subject to a master netting arrangement resulted in a net liability of
$0.2 million recorded within Other Current Liabilities on the
condensed consolidated balance sheets. As of December 31, 2023, the FX contracts were fully
settled and netted to zero on the Company’s condensed consolidated balance sheets.
For
the three and nine months ended September 30, 2024, the Company recorded a realized gain
of $35,601 and $86,355, respectively, on FX forward contracts within
Production Services Revenue on the condensed consolidated statements of operations. For the three and nine months ended September 30,
2023, the Company recorded a realized loss of $14,890 and $40,294, respectively, on FX forward contracts
within Production Services Revenue on the condensed consolidated statements of operations.
Trade Accounts Receivable and Allowance for
Credit Loss
As of September 30, 2024
and December 31, 2023, the Company recorded an allowance for credit loss of $0.2 million and $0.2 million, respectively.
Tax Credits Receivable
As of September 30, 2024
and December 31, 2023, $12.9 million and $20.7 million, respectively, in current tax credit receivables related to Wow’s film
and television productions were recorded, net of $0.6 million and $0.5 million, respectively, recorded as an allowance for credit loss.
It is estimated that the Company will collect the receivables balance; therefore, no additional reserve was recorded.
Concentration of Risk
The Company maintains its
cash in bank deposit accounts which, at times, may exceed the Federal Deposit Insurance Corporation’s (“FDIC”) or the
Canadian Deposit Insurance Corporation’s (“CDIC”) insured amounts. Balances on interest bearing deposits at banks in
the United States are insured by the FDIC up to $250,000 per account and deposits in banks in Canada are insured by the CDIC up to CAD
100,000. As of September 30, 2024 and December 31, 2023, the Company had twelve and ten bank deposit accounts with an aggregate
uninsured balance of $3.0 million and $2.5 million, respectively.
The Company has a managed
account with a financial institution. The managed account maintains its investments in marketable securities of approximately $4.1 million
and $12.0 million as of September 30, 2024 and December 31, 2023, respectively. Assets in the managed account are protected
by the Securities Investor Protection Corporation (“SIPC”) up to $500,000 (with a limit of $250,000 for cash). In addition,
the financial institution provides additional “excess of SIPC” coverage which insures up to $1.0 billion. As of September 30,
2024 and December 31, 2023, the Company did not have account balances held at this financial institution that exceed the insured
balances.
The Company’s investment
portfolio consists of investment-grade securities diversified among security types, industries and issuers. The Company’s policy
limits the amount of credit exposure to any one security issue or issuer and the Company believes no significant concentration of credit
risk exists with respect to these investments.
During the three months ended
September 30, 2024, the Company had four customers, whose total revenue exceeded 10% of the total consolidated revenue. These customers
accounted for 77.2% of the total revenue.
During the nine months ended
September 30, 2024, the Company had three customers, whose total revenue exceeded 10% of the total consolidated revenue. These customers
accounted for 60.2% of the total revenue. As of September 30, 2024, the Company had three customers whose total accounts receivable
exceeded 10% of the total accounts receivable. These customers accounted for 59.4% of the total accounts receivable as of September 30,
2024.
During the three months ended
September 30, 2023, the Company had four customers whose total revenue exceeded 10% of the total consolidated revenue. These customers
accounted for 73.1% of the total revenue.
During the nine months ended
September 30, 2023, the Company had four customers, whose total revenue exceeded 10% of the total consolidated revenue. These customers
accounted for 79.3% of the total revenue. As of September 30, 2023, the Company had three customers whose total accounts receivable
exceeded 10% of the total accounts receivable. These customers accounted for 55.6% of the total accounts receivable as of September 30,
2023.
There is significant financial
risk associated with a dependence upon a small number of customers. The Company periodically assesses the financial strength of these
customers and establishes allowances for any anticipated credit losses.
