UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
Registrant’s telephone
number, including area code:
______________________________
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of Exchange where registered |
| The |
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.
Indicate by check mark whether the registrant
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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 | |
| Smaller reporting company | |||
| Emerging growth company |
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
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As of November 13, 2024, the registrant had shares of common stock outstanding.
Kartoon Studios, Inc.
FORM 10-Q
Table of Contents
| 2 |
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 | $ | $ | ||||||
| Investments in Marketable Securities (amortized cost of $ | ||||||||
| Accounts Receivable (net of allowance of $ | ||||||||
| Tax Credits Receivable (net of allowance of $ | ||||||||
| Notes and Accounts Receivable from Related Party | ||||||||
| Other Receivable | ||||||||
| Prepaid Expenses and Other Assets | ||||||||
| Total Current Assets | ||||||||
| Noncurrent Assets: | ||||||||
| Property and Equipment, net | ||||||||
| Operating Lease Right-of-Use Assets, net | ||||||||
| Finance Lease Right-of-Use Assets, net | ||||||||
| Film and Television Costs, net | ||||||||
| Investment in Your Family Entertainment AG | ||||||||
| Intangible Assets, net | ||||||||
| Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | $ | ||||||
| Participations Payable | ||||||||
| Accrued Expenses | ||||||||
| Accrued Salaries and Wages | ||||||||
| Deferred Revenue | ||||||||
| Margin Loan | ||||||||
| Production Facilities | ||||||||
| Bank Indebtedness | ||||||||
| Current Portion of Operating Lease Liabilities | ||||||||
| Current Portion of Finance Lease Liabilities | ||||||||
| Warrant Liability | ||||||||
| Due to Related Party | ||||||||
| Other Current Liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Noncurrent Liabilities: | ||||||||
| Deferred Revenue | ||||||||
| Operating Lease Liabilities, Net Current Portion | ||||||||
| Finance Lease Liabilities, Net Current Portion | ||||||||
| Deferred Tax Liability, net | ||||||||
| Other Noncurrent Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 19) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred Stock, $ par value, shares authorized, as of September 30, 2024 and December 31, 2023 | ||||||||
| 0% Series A Convertible Preferred Stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 2024 and December 31, 2023 | ||||||||
| Series B Preferred Stock, $ par value, share authorized, share issued and outstanding as of September 30, 2024 and December 31, 2023 | ||||||||
| Series C Preferred Stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 2024 and December 31, 2023 | ||||||||
| Common Stock, $ par value, shares authorized, and shares issued and and outstanding as of September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional Paid-in Capital | ||||||||
| Treasury Stock at Cost, and , shares of common stock as of September 30, 2024 and December 31, 2023, respectively | ( | ) | ( | ) | ||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Accumulated Other Comprehensive Loss | ( | ) | ( | ) | ||||
| Total Kartoon Studios, Inc. Stockholders' Equity | ||||||||
| Non-Controlling Interests in Consolidated Subsidiaries | ||||||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
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 | $ | $ | $ | $ | ||||||||||||
| Content Distribution | ||||||||||||||||
| Licensing & Royalties | ||||||||||||||||
| Media Advisory & Advertising Services | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Marketing and Sales | ||||||||||||||||
| Direct Operating Costs | ||||||||||||||||
| General and Administrative | ||||||||||||||||
| Impairment of Property and Equipment | ||||||||||||||||
| Impairment of Intangible Assets | ||||||||||||||||
| Impairment of Goodwill | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss Before Income Tax Benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income Tax Benefit | ||||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Attributable to Non-Controlling Interests | ||||||||||||||||
| Net Loss Attributable to Kartoon Studios, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss per Share (Basic) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss per Share (Diluted) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Shares Outstanding (Basic) | ||||||||||||||||
| Weighted Average Shares Outstanding (Diluted) | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Change in Accumulated Other Comprehensive Income (Loss): | ||||||||||||||||
| Change in Unrealized Gain on Marketable Securities | ||||||||||||||||
| Realized Losses on Marketable Securities Reclassified from AOCI into Earnings | ||||||||||||||||
| Foreign Currency Translation Adjustments | ( | ) | ( | ) | ||||||||||||
| Total Change in Accumulated Other Comprehensive Loss | ||||||||||||||||
| Total Comprehensive Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Attributable to Non-Controlling Interests | ||||||||||||||||
| Total Comprehensive Net Loss Attributable to Kartoon Studios, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Issuance of Common Stock for Services | – | – | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | – | – | |||||||||||||||||||||||||||||||||||||||
| Share Based Compensation | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net Loss | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Issuance of Common Stock for Services | – | – | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | – | ||||||||||||||||||||||||||||||||||||||||
| Proceeds from Securities Purchase Agreement, Net | – | – | |||||||||||||||||||||||||||||||||||||||
| Share Based Compensation | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net Loss | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Issuance of Common Stock for Services | – | – | |||||||||||||||||||||||||||||||||||||||
| Reclassification Related to Reverse Stock Split | – | ( | ) | – | – | ||||||||||||||||||||||||||||||||||||
| Share Based Compensation | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Net Loss | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| 6 |
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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Fractional Shares Issued Upon Reverse Stock Split | – | – | |||||||||||||||||||||||||||||||||||||||
| Share Based Compensation | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Net Loss | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, March 31. 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Issuance of Common Stock for Services | – | – | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Proceeds From Warrant Exchange, net | – | – | |||||||||||||||||||||||||||||||||||||||
| Share Based Compensation | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Net Loss | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Issuance of Common Stock for Services | – | – | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Share Based Compensation | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net Loss | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
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 | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
| Amortization of Film and Television Costs | ||||||||
| Depreciation and Amortization of Property, Equipment & Intangible Assets | ||||||||
| Amortization of Right-of-Use Asset | ||||||||
| Amortization of Premium on Marketable Securities | ||||||||
| Share-Based Compensation Expense | ||||||||
| Impairment of Film and Television Costs | ||||||||
| Impairment of Intangible Assets | ||||||||
| Impairment of Goodwill | ||||||||
| Impairment of Property and Equipment | ||||||||
| Deferred Income Taxes | ( | ) | ||||||
| Loss on Early Lease Termination | ||||||||
| Marketing Expenses in Exchange for Stock | ||||||||
| (Gain) Loss on Revaluation of Equity Investments in Your Family Entertainment AG | ( | ) | ||||||
| Unrealized (Gain) Loss on Foreign Currency of Equity Investments in Your Family Entertainment AG | ( | ) | ||||||
| Gain on Revaluation of Warrants | ( | ) | ( | ) | ||||
| Realized Loss on Marketable Securities | ||||||||
| Warrant Incentive Expense | ||||||||
| Stock Issued for Services | ||||||||
| Credit Loss Expense | ||||||||
| Other Non-Cash Items | ( | ) | ||||||
| Decrease (Increase) in Operating Assets: | ||||||||
| Accounts Receivable | ||||||||
| Other Receivable | ( | ) | ||||||
| Tax Credits Earned (less capitalized) | ( | ) | ( | ) | ||||
| Tax Credits Received | ||||||||
| Film and Television Costs, net | ( | ) | ( | ) | ||||
| Prepaid Expenses and Other Assets | ( | ) | ( | ) | ||||
| Increase (Decrease) in Operating Liabilities: | ||||||||
| Accounts Payable | ( | ) | ( | ) | ||||
| Accrued Salaries & Wages | ( | ) | ( | ) | ||||
| Accrued Expenses | ( | ) | ||||||
| Accrued Production Costs | ||||||||
| Participations Payable | ( | ) | ( | ) | ||||
| Deferred Revenue | ( | ) | ||||||
| Lease Liability | ( | ) | ( | ) | ||||
| Due to Related Party | ( | ) | ||||||
| Other Liabilities | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Repayments from/(Loans to) Related Party for Note Receivables | ( | ) | ||||||
| Proceeds from Principal Collections on Marketable Securities | ||||||||
| Proceeds from Sales and Maturities of Marketable Securities | ||||||||
| Purchase of Property & Equipment | ( | ) | ( | ) | ||||
| Net Cash Provided by Investing Activities | ||||||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from Margin Loan | ||||||||
| Repayments of Margin Loan | ( | ) | ( | ) | ||||
| Proceeds from Production Facilities | ||||||||
| Repayment of Production Facilities | ( | ) | ( | ) | ||||
| (Repayments of )/Proceeds from Bank Indebtedness, net | ( | ) | ||||||
| Proceeds from Securities Purchase Agreement | ||||||||
| Principal Payments on Finance Lease Obligations | ( | ) | ( | ) | ||||
| Debt Issuance Costs | ( | ) | ( | ) | ||||
| Shares Withheld for Taxes on Vested Restricted Shares | ( | ) | ||||||
| Payment for Warrant Put Option Exercise | ( | ) | ||||||
| Net Cash Used in Financing Activities | ( | ) | ( | ) | ||||
| Effect of Exchange Rate Changes on Cash | ||||||||
| Net Increase (Decrease) in Cash | ( | ) | ||||||
| Beginning Cash | ||||||||
| Ending Cash | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Cash Paid for Interest | $ | $ | ||||||
| Non-Cash Financing and Investing Activities | ||||||||
| Leased Assets Obtained in Exchange for New Finance Lease Liabilities | $ | $ | ||||||
| Warrants Issued for Services | $ | $ | ||||||
| Warrant Modification | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 8 |
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
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
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.
| 9 |
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
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 $
On June 21, 2024, the Company
announced the launch of “Winnie-the-Pooh” on the Kartoon Channel through a $
Liquidity, Going Concern, and Capital Resources
As of September 30, 2024,
the Company had cash of $ million, which increased by $ million as compared to December 31, 2023. The increase was primarily
due to cash provided by investing activities of $ million, offset by cash used in financing activities of $ million and cash used
for operating activities of $ million. The cash provided by investing activities was primarily due to sales of marketable securities
of $.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 $
As of September 30, 2024,
the Company held available-for-sale marketable securities with a fair value of $
As of September 30, 2024
and December 31, 2023, the Company’s margin loan balance was $
| 10 |
For the three months ended
September 30, 2024 and September 30, 2023, the Company incurred interest expense on the margin loan of $
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 $
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 $
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 $ million and $ million, respectively. For the nine months ended September 30, 2024 and September 30, 2023, the Company
reported net losses of $ million and $ million, respectively. The Company reported net cash used in operating activities of $
million and net cash used in operating activities of $ 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 $ million primarily due to approximately $
| 11 |
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
$
For
the three and nine months ended September 30, 2024, the Company recorded a realized gain
of $
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 $
Tax Credits Receivable
As of September 30, 2024 and December 31, 2023, $ million and $ million, respectively, in current tax credit receivables related to Wow’s film and television productions were recorded, net of $ million and $ 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.