Fair Value of Financial Instruments
The following table summarizes
the marketable securities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30,
2024 (in thousands):
Schedule of marketable securities measured at fair value on a recurring basis | |
| | | |
| | | |
| | |
| |
Level 1 | | |
Level 2 | | |
Total Fair Value | |
Investments in Marketable Securities: | |
| | | |
| | | |
| | |
Corporate Bonds | |
$ | 1,035 | | |
$ | – | | |
$ | 1,035 | |
U.S. agency and government sponsored securities | |
| – | | |
| 1,913 | | |
| 1,913 | |
U.S. states and municipalities | |
| – | | |
| 1,131 | | |
| 1,131 | |
Total | |
$ | 1,035 | | |
$ | 3,044 | | |
$ | 4,079 | |
Fair values were determined
for each individual security in the investment portfolio. The Company’s marketable securities are considered to be available-for-sale
investments as defined under the Financial Accounting Standards Board (“FASB”) ASC 320, Investments – Debt and Equity
Securities. An allowance for credit loss was not recorded for the marketable securities as of September 30, 2024 and December 31,
2023. Refer to Note 5 for additional details.
New Accounting Standards Issued but Not Yet
Adopted
In October 2023, the FASB
issued Accounting Standards Update (“ASU”) No. 2023-06, Disclosure Improvements. The new guidance clarifies or improves
disclosure and presentation requirements on a variety of topics in the codification. The amendments will align the requirements in the
FASB Accounting Standard Codification with the SEC’s regulations. The amendments are effective prospectively on the date each individual
amendment is effectively removed from Regulation S-X or Regulation S-K. The Company is in the process of evaluating the impact that the
adoption of this ASU will have to the condensed consolidated financial statements and related disclosures, which is not expected to be
material.
In November 2023, the FASB
issued ASU No. 2023-07, Segment Reporting – Improvements to Reportable Segments Disclosures. The amendments enhance disclosures
of significant segment expenses by requiring disclosure of significant segment expenses regularly provided to the chief operating decision
maker (CODM), extend certain annual disclosures to interim periods, and permit more than one measure of segment profit or loss to be reported
under certain conditions. The amendments are effective for the Company in fiscal years beginning after December 15, 2023, and interim
periods within fiscal years beginning after December 15, 2024. Early adoption of the amendment is permitted, including adoption in any
interim periods for which financial statements have not been issued. The Company is in the process of evaluating the impact that the adoption
of this ASU will have to the condensed consolidated financial statements and related disclosures, which is expected to result in enhanced
disclosures.
In December 2023, the FASB
issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires that an entity, on an
annual basis, disclose additional income tax information, primarily related to the rate reconciliation and income taxes paid. The amendment
in the ASU is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this ASU are effective
for annual periods beginning after December 15, 2024. The Company is in the process of evaluating the impact that the adoption of this
ASU will have to the condensed consolidated financial statements and related disclosures, which is expected to result in enhanced disclosures
and is not expected to be material.
Note 3: Variable Interest Entity
In July 2020, the Company
entered into a binding term sheet with POW! Entertainment, LLC. (“POW”) in which the Company agreed to form an entity with
POW to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is
called “Stan Lee Universe, LLC” (“SLU”). POW and the Company executed an operating agreement for the joint venture,
effective as of June 1, 2021. The purpose of the acquisition was to enable the Company to assume the worldwide rights, in perpetuity,
to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing,
comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations (the “Stan Lee Assets”),
from which the Company plans to develop and license multiple properties each year.
During the three months ended
September 30, 2024 and September 30, 2023, SLU generated a net loss of $63,552 and $35,846, respectively. During the nine months ended
September 30, 2024 and September 30, 2023, SLU generated a net loss of $132,750 and $83,179, respectively. There were no contributions
or distributions during the three and nine months ended September 30, 2024 and September 30, 2023, and there were no changes
in facts and circumstances that would result in a re-evaluation of the VIE assessment.
Note 4: Investment in Equity Interest
As of September 30,
2024 and December 31, 2023, the Company owned 6,857,132 shares
of YFE. At the time of the initial investment in 2021, it was determined that based on the Company’s 28.69%
ownership in YFE, the Company had significant influence over the entity. Therefore, under the equity method of accounting, the
Company elected to account for the investment at fair value under the fair value option. Under the fair value option, the investment
is remeasured and recorded at fair value each reporting period, with the change recorded through earnings. As of September 30,
2024, the fair value of the investment was determined to be $18.0
million recorded within noncurrent assets on the Company’s condensed consolidated balance sheets. YFE shows a considerably
lower trading volume compared to industry standards, especially within the broader media and entertainment sector. Under ASC 820,
for an asset or liability to qualify as Level 1, it must have quoted prices in an active market. However, the standard also
addresses situations where trading volume is low. ASC 820-10-35-41 states that an active market is one in which transactions for the
asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. When trading
volume is low, determining whether the market is still active requires judgment. When considering the use of share price to value an
investment in YFE the company had to weigh the arguments for and against the application of Level 1 inputs under ASC 820. An asset
could remain in Level 1 if there are enough considerations to support that the market is accessible and reflects current pricing
information, despite low volume. While the low trading volume raises concerns regarding the reliability of using share price as a
Level 1 input under ASC 820, the company will closely monitor the trading volume and financial performance of the investee. This
ongoing oversight will help ensure that any updates to the investment's fair value reflect true market conditions as they evolve
over time, considering both the potential growth of the company and fluctuations in trading activity.