| 12 |
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 $
The Company has a managed
account with a financial institution. The managed account maintains its investments in marketable securities of approximately $
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
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
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
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
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):
| Level 1 | Level 2 | Total Fair Value | ||||||||||
| Investments in Marketable Securities: | ||||||||||||
| Corporate Bonds | $ | $ | $ | |||||||||
| U.S. agency and government sponsored securities | ||||||||||||
| U.S. states and municipalities | ||||||||||||
| Total | $ | $ | $ | |||||||||
| 13 |
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
During the three months ended
September 30, 2024 and September 30, 2023, SLU generated a net loss of $
| 14 |
Note 4: Investment in Equity Interest
As of September 30,
2024 and December 31, 2023, the Company owned shares
of YFE. At the time of the initial investment in 2021, it was determined that based on the Company’s
The fair value as of September 30, 2024 decreased by net $
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 $ million and a market value of $
| Adjusted Cost | Unrealized Loss | Fair Value | ||||||||||
| Corporate Bonds | $ | $ | ( | ) | $ | |||||||
| U.S. Agency and Government Sponsored Securities | ( | ) | ||||||||||
| U.S. States and Municipalities | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
The investments in marketable
securities as of December 31, 2023 had an adjusted cost basis of $ million and a market value of $
| Adjusted Cost | Unrealized Loss | Fair Value | ||||||||||
| Corporate Bonds | $ | $ | ( | ) | $ | |||||||
| U.S. Treasury | ( | ) | ||||||||||
| U.S. Agency and Government Sponsored Securities | ( | ) | ||||||||||
| U.S. States and Municipalities | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
The Company holds
| 15 |
Realized losses of $
The contractual maturities of the Company’s marketable investments as of September 30, 2024 were as follows (in thousands):
| Fair Value | ||||
| Due within 1 year | $ | |||
| Due after 1 year through 5 years | ||||
| Total | $ | |||
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):
| As of | ||||||||
| September 30, 2024 | December 31, 2023 | |||||||
| Furniture and Equipment | $ | $ | ||||||
| Computer Equipment | ||||||||
| Leasehold Improvements | ||||||||
| Software | ||||||||
| Property and Equipment, gross | ||||||||
| Less Accumulated Depreciation | ( | ) | ( | ) | ||||
| Foreign Currency Translation Adjustment | ( | ) | ( | ) | ||||
| Property and Equipment, net | $ | $ | ||||||
During the three months ended
September 30, 2024 and September 30, 2023, the Company recorded depreciation expense of $
The Company did
Due to a lease termination
effective August 1, 2023, $
| 16 |
Note 7: Leased Right-of-Use Assets, net
Leased right-of-use assets consisted of the following (in thousands):
| As of | ||||||||
| September 30, 2024 | December 31, 2023 | |||||||
| Office Lease Assets | $ | $ | ||||||
| Equipment Lease Assets | ||||||||
| Right-of-Use Assets, Gross | ||||||||
| Accumulated Amortization | ( | ) | ( | ) | ||||
| Foreign Currency Translation Adjustment | ( | ) | ( | ) | ||||
| Leased Right-of-Use Assets, net | $ | $ | ||||||
As of September 30, 2024,
the weighted-average lease term for the Company’s operating leases was
Operating lease costs during
the three months ended September 30, 2024 and September 30, 2023 were $
During the three and nine
months ended September 30, 2024, the Company recorded right-of-use (“ROU”) amortization of $
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 $
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):
| Film and Television Costs, net as of December 31, 2023 | $ | |||
| Additions to Film and Television Costs | ||||
| Disposals | ( | ) | ||
| Film Amortization Expense | ( | ) | ||
| Foreign Currency Translation Adjustment | ( | ) | ||
| Film and Television Costs, net as of September 30, 2024 | $ |
| 17 |
During the three months ended
September 30, 2024 and September 30, 2023, the Company recorded film amortization expense of $
For the three and nine months
ended September 30, 2023, the Company recorded film and television impairment write-downs of $
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
| Weighted Average Remaining Amortization | As of | |||||||||||
| Period | September 30, 2024 | December 31, 2023 | ||||||||||
| Customer Relationships | $ | $ | ||||||||||
| Digital Networks | ||||||||||||
| Trade Names | ||||||||||||
| Intangible Assets, gross | ||||||||||||
| Less: Accumulated Amortization | ( | ) | ( | ) | ||||||||
| Foreign Currency Translation Adjustment | ( | ) | ( | ) | ||||||||
| Intangible Assets, net | $ | $ | ||||||||||
During the three months ended
September 30, 2024 and September 30, 2023, the Company recorded intangible asset amortization expense of $
The Company did
During the nine months ended
September 30, 2023, the Company recorded a total Impairment of Intangible Assets of $
| 18 |
Expected future amortization of intangible assets subject to amortization as of September 30, 2024 is as follows (in thousands):
| Fiscal Year: | ||||
| 2024 (remainder of year) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
As of September 30, 2024, $
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 $
Note 11: Margin Loan
As of September 30, 2024 and December 31,
2023, the Company’s margin loan balance was $ million and $ million, respectively. During the nine months ended September 30,
2024, the Company borrowed an additional $
For the three months ended
September 30, 2024 and September 30, 2023, the Company incurred interest expense on the margin loan of $
| 19 |
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 $
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 $
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
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
As
of September 30, 2024 and December 31, 2023, the Company had an outstanding balance of $
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
As
of September 30, 2024, the outstanding balance of $
| 20 |
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 $
As
of September 30, 2024, the outstanding balance of $
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 $
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 $
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 .
As of September 30, 2024 and December 31, 2023, there were and shares of common stock outstanding, respectively.
Preferred Stock
The Company has shares of preferred stock authorized with a par value of $ 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.
| 21 |
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 shares of Series A Convertible Preferred Stock outstanding. As of September 30, 2024 and December 31, 2023, there was share of Series B Preferred Stock outstanding. As of September 30, 2024 and December 31,2023, there were shares of Series C Preferred Stock outstanding.
Treasury Stock
During the nine months ended
September 30, 2024 and September 30, 2023, and shares of common stock with a cost of $
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 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 shares from 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 , however the remaining 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 and options, respectively. The options to purchase common stock had a weighted-average grant date fair market value of $.
| 22 |
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:
| Exercise Price | $ | |||
| Dividend Yield | % | |||
| Volatility | % | |||
| Risk-free interest rate | % | |||
| Expected life of options | years |
The following table summarizes the Company’s option activity:
| Stock Options | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price per Share | ||||||||||
| Outstanding at December 31, 2023 | $ | |||||||||||
| Granted | $ | |||||||||||
| Exercised | – | $ | ||||||||||
| Forfeited/Cancelled | ( | ) | – | $ | ||||||||
| Expired | ( | ) | – | $ | ||||||||
| Outstanding at September 30, 2024 | $ | |||||||||||
| Unvested at September 30, 2024 | $ | |||||||||||
| Vested and exercisable at September 30, 2024 | $ | |||||||||||
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 options becoming immediately vested on the separation date and $ million in expense recognized by the Company.