The fair value as of September 30, 2024 decreased by net $1.1 million,
as compared to December 31, 2023. The decrease is the effect of foreign currency remeasurement from EURO to USD resulting in a gain
of $0.2 million and share price fluctuations resulting in a loss of $1.3 million. The total change in fair value is recorded within Other
Income (Expense), net on the Company’s condensed consolidated statements of operations. As of September 30, 2024 and December 31,
2023, the Company’s ownership in YFE was 44.8%.
Note 5: Marketable Securities
The Company classifies and
accounts for its marketable debt securities as available-for-sale securities (“AFS”) and the securities are stated at fair
value. Per ASC 326, the Company is required to recognize an allowance for credit losses on its AFS debt securities and recognize a credit
loss expense once securities become impaired.
The investments in marketable
securities had an adjusted cost basis of $4.3 million and a market value of $4.1 million as of September 30, 2024. The balances consisted
of the following securities (in thousands):
Schedule of marketable securities | |
| | | |
| | | |
| | |
| |
Adjusted Cost | | |
Unrealized Loss | | |
Fair Value | |
Corporate Bonds | |
$ | 1,080 | | |
$ | (45 | ) | |
$ | 1,035 | |
U.S. Agency and Government Sponsored Securities | |
| 2,000 | | |
| (87 | ) | |
| 1,913 | |
U.S. States and Municipalities | |
| 1,186 | | |
| (55 | ) | |
| 1,131 | |
Total | |
$ | 4,266 | | |
$ | (187 | ) | |
$ | 4,079 | |
The investments in marketable
securities as of December 31, 2023 had an adjusted cost basis of $12.8 million and a market value of $12.0 million. The balances
consisted of the following securities (in thousands):
| |
Adjusted Cost | | |
Unrealized Loss | | |
Fair Value | |
Corporate Bonds | |
$ | 6,333 | | |
$ | (425 | ) | |
$ | 5,908 | |
U.S. Treasury | |
| 646 | | |
| (37 | ) | |
| 609 | |
U.S. Agency and Government Sponsored Securities | |
| 2,000 | | |
| (148 | ) | |
| 1,852 | |
U.S. States and Municipalities | |
| 3,859 | | |
| (278 | ) | |
| 3,581 | |
Total | |
$ | 12,838 | | |
$ | (888 | ) | |
$ | 11,950 | |
The Company holds 5 AFS securities,
all of which were in an unrealized loss position and have been in an unrealized loss position for a period greater than 12 months as of
September 30, 2024. The AFS securities held by the Company as of December 31, 2023 had also been in an unrealized loss position
for a period greater than 12 months. The Company reported the net unrealized losses in accumulated other comprehensive income (loss),
a component of stockholders’ equity. As of September 30, 2024 and December 31, 2023, an allowance for credit loss was
not recognized as the issuers of the securities had not established a cause for default, various rating agencies had reaffirmed each security's
investment grade status and the Company did not have the intent, nor is it required to sell its securities prior to recovery.
Realized losses of $0.1 million
and $1.9 million were recognized in earnings during the three months ended September 30, 2024 and September 30, 2023, respectively. Realized
losses of $0.5 million and $4.2 million were recognized in earnings during the nine months ended September 30, 2024 and September 30,
2023, respectively. The losses were due to selling securities prior to maturity to prevent further market condition losses on the securities.
The contractual maturities
of the Company’s marketable investments as of September 30, 2024 were as follows (in thousands):
Schedule of contractual maturities of marketable investments | |
| | |
| |
Fair Value | |
Due within 1 year | |
$ | – | |
Due after 1 year through 5 years | |
| 4,079 | |
Total | |
$ | 4,079 | |
The Company may sell certain
of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit
risk, duration and asset allocation.
Note 6: Property and Equipment, net
The Company has property and
equipment as follows (in thousands):
Schedule of property and equipment, net | |
| | | |
| | |
| |
As of | |
| |
September 30, 2024 | | |
December 31, 2023 | |
Furniture and Equipment | |
$ | 117 | | |
$ | 117 | |
Computer Equipment | |
| 226 | | |
| 219 | |
Leasehold Improvements | |
| 2,208 | | |
| 2,200 | |
Software | |
| 250 | | |
| 192 | |
Property and Equipment, gross | |
| 2,801 | | |
| 2,728 | |
| |
| | | |
| | |
Less Accumulated Depreciation | |
| (985 | ) | |
| (724 | ) |
Foreign Currency Translation Adjustment | |
| (161 | ) | |
| (127 | ) |
Property and Equipment, net | |
$ | 1,655 | | |
$ | 1,877 | |
During the three months ended
September 30, 2024 and September 30, 2023, the Company recorded depreciation expense of $0.1 million and $0.1 million, respectively. During
the nine months ended September 30, 2024 and September 30, 2023, the Company recorded depreciation expense of $0.3 million and $0.3 million,
respectively.
The Company did not incur
any impairment charges on its property and equipment during the three and nine months ended September 30, 2024.
Due to a lease termination
effective August 1, 2023, $0.1 million of property and equipment was written down to zero and recorded in loss on lease termination within
Other Income (Expense), net on the condensed consolidated statement of operations during the three and nine months ended September 30,
2023. In addition, during the first quarter of 2023, due to changes in the Company's estimated undiscounted future cash flows, a reassessment
of its long-lived assets was performed. As a result, the carrying value of one of the Company's asset group’s property and equipment
assets were written down to zero and an Impairment of Property and Equipment of $0.1 million was recorded within Operating Expenses in
the condensed consolidated statement of operations.
Note 7: Leased Right-of-Use Assets, net
Leased right-of-use assets
consisted of the following (in thousands):
Schedule of leased right of use assets | |
| | | |
| | |
| |
As of | |
| |
September 30, 2024 | | |
December 31, 2023 | |
Office Lease Assets | |
$ | 9,437 | | |
$ | 9,437 | |
Equipment Lease Assets | |
| 5,360 | | |
| 5,360 | |
Right-of-Use Assets, Gross | |
| 14,797 | | |
| 14,797 | |
| |
| | | |
| | |
Accumulated Amortization | |
| (6,637 | ) | |
| (5,237 | ) |
Foreign Currency Translation Adjustment | |
| (769 | ) | |
| (617 | ) |
Leased Right-of-Use Assets, net | |
$ | 7,391 | | |
$ | 8,943 | |
As of September 30, 2024,
the weighted-average lease term for the Company’s operating leases was 76 months and the weighted-average discount rate was 11.1%.
As of December 31, 2023, the weighted-average lease term for operating leases was 83 months and the weighted-average discount rate
was 11.1%.
Operating lease costs during
the three months ended September 30, 2024 and September 30, 2023 were $0.9 million and $0.4 million, respectively, recorded within General
and Administrative Expenses on the Company’s condensed consolidated statements of operations. Operating lease costs during the nine
months ended September 30, 2024 and September 30, 2023 were $1.2 million and $1.2 million, respectively, recorded within General and Administrative
Expenses on the Company’s condensed consolidated statements of operations.
During the three and nine
months ended September 30, 2024, the Company recorded right-of-use (“ROU”) amortization of $0.2 million and $1.0 million,
respectively. During the three and nine months ended September 30, 2023, the Company recorded ROU amortization of $0.5 million and
$1.6 million, respectively. ROU amortization is recorded within General and Administrative Expenses and accretion of interest expense
is recorded within Other Income (Expense), net on the Company’s condensed consolidated statements of operations.
On August 2, 2023, Beacon
Media, signed a Termination of Lease Agreement (the “Lease Termination”), effective August 1, 2023 (the “Effective Date”),
related to the office space in Lyndhurst, NJ. The Lease Termination requires Beacon Media to pay an aggregate of $0.1 million in
consideration for terminating the lease. The Company wrote off the ROU asset, lease liability, prepaid deposit and fixed assets on the
Effective Date. Including fees, the Company recorded a total loss on lease termination of $0.2 million within Other Income (Expense),
net on the Company’s condensed consolidated statement of operations during the three months ended September 30, 2023.