During the three months ended September 30, 2024 and September 30, 2023, the Company recognized $ and $ 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 $ million and $ 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 $ 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 .
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
and fully vested RSUs to the Company’s board members, employees, and consultants, with a fair market value of $
An aggregate of shares of common stock were issued during the nine months ended September 30, 2024 as a result of RSUs vested during the current and prior periods.
| 23 |
The following table summarizes the Company’s RSU activity:
| Restricted Stock Units | Weighted- Average Grant Date Fair Value per Share | |||||||
| Unvested at December 31, 2023 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | $ | |||||||
| Unvested at September 30, 2024 | $ | |||||||
During the three months ended September 30, 2024 and September 30, 2023, the Company recognized $ million and $ million, respectively, in share-based compensation expense related to RSUs. During the nine months ended September 30, 2024 and September 30, 2023, the Company recognized $ million and $ million, respectively, in share-based compensation expense related to RSU awards included in General and Administrative Expenses on the Company’s condensed consolidated statements of operations. The unvested share-based compensation as of September 30, 2024 was $ million which will be recognized through the fourth quarter of 2026 assuming the underlying grants are not cancelled or forfeited. The total fair value of shares vested during the nine months ended September 30, 2024 was $ million.
Note 16: Warrants
The following table summarizes the Company’s warrant activity:
| Warrants | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price per Share | ||||||||||
| Outstanding at December 31, 2023 | $ | |||||||||||
| Granted | $ | |||||||||||
| Exercised | – | $ | – | |||||||||
| Expired | ( | ) | – | $ | ||||||||
| Forfeitures | – | $ | – | |||||||||
| Outstanding at September 30, 2024 | $ | |||||||||||
| Exercisable at September 30, 2024 | $ | |||||||||||
| Exercisable at December 31, 2023 | $ | |||||||||||
As of September 30, 2024,
| 24 |
The Company has
The fair value of the outstanding derivative warrants was determined by using the Black-Scholes Merton option pricing model based on the following assumptions as of September 30, 2024:
| Market Price | $ | |||
| Exercise Price | $ | |||
| Dividend Yield | % | |||
| Volatility | % | |||
| Risk-free Interest Rate | % | |||
| Expected Life of Warrants | years |
Note 17: Supplemental Financial Statement Information
Other Income (Expense), net
Components of Other Income (Expense), net, are summarized as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Interest Expense (a) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Warrant Incentive Expense (b) | ( | ) | ||||||||||||||
| Gain on Revaluation of Warrants (c) | ||||||||||||||||
| Gain (Loss) on Revaluation of Equity Investment in YFE (d) | ( | ) | ( | ) | ( | ) | ||||||||||
| Realized Loss on Marketable Securities Investments (e) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (Loss) on Foreign Exchange (f) | ( | ) | ( | ) | ||||||||||||
| Interest Income (g) | ||||||||||||||||
| Loss on Early Lease Termination (h) | ( | ) | ( | ) | ||||||||||||
| Finance Lease Interest Expense (i) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (j) | ||||||||||||||||
| Other Income (Expense), net | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Three Months and Nine Months Ended September 30, 2024
| (a) | Interest Expense during the three and nine months ended September 30, 2024 primarily consisted of $ | |
| (b) | There was |
| 25 |
| (c) | The Gain on Revaluation of Warrants during the three and nine months ended September 30, 2024 is primarily related to the changes in fair value of the remaining outstanding warrant classified as a liability due to decreases in market price. | |
| (d) | As accounted for using the fair value option, the loss on the YFE investment revaluation during the three and nine months ended September 30, 2024, excluding the impact of foreign currency recorded separately, is a result of a decrease in YFE’s stock price as of September 30, 2024. | |
| (e) | The Realized Loss on Marketable Securities Investments during the three and nine months ended September 30, 2024 reflects the loss that will not be recovered from the investments due to selling securities prior to maturity. | |
| (f) | The Gain on Foreign Exchange during the three and nine months ended September 30, 2024 primarily related to the revaluation of the YFE investment, resulting in a gain of $ | |
| (g) | Interest Income during the three and nine months ended September 30, 2024 primarily consisted of interest income, net of premium amortization expense, recorded for the investments in marketable securities. | |
| (h) | There was no gain or loss on lease termination in 2024. | |
| (i) | The Finance Lease Interest Expense during the three and nine months ended September 30, 2024 represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line. | |
| (j) | Other during the three and nine months ended September 30, 2024 is primarily related to late fees from select clients on a payment plan. |
Three Months and Nine Months Ended September 30, 2023
| (a) | Interest expense during the three and nine months ended September 30, 2023 primarily consisted of $ | |
| (b) | The Warrant Incentive Expense is related to the $ | |
| (c) | The gain on warrant revaluation during the three months ended September 30, 2023 is primarily related to the $ | |
| (d) | As accounted for using the fair value option, the gain or loss on the YFE investment revaluation, excluding the impact of foreign currency recorded separately, is a result of the increases or decreases in YFE’s stock price as of the current reporting period when compared to the prior reporting period. | |
| (e) | The net realized loss on marketable securities reflects the loss that will not be recovered from the investments due to selling securities and issuers' prepayments of principals on certain mortgage-backed securities. | |
| (f) | The loss on foreign currency exchange during the three and nine months ended September 30, 2023 primarily related to the EURO weakening against the USD when compared to the prior reporting period. | |
| (g) | Interest Income during the three and nine months ended September 30, 2023 primarily consisted of interest income of $ | |
| (h) | The loss on early termination of lease is due to early termination of the Lyndhurst, NJ office lease, effective August 1, 2023. The loss includes fees of $ | |
| (i) | The finance lease interest expense represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line. | |
| (j) | Other during the three and nine months ended September 30, 2023 is primarily related to late fees from select clients on a payment plan. |
| 26 |
Note 18: Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.