Note 8: Film and Television Costs, net
The following table highlights
the activity in Film and Television Costs as of September 30, 2024 and December 31, 2023 (in thousands):
Schedule of film and television costs activity | |
| | |
Film and Television Costs, net as of December 31, 2023 | |
$ | 1,295 | |
Additions to Film and Television Costs | |
| 818 | |
Disposals | |
| (73 | ) |
Film Amortization Expense | |
| (176 | ) |
Foreign Currency Translation Adjustment | |
| (6 | ) |
Film and Television Costs, net as of September 30, 2024 | |
$ | 1,858 | |
During the three months ended
September 30, 2024 and September 30, 2023, the Company recorded film amortization expense of $61,672 and $0.1 million, respectively. During
the nine months ended September 30, 2024 and September 30, 2023, the Company recorded amortization expense of $0.2 million and
$0.5 million, respectively.
For the three and nine months
ended September 30, 2023, the Company recorded film and television impairment write-downs of $6.2 million. The Company did not incur
any film and television impairment write-downs during the three and nine months ended September 30, 2024.
Note 9: Intangible Assets, net
Intangible Assets, net
The Company had the following
intangible assets (in thousands) with their weighted average remaining amortization period (in years):
Intangible Assets, net
Schedule of intangible asset | |
| | | |
| | | |
| | |
| |
Weighted Average Remaining Amortization | | |
As of | |
| |
Period | | |
September 30, 2024 | | |
December 31, 2023 | |
Customer Relationships | |
| 5.7 | | |
$ | 17,390 | | |
$ | 17,325 | |
Digital Networks | |
| 13.5 | | |
| 803 | | |
| 803 | |
Trade Names | |
| 66.7 | | |
| 10,100 | | |
| 9,970 | |
Intangible Assets, gross | |
| | | |
| 28,293 | | |
| 28,098 | |
| |
| | | |
| | | |
| | |
Less: Accumulated Amortization | |
| | | |
| (5,528 | ) | |
| (3,794 | ) |
Foreign Currency Translation Adjustment | |
| | | |
| (1,639 | ) | |
| (1,311 | ) |
Intangible Assets, net | |
| | | |
$ | 21,126 | | |
$ | 22,993 | |
During the three months ended
September 30, 2024 and September 30, 2023, the Company recorded intangible asset amortization expense of $0.5 million for each reporting
period. During the nine months ended September 30, 2024 and September 30, 2023, the Company recorded intangible asset amortization expense
of $1.5 million and $1.6 million, respectively.
The Company did not incur
any impairment charges on its definite and indefinite-lived intangible assets during the three and nine months ended September 30,
2024.
During the nine months ended
September 30, 2023, the Company recorded a total Impairment of Intangible Assets of $4.0 million within Operating Expenses in the
condensed consolidated statement of operations. The impairment charge consisted of a write-down of definite-lived intangible assets of
$2.8 million, net of $0.6 million in accumulated depreciation, due to a decrease in an asset group’s estimated undiscounted
cash flows. Furthermore, it was determined that the Frederator tradename, an indefinite-lived intangible asset, was impaired by $1.3 million.
Expected future amortization
of intangible assets subject to amortization as of September 30, 2024 is as follows (in thousands):
Schedule of expected future intangible asset amortization | |
| | |
Fiscal Year: | |
| |
2024 (remainder of year) | |
$ | 516 | |
2025 | |
| 2,072 | |
2026 | |
| 2,062 | |
2027 | |
| 2,062 | |
2028 | |
| 2,062 | |
Thereafter | |
| 6,792 | |
Total | |
$ | 15,566 | |
As of September 30, 2024, $5.6 million of
the Company’s intangible assets related to the acquired trade names from the Wow acquisition had indefinite lives and are not subject
to amortization.
Note 10: Deferred Revenue
As of September 30, 2024
and December 31, 2023, the Company had aggregate short term and long term deferred revenue of $8.4 million and $6.6 million, respectively.
The increase in deferred revenue is primarily related to the stage of progress of various productions as of September 30, 2024, compared
to the progress as of December 31, 2023. Wow's deferred revenue balance relates to cash received from customers for productions in
progress. Revenue is fully recognized upon production completion. Deferred revenue also includes both (i) variable fee contracts with
licensees and customers in which the Company collected advances and minimum guarantees against future royalties and (ii) fixed fee contracts.
The Company recognizes revenue related to these contracts when all revenue recognition criteria have been met.
Note 11: Margin Loan
As of September 30, 2024 and December 31,
2023, the Company’s margin loan balance was $1.1 million and $0.8 million, respectively. During the nine months ended September 30,
2024, the Company borrowed an additional $9.1 million from its investment margin account and repaid $8.8 million primarily with
cash received from sales and maturities of marketable securities. The borrowed amounts were primarily used for operational costs. The
interest rates for the borrowings fluctuate based on the Fed Funds Upper Target plus 0.60%. The weighted average interest rates were 0.46%
and 0.98%, respectively, on average margin loan balances of $1.0 million and $27.4 million as of September 30, 2024 and December 31,
2023, respectively.
For the three months ended
September 30, 2024 and September 30, 2023, the Company incurred interest expense on the margin loan of $11,070 and $0.2 million, respectively.
The Company incurred interest expense on the margin loan of $42,131 and $1.5 million during the nine months ended September 30, 2024 and
September 30, 2023, respectively. The investment margin account borrowings do not mature but are collateralized by the marketable securities
held by the same custodian and the custodian can issue a margin call at any time, effecting a payable on demand loan. Due to the call
option, the margin loan is recorded as a current liability on the Company’s condensed consolidated balance sheets.
Note 12: Bank Indebtedness and Production Facilities
The Company has certain credit
facilities (together, the “Facilities”) that are comprised of the following:
Revolving Demand Facility
As
of September 30, 2024 and December 31, 2023, the Company
had an outstanding balance of $0.6 million (CAD 0.8 million) and $2.9 million (CAD 3.8 million),
respectively, on the revolving demand facility by way of bank prime rate loan draws, included as Bank Indebtedness within current liabilities
on the Company’s condensed consolidated balance sheets.
During
March 2024, the Company amended the revolving demand facility. As a result of the amendment, the revolving demand facility allows for
draws of up to $0.7 million (CAD 1.0 million) to be made by way of CAD prime rate loans,
CAD overdrafts, USD base rate loans or letters of credit up to a maximum of $0.2 million in either
CAD or USD and having a term of up to 1 year. The CAD prime borrowings and overdrafts bear interest
at a rate equal to bank prime plus 2.00% per annum. The USD base rate borrowings bear interest at
a rate equal to bank base rate plus 2.00% per annum.
Treasury Risk Management Facility
During March
2024, an amendment was entered into that removed the treasury risk management facility. As of the date of the amendment and December 31,
2023, there were no outstanding amounts drawn under the treasury risk management facility.
Production Facilities
The
production facilities are used for financing specific productions. The Company’s production facilities bear interest at rates ranging
from bank prime plus 1.00% - 1.25% per annum. The production facilities
are generally repayable on demand and are guaranteed and secured by the Company with no limitations for maximum potential future payments.
The security reflects substantially all of the Company's tangible and intangible assets including a combination of federal and provincial
tax credits, other government incentives, production service agreements and license agreements.
As
of September 30, 2024 and December 31, 2023, the Company had an outstanding balance of $8.7
million (CAD 11.8 million), including $1.3 million (CAD 1.7 million)
of interest, and $15.3 million (CAD 20.3 million), including $1.4 million (CAD 1.9 million)
of interest, respectively, recorded as Production Facilities, net within current liabilities on the Company’s condensed consolidated
balance sheets.
Equipment Lease Line
During
March 2024, the equipment lease line was terminated, however, the Company continued to make the regular principal and interest payments
under the specific financing terms of the existing equipment lease agreements. Each existing transaction under the equipment lease line
has specific financing terms in respect of the leased equipment such as term, finance amount, rate, and payment terms. The finance rates
for these equipment leases range from 4.49% to 7.18% with remaining
lease terms of 1 - 2 months as of September 30, 2024.
As
of September 30, 2024, the outstanding balance of $0.6 million (CAD 0.8 million)
was included within current Finance Lease Liabilities on the Company’s condensed consolidated balance sheets.