ASC 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s condensed consolidated financial statements. ASC 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the condensed consolidated financial statements.
Income tax benefit was $
million for the nine months ended September 30, 2023, which related to impairments of certain intangible assets during the first
quarter of 2023 resulting in a decrease to the Deferred Tax Liability, net, balance. There were
Kartoon Studios, Inc. and its wholly-owned U.S. subsidiaries are subject to U.S. income taxes and file a consolidated tax return in the U.S. The Beacon Communications Group, Ltd., Ameba Inc. and WOW Unlimited Media Inc. are subject to Canadian income taxes on a stand-alone basis and file separate tax returns in Canada.
The Company files income tax returns in the U.S. federal jurisdiction and in the states of California, Florida, Massachusetts, New Jersey, New York, as well as Canada. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses were generated and carried forward to make adjustments up to the amount of the net operating losses. The Company is currently subject to U.S. federal, state and local and foreign tax examinations by tax authorities. The Company is no longer subject to audits by U.S. federal, state, local or foreign authorities for years prior to 2019.
Kartoon Studios, Inc. and its wholly-owned U.S. subsidiaries are subject to U.S. income taxes and file a consolidated tax return in the U.S. The Beacon Communications Group, Ltd., Ameba Inc. and WOW Unlimited Media Inc. are subject to Canadian income taxes on a stand-alone basis and file separate tax returns in Canada.
Note 19: Commitments and Contingencies
The following is a schedule of future minimum cash contractual obligations as of September 30, 2024 (in thousands):
| 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | ||||||||||||||||||||||
| Operating Leases | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Finance Leases | ||||||||||||||||||||||||||||
| Employment Contracts | ||||||||||||||||||||||||||||
| Consulting Contracts | ||||||||||||||||||||||||||||
| Debt | ||||||||||||||||||||||||||||
| Contractual obligation | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
The present value discount
of the minimum operating lease payments above was $
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Other Funding Commitments
The Company enters into various agreements associated with its individual properties. Some of these agreements call for the potential future payment of royalties or “profit” participations for either (i) the use of third party intellectual property, in which the Company is obligated to share net profits with the underlying rights holders on a certain basis as defined in the respective agreements, or (ii) services rendered by animation studios, post-production studios, writers, directors, musicians or other creative talent for which the Company is obligated to share with these service providers a portion of the net profits of the properties on which they have rendered services, as defined in each respective agreement.
Note 20: Related Party Transactions
Pursuant to his employment
agreement dated December 7, 2020, Andy Heyward, the Company’s CEO, is entitled to an executive producer fee of $
On August 25, 2022, Mr. Heyward’s
employment agreement was amended to include assignment of music royalties to Mr. Heyward for all musical compositions in which he provides
services as a composer for or on behalf of the Company, in the event that the Company acquires up to
On February 27, 2023, Mr.
Heyward’s employment agreement was further amended to provide him a creative producer fee of $
On July 21, 2020, the Company
entered into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal is Andy Heyward.
The Company entered into a customary merchandise license agreement with AHAA for the use of characters and logos related to Warren Buffett’s
Secret Millionaires Club and Stan Lee’s Mighty 7 in connection with certain products to be sold by AHAA. The terms
and conditions of such license are customary within the industry, and the Company earns an arm’s-length industry standard royalty
on all sales made by AHAA utilizing the licensed content. During the nine months ended September 30, 2024 and September 30, 2023, Mr.
Heyward has
On July 19, 2022, the Company entered into a Shareholder Loan Agreement with YFE in the amount of $ million (EURO million), accruing interest at the fixed annualized rate of %, with successive interest periods of due on the last day of each calendar quarter. The principal plus interest must be repaid by no later than June 30, 2026. As of September 30, 2024 and December 31, 2023, $ million and $ million, respectively, is included within Notes and Accounts Receivable from Related Party on the Company’s condensed consolidated balance sheets.
During 2022, the Company entered
into a sublease agreement with a related party to lease office in the general office space at 190 N. Canon Drive, Suite 400, Beverly
Hills, CA 90210. The monthly sublease payments were $
During the quarter ended September 30,
2024, the Company entered into a one year consulting agreement with a related party for office
space interior design services. The agreement is subject to an initial fee of $
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Note 21: Segment Reporting
The Company’s Chief Operating Decision Maker (“CODM”) uses revenue and net earnings to evaluate the profitability and performance of each operating segment. All other financial information is reviewed by the CODM on a condensed consolidated basis. The CODM does not evaluate the operating segments using asset information and it is therefore not disclosed. All expenses directly attributable to each reportable segment are included in the operating results for each segment. However, the CODM does not evaluate the expenses by operating segment and, therefore, it is not separately presented.
The following table presents the revenue and net earnings within the Company's operating segments (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Total Revenues: | ||||||||||||||||
| Content Production & Distribution | $ | $ | $ | $ | ||||||||||||
| Media Advisory & Advertising Services | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
| Net Loss: | ||||||||||||||||
| Content Production & Distribution | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Media Advisory & Advertising Services | ( | ) | ( | ) | ( | ) | ||||||||||
| Total Net Loss Attributable to Kartoon Studio, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Geographic Information
The following table provides information about disaggregated revenue by geographic area (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Total Revenues: | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Canada | ||||||||||||||||
| United Kingdom | ||||||||||||||||
| Other | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
Note 22: Subsequent Events
Subsequent to
September 30, 2024, the Company sold marketable securities and received proceeds of $
As of November 14, 2024, there were no additional subsequent events to report.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the three and nine months ended September 30, 2024 and September 30, 2023. Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission (the “SEC”), in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Risk Factors” below in this Quarterly Report on Form 10-Q (the “Form 10-Q”) and in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on April 9, 2024 (the “2023 Annual Report”), and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire. References to “we”, “us”,”our”, and the “Company” refer to Kartoon Studios, Inc.
Overview
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide readers of our condensed consolidated financial statements with the perspectives of management. This should allow the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends, and future prospects. It should be noted that the MD&A contains forward-looking statements that involve risks and uncertainties.