Equipment Lease Facility
The
Company also entered into an equipment lease agreement with a Canadian bank. This additional equipment lease facility allows the Company
to finance equipment purchases of up to $1.0 million (CAD 1.4 million) in total. Each transaction
under the equipment lease facility has specific financing terms in respect of the leased equipment such as term, finance amount, rate,
and payment terms. As of September 30, 2024, the Company has leases remaining under this facility
with finance rates of 7.52% to 8.20% and remaining lease terms
of 14 - 23 months.
As
of September 30, 2024, the outstanding balance of $0.4 million (CAD 0.5 million)
was included within current and noncurrent Finance Lease Liabilities on the Company’s condensed consolidated balance sheets.
Loan Covenants, Violations
and Waiver
The
Company is subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility and equipment
lease agreements that have an aggregate total outstanding balance of $1.2 million (CAD 1.6 million).
The Company
has continued to make its regular principal and interest payments in a timely basis since the effective borrowing date.
The
revolving demand facility and the equipment lease line can be called at any time by the lender as per the original and amended terms of
the facilities. As of September 30, 2024, the Company was not in compliance with a financial
covenant to maintain a minimum liquidity threshold. Due to financial covenant violations in the second quarter of 2024, the Company’s
remaining equipment lease agreements with the lender of $0.6 million (CAD 0.8 million) as of September 30,
2024, are subject to early repayment. During the three months ended September 30, 2024,
the lender and the Company reached an agreement in principle for a repayment plan for the equipment leases under the equipment lease line.
On August 30, 2024, the Company paid $0.1 million (CAD 0.1 million) to the lender as part
of its early repayment plan for the existing equipment lease line agreements. Subsequent to September 30, 2024, the Company paid
$0.3 million (CAD 0.4 million) to the lender as part of its repayment plan for the equipment
lease line. The Company expects to enter into a written agreement with the lender prior to the end of the fourth quarter of 2024 to amend
the revolving demand facility and equipment lease line.
Note 13: Stockholders’ Equity
Common Stock
As of September 30, 2024
and December 31, 2023, the total number of authorized shares of common stock was 190,000,000.
As of September 30, 2024
and December 31, 2023, there were 39,555,161 and 35,247,744 shares of common stock outstanding, respectively.
Preferred Stock
The Company has 10,000,000
shares of preferred stock authorized with a par value of $0.001 per share. The board of directors is authorized, subject to any limitations
prescribed by law, without further vote or action by the Company’s stockholders, to issue from time-to-time shares of preferred
stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges as shall be determined by the board of directors, which may include, among
others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
In connection with the Company’s
acquisition of Wow, certain eligible Canadian stockholders, noteholders and optionholders of Wow elected to receive the Exchangeable Shares
in the capital of the Wow Exchange Co. Inc. (“ExchangeCo”) instead of shares of the Company’s common stock to which
they were otherwise entitled.
The shares of ExchangeCo were
exchangeable into shares of the Company’s common stock in accordance with their terms. Holders of the ExchangeCo shares were entitled
to defined voting rights (the “Voting Rights”) in the Company pursuant to a voting and exchange trust agreement (the “Voting
Agreement”) dated April 6, 2022 among the Company, ExchangeCo, 1329258 B.C. Ltd. (“CallCo”) and Computershare Trust
Company of Canada (the “Voting Trustee”). The Voting Trustee holds a single share of Series B Preferred Stock in the capital
of the Company (the “Special Voting Share”), which granted the Voting Trustee that number of votes at the meetings of the
Company’s stockholders as is equal to the number of shares of the Company’s common stock that at such time have not been delivered
pursuant to the tender of ExchangeCo shares. The Voting Trustee was required to exercise each vote attached to the Special Voting Share
only as directed by the relevant holder of the underlying Company shares of common stock and, in the absence of any instructions, would
not exercise voting rights with respect to the applicable shares. On August 16, 2024, CallCo acquired the balance of the remaining exchangeable
shares of ExchangeCo in consideration for shares in the Company’s common stock. Accordingly, the shares of ExchangeCo are no longer
held by the public and therefore, (i) the Voting Agreement automatically terminated, and (ii) there are no longer Voting Rights in respect
of the shares of ExchangeCo or the Special Voting Share.
As of September 30, 2024
and December 31, 2023, there were 0 shares of Series A Convertible Preferred Stock outstanding. As of September 30, 2024 and
December 31, 2023, there was 1 share of Series B Preferred Stock outstanding. As of September 30, 2024 and December 31,2023, there were 0 shares of Series C Preferred Stock outstanding.
Treasury Stock
During the nine months ended
September 30, 2024 and September 30, 2023, 217 and 8,306 shares of common stock with a cost of $252 and $24,700, respectively, were withheld
to cover taxes owed by certain employees, all of which were included as treasury stock outstanding and recorded at cost within Treasury
Stock on the condensed consolidated balance sheet.
Note 14: Stock Options
On September 1, 2020, the
Company adopted the Kartoon Studios, Inc. 2020 Incentive Plan (the “2020 Plan”) as voted by the Board of Directors. The Board
of Directors approved the maximum number of shares available for issuance up to an aggregate of 3,000,000 shares of common stock, which
does not include shares that the Company may issue related to acquisitions. On May 23, 2024, the Board of Directors approved the maximum
number of shares available for issuance up to an aggregate of 5,000,000 shares from 3,000,000 shares of common stock in the initial 2020
Plan. The 2020 Plan replaced the previously adopted 2015 Incentive Plan (the “2015 Plan”) that had a total number of authorized
shares of 216,767, however the remaining 12,000 outstanding shares granted under the 2015 Plan, as of September 30, 2024, remain
to be governed under such plan. All expired or terminated shares granted under the 2015 Plan, that have not been vested or exercised,
reverts to and again becomes available for issuance under the 2020 Plan.
During the nine months ended
September 30, 2024 and September 30, 2023, the Company granted options to purchase 35,000 and no options, respectively. The 35,000 options
to purchase common stock had a weighted-average grant date fair market value of $24,210.
The fair value of the options
granted during the nine months ended September 30, 2024 were calculated using the Black-Scholes Merton (“BSM”) option
pricing model based on the following assumptions:
Schedule of assumptions used | |
| | |
Exercise Price | |
$ | 0.95 | |
Dividend Yield | |
| –
% | |
Volatility | |
| 92.1% | |
Risk-free interest rate | |
| 4.3% | |
Expected life of options | |
| 5.0 years | |
The following table summarizes
the Company’s option activity:
Schedule of option activity | |
| | | |
| | | |
| | |
| |
Stock Options | | |
Weighted-Average Remaining Contractual Life | | |
Weighted-Average Exercise Price per Share | |
Outstanding at December 31, 2023 | |
| 1,183,908 | | |
| 5.56 | | |
$ | 14.96 | |
Granted | |
| 35,000 | | |
| 4.72 | | |
$ | 0.95 | |
Exercised | |
| – | | |
| – | | |
$ | – | |
Forfeited/Cancelled | |
| (259,468 | ) | |
| – | | |
$ | 21.08 | |
Expired | |
| (5,800 | ) | |
| – | | |
$ | 19.90 | |
Outstanding at September 30, 2024 | |
| 953,640 | | |
| 5.04 | | |
$ | 12.75 | |
| |
| | | |
| | | |
| | |
Unvested at September 30, 2024 | |
| 102,499 | | |
| 4.35 | | |
$ | 4.23 | |
Vested and exercisable at September 30, 2024 | |
| 851,141 | | |
| 5.12 | | |
$ | 13.77 | |
During the nine months ended
September 30, 2023, upon termination of certain employees, the Company accelerated the vesting of any unvested options held by the
employees pursuant to their employment agreements. This resulted in 55,816 options becoming immediately vested on the separation date
and $0.1 million in expense recognized by the Company.
During the three months ended
September 30, 2024 and September 30, 2023, the Company recognized $23,804 and $0.2 million, respectively, in share-based compensation
expense related to stock options. During the nine months ended September 30, 2024 and September 30, 2023, the Company recognized $0.1
million and $0.9 million, respectively, in share-based compensation expense related to stock options. Share-based compensation expense
is included in General and Administrative Expense on the Company’s condensed consolidated statements of operations. The unrecognized
share-based compensation expense at September 30, 2024 was $48,503 which will be recognized through the second quarter of 2025 assuming
the underlying grants are not cancelled or forfeited. The outstanding shares as of September 30, 2024 had an aggregated intrinsic
value of zero.
Note 15: Restricted Stock Units
Restricted stock units (“RSUs”)
are granted under the Company’s 2020 Plan. During the nine months ended September 30, 2024 and September 30, 2023, the Company granted
286,324 and 76,508 fully vested RSUs to the Company’s board members, employees, and consultants, with a fair market value of $