Our Business
Our Content Distribution business is focused on achieving scale across our networks, including Kartoon Channel!, Frederator, Ameba, and Kartoon Channel! Worldwide. Revenue growth will be driven by the continued focus on licensed content and exploitation of our current content such as Stan Lee, Shaq's Garage, Rainbow Rangers and many more. Continued profit growth will be realized the more we can scale the business across our platforms. In addition, we are looking at artificial intelligence (“AI”) tools to reduce the cost of operating distribution expenses such as dubbing expenses, video resolution upscaling and converting between 2D and 3D.
Our Production Services business is focused on creating high-quality original and for hire content in the most efficient way possible. To achieve this, our Mainframe Studios division, the main driver of this business, is exploring more ways to improve operations by adopting a more flexible and efficient approach. This includes collaborating with outsource partners and utilizing AI technology to streamline processes and drive efficiencies within the organization.
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Our Licensing & Royalties business has the most upside and potential for the Company. We are looking to take advantage of our incredible set of Stan Lee assets to drive consumer products - both digitally and physically. We will be focused on utilizing all of our IP assets further in 2024 and beyond.
Our Media Advisory & Advertising Services business is focused on driving deal flow opportunities and winning annuity business through retainers and projects. The team continues to focus on the toy business, but also expansion into tangential industries such as family and travel. The team has expanded their reach recently by leveraging their relationships with influencers to promote products and provide bespoke marketing initiatives for the clients.
Results of Operations
Our summary results for the three months ended September 30, 2024 and 2023 are below:
Revenue
| Three Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | % Change | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Production Services | $ | 4,898 | $ | 6,360 | $ | (1,462 | ) | (23)% | ||||||||
| Content Distribution | 2,348 | 2,562 | (214 | ) | (8)% | |||||||||||
| Licensing & Royalties | 37 | 153 | (116 | ) | (76)% | |||||||||||
| Media Advisory & Advertising Services | 1,425 | 997 | 428 | 43% | ||||||||||||
| Total Revenue | $ | 8,708 | $ | 10,072 | $ | (1,364 | ) | (14)% | ||||||||
Production Services revenue was generated specifically by Wow providing animation production services. Revenue for production services is recognized over time on a percentage of completion basis, therefore, as the projects are still in progress, we recognize revenue based upon the proportion of costs incurred cumulatively to total expected costs. Consequently, less revenue is recognized during the periods in which the projects are near completion or completed. Revenue for Wow production services for the three months ended September 30, 2024 was 23% lower than the Wow production services revenue recognized during three months ended September 30, 2023 primarily due to a lower volume of active service production projects in the current period versus the prior year period.
Revenue related to Content Distribution on advertisement supported video on demand (“AVOD”) and subscription video on demand (“SVOD”), including advertising sales for the three months ended September 30, 2024, decreased by 8% as compared to the three months ended September 30, 2023. This was primarily due to a decrease in Frederator’s creator network revenue of $0.2 million from YouTube due to reduced advertising spending and a decline in revenue per mille (“RPM”) advertising rates.
Revenue related to Licensing & Royalties for the three months ended September 30, 2024 decreased by 76% as compared to the three months ended September 30, 2023 primarily due to higher royalties earned in the prior year for owned IP and music royalties.
Revenue generated by Media Advisory & Advertising services for the three months ended September 30, 2024 increased by 43% as compared to the three months ended September 30, 2023 primarily due to higher net renewal activity and media purchases from clients.
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Expenses
| Three Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | % Change | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Marketing and Sales | $ | 290 | $ | 522 | $ | (232 | ) | (44)% | ||||||||
| Direct Operating Costs | 5,766 | 13,475 | (7,709 | ) | (57)% | |||||||||||
| General and Administrative | 5,199 | 8,679 | (3,480 | ) | (40)% | |||||||||||
| Total Expenses | $ | 11,255 | $ | 22,676 | $ | (11,421 | ) | (50)% | ||||||||
The decrease in Marketing and Sales expenses for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was primarily due to a decrease of $0.3 million in marketing expenses associated with company brand development.
Direct Operating Costs during the three months ended September 30, 2024 consisted primarily of salaries and related expenses for the animation production services employees of Wow and Frederator. Channel expenses, licensing and production of content costs, such as participation expenses related to profit sharing obligations with various animation studios, post-production studios, writers, directors, musicians or other creative talent that had rendered services and amortization, including any write-downs of film and television costs, make up the remainder of Direct Operating Costs. The decrease was primarily due to $6.3 million of film cost impairments and write-down of development projects for the three months ended September 30, 2023, a $1.1 million reduction in salary costs, net of tax credits, from a decline in headcount as a result of lower volumes of service production projects for the three months ended September 30, 2024, compared to the same period of the prior year, and a reduction of $0.2 million in participation estimates related to Wow owned IP.
The decrease in General and Administrative expenses for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was primarily due to a decrease in expenses of $1.9 million related to cost saving initiatives, a decrease of $0.6 million in litigation expenses mainly due to a litigation insurance provision recognized in the three months ended September 30, 2024, a decrease of $0.4 million in annual shareholder meeting expenses of holding the annual shareholder meeting during the quarter ended September 30, 2024 as opposed to earlier in the prior year, and lower depreciation expense of $0.3 million for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.
During the three months ended September 30, 2023, we reassessed our nonfinancial assets, including our definite-lived intangible assets, our indefinite-lived intangible assets and our remaining goodwill for impairment. As a result, we concluded that impairment charges to those assets were required. We concluded that there were no indications or triggering events that would further impair the assets during the three months ended September 30, 2024.
Our summary results for the nine months ended September 30, 2024 and 2023 are below:
Revenue
| Nine Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | % Change | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Production Services | $ | 12,756 | $ | 23,279 | $ | (10,523 | ) | (45)% | ||||||||
| Content Distribution | 7,002 | 8,815 | (1,813 | ) | (21)% | |||||||||||
| Licensing & Royalties | 235 | 362 | (127 | ) | (35)% | |||||||||||
| Media Advisory & Advertising Services | 3,177 | 2,820 | 357 | 13% | ||||||||||||
| Total Revenue | $ | 23,170 | $ | 35,276 | $ | (12,106 | ) | (34)% | ||||||||
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Production Services revenue was generated specifically by Wow providing animation production services. Revenue for production services is recognized over time on a percentage of completion basis, therefore, as the projects are still in progress, we recognize revenue based upon the proportion of costs incurred cumulatively to total expected costs. Consequently, less revenue is recognized during the periods in which the projects are near completion or completed. Revenue for Wow production services for the nine months ended September 30, 2024 was 45% lower than the Wow production services revenue recognized during nine months ended September 30, 2023 primarily due to a lower volume of active service production projects in the current period versus the prior year period.
Revenue related to Content Distribution on AVOD and SVOD, including advertising sales for the nine months ended September 30, 2024, decreased by 21% as compared to the nine months ended September 30, 2023. This was primarily due to a decrease in Frederator’s creator network revenue of $1.7 million from YouTube due to reduced advertising spending and a decline in RPM advertising rates.
Revenue related to Licensing & Royalties for the nine months ended September 30, 2024 decreased by 35% as compared to the nine months ended September 30, 2023 primarily due to higher royalties earned in the prior year for music royalties.
Revenue generated by Media Advisory & Advertising services for the nine months ended September 30, 2024 increased by 13% as compared to the nine months ended September 30, 2023 primarily due to higher net renewal activity, client fees, and media purchases from clients.
Expenses
| Nine Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | % Change | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Marketing and Sales | $ | 1,026 | $ | 2,457 | $ | (1,431 | ) | (58)% | ||||||||
| Direct Operating Costs | 15,936 | 34,301 | (18,365 | ) | (54)% | |||||||||||
| General and Administrative | 19,710 | 26,274 | (6,564 | ) | (25)% | |||||||||||
| Impairment of Property and Equipment | – | 120 | (120 | ) | —% | |||||||||||
| Impairment of Intangible Assets | – | 4,023 | (4,023 | ) | —% | |||||||||||
| Impairment of Goodwill | – | 11,287 | (11,287 | ) | —% | |||||||||||
| Total Expenses | $ | 36,672 | $ | 78,462 | $ | (41,790 | ) | (53)% | ||||||||
The decrease in Marketing and Sales expenses for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was primarily due to expenses incurred for stock issued for services of $1.3 million related to our Shaq’s Garage series that was not incurred during the current nine months ended September 30, 2024, and a decrease of $0.3 million in marketing expenses associated with company brand development
Direct Operating Costs during the nine months ended September 30, 2024 consisted primarily of salaries and related expenses for the animation production services employees of Wow and Frederator. Channel expenses, licensing and production of content costs, such as participation expenses related to profit sharing obligations with various animation studios, post-production studios, writers, directors, musicians or other creative talent that had rendered services and amortization, including any write-downs of film and television costs, make up the remainder of Direct Operating Costs. The decrease of 54% as compared to the nine months ended September 30, 2023 was primarily due to a $11.5 million reduction in salary costs, net of tax credits, as a result in a reduction in headcount due to a lower volume of service production projects for the nine months ended September 30, 2024, compared to the same period of the prior year, and $6.5 million of film cost impairments and write-down of development projects for the nine months ended September 30, 2024.
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The decrease in General and Administrative expenses for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was primarily due to a decrease of $2.0 million as a result of decreased use in equipment rentals and software licenses, a decrease of $1.5 million in share-based compensation expense, a decrease of $1.5 million in payroll related expenses, a decrease of $0.9 million in depreciation related to equipment leases that had ended prior to the current period, and a decrease of $0.6 million in general administrative expenses related to additional cost saving initiatives.
During the nine months ended September 30, 2023, we reassessed our nonfinancial assets, including our definite-lived intangible assets, our indefinite-lived intangible assets and our remaining goodwill for impairment. As a result, we concluded that impairment charges to those assets were required. We concluded that there were no indications or triggering events that would further impair the assets during the nine months ended September 30, 2024.
Other Expense, net
Components of Other Expense, net are summarized as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Interest Expense (a) | $ | (176 | ) | $ | (672 | ) | $ | (625 | ) | $ | (2,777 | ) | ||||
| Warrant Incentive Expense (b) | – | – | – | (12,664 | ) | |||||||||||
| Gain on Revaluation of Warrants (c) | 3 | 2,797 | 63 | 8,999 | ||||||||||||
| Gain (Loss) on Revaluation of Equity Investment in YFE (d) | (461 | ) | (2,325 | ) | (1,342 | ) | 1,102 | |||||||||
| Realized Loss on Marketable Securities Investments (e) | (148 | ) | (1,897 | ) | (505 | ) | (4,154 | ) | ||||||||
| Gain (Loss) on Foreign Exchange (f) | 999 | (637 | ) | 19 | (282 | ) | ||||||||||
| Interest Income (g) | 40 | 95 | 135 | 563 | ||||||||||||
| Loss on Early Lease Termination (h) | – | (232 | ) | – | (232 | ) | ||||||||||
| Finance Lease Interest Expense (i) | (20 | ) | (48 | ) | (74 | ) | (152 | ) | ||||||||
| Other (j) | 189 | 11 | 723 | 37 | ||||||||||||
| Other Income (Expense), net | $ | 602 | $ | (2,236 | ) | $ | (981 | ) | $ | (6,783 | ) | |||||
Three Months and Nine Months Ended September 30, 2024
| (a) | Interest Expense during the three and nine months ended September 30, 2024 primarily consisted of $0.2 million and $0.6 million, respectively, primarily due to interest incurred on production facilities and bank indebtedness. | |
| (b) | There was no warrant incentive expense in 2024. | |
| (c) | The Gain on Revaluation of Warrants during the three and nine months ended September 30, 2024 is primarily related to the changes in fair value of the remaining outstanding warrant classified as a liability due to decreases in market price. | |
| (d) | As accounted for using the fair value option, the loss on the YFE investment revaluation during the three and nine months ended September 30, 2024, excluding the impact of foreign currency recorded separately, is a result of a decrease in YFE’s stock price as of September 30, 2024. | |
| (e) | The Realized Loss on Marketable Securities Investments during the three and nine months ended September 30, 2024 reflects the loss that will not be recovered from the investments due to selling securities prior to maturity. |
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| (f) | The Gain on Foreign Exchange during the three and nine months ended September 30, 2024 primarily related to the revaluation of the YFE investment, resulting in a gain of $0.8 million and $0.2 million, respectively due to the EURO fluctuation to USD as compared to the prior reporting period. The remaining balance is related to remeasurements of transactions made in foreign currencies that are outstanding as of the condensed consolidated balance sheet date. | |
| (g) | Interest Income during the three and nine months ended September 30, 2024 primarily consisted of interest income, net of premium amortization expense, recorded for the investments in marketable securities. | |
| (h) | There was no gain or loss on lease termination in 2024. | |
| (i) | The Finance Lease Interest Expense during the three and nine months ended September 30, 2024 represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line. | |
| (j) | Other during the three and nine months ended September 30, 2024 is primarily related to late fees from select clients on a payment plan. |
Three Months and Nine Months Ended September 30, 2023
| (a) | Interest expense during the three and nine months ended September 30, 2023 primarily consisted of $0.2 million and $1.5 million of interest incurred on the margin loan, respectively, and $0.5 million and $1.3 million, respectively, of interest incurred on production facilities loans and bank indebtedness. | |
| (b) | The Warrant Incentive Expense is related to the $12.7 million fair value of Exchange Warrants that were issued during the three months ended June 30, 2023 to certain existing warrant holders in exchange for previously issued outstanding warrants. | |
| (c) | The gain on warrant revaluation during the three months ended September 30, 2023 is primarily related to the $2.7 million change in fair value as of the end of the current reporting period of the Exchange Warrants and SEG Warrants compared to the fair value as of the end of the prior reporting period due to a decrease in market price. The gain on warrant revaluation during the nine months ended September 30, 2023 is primarily related to the $8.8 million change in fair value as of the end of the current reporting period of the Exchange Warrants and SEG Warrants compared to the fair value as of the issuance date due to a decrease in market price. | |
| (d) | As accounted for using the fair value option, the gain or loss on the YFE investment revaluation, excluding the impact of foreign currency recorded separately, is a result of the increases or decreases in YFE’s stock price as of the current reporting period when compared to the prior reporting period. | |
| (e) | The net realized loss on marketable securities reflects the loss that will not be recovered from the investments due to selling securities and issuers' prepayments of principals on certain mortgage-backed securities. | |
| (f) | The loss on foreign currency exchange during the three and nine months ended September 30, 2023 primarily related to the EURO weakening against the USD when compared to the prior reporting period. | |
| (g) | Interest Income during the three and nine months ended September 30, 2023 primarily consisted of interest income of $0.1 million and $0.4 million, net of premium amortization expense, recorded for the investments in marketable securities, respectively. | |
| (h) | The loss on early termination of lease is due to early termination of the Lyndhurst, NJ office lease, effective August 1, 2023. The loss includes fees of $0.1 million and the write-down of assets and liabilities resulting in net, $0.1 million of loss. | |
| (i) | The finance lease interest expense represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line. | |
| (j) | Other during the three and nine months ended September 30, 2023 is primarily related to late fees from select clients on a payment plan. |
Liquidity, Going Concern, and Capital Resources
As of September 30, 2024, we 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 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. The cash provided by investing activities was primarily due to sales of marketable securities of $8.0 million.
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As of September 30, 2024, we 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, our margin loan balance was $1.1 million and $0.8 million, respectively. During the nine months ended September 30, 2024, we borrowed an additional $9.1 million from our 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 0.71% and 0.98%, respectively, on average margin loan balances of $7.5 million and $27.4 million as of September 30, 2024 and December 31, 2023, respectively.
For three months ended September 30, 2024 and September 30, 2023, we incurred interest expense on the loan of $11,070 and $0.2 million, respectively. We 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 our condensed consolidated balance sheets.
We are 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).
During March 2024, we 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, we have 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 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, we are not in compliance with a financial covenant to maintain a minimum liquidity threshold. Due to financial covenant violations in the second quarter of 2024, our remaining equipment lease agreements with the lender of $0.6 million (CAD 0.8 million) are subject to early repayment. During the three months ended September 30, 2024, the lender 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, we paid $0.1 million (CAD 0.1 million) to the lender as part of our repayment plan for the existing equipment lease line agreements. Subsequent to September 30, 2024, we paid $0.3 million (CAD 0.4 million) to the lender as part of our repayment plan for the equipment lease line. The amendment and covenant violation did not have any impact on our production facilities that are separate from the revolving demand facility and are used for financing specific productions.
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Working Capital
As of September 30, 2024, we had total current assets of $37.2 million, including cash of $4.6 million and marketable securities of $4.1 million, and our total current liabilities were $33.7 million. We had working capital of $3.5 million as of September 30, 2024 as compared to working capital of $11.5 million as of December 31, 2023. The decrease of $8.0 million was primarily due to sales of marketable securities of $8.0 million, a decrease in accounts receivable and tax credits receivable of $14.0 million, partially offset by a decrease in accounts payable of $4.8 million and a decrease in production facilities and bank indebtedness of $8.9 million. During the nine months ended September 30, 2024, we met our immediate cash requirements through existing cash balances and through the sale of marketable securities. Additionally, we used equity and equity-linked instruments to pay for services and compensation. 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.
Comparison of Cash Flows for the Nine Months Ended September 30, 2024 and September 30, 2023
Our total cash as of September 30, 2024 and September 30, 2023 was $4.6 million and $3.9 million, respectively.
| Nine Months Ended September 30, | ||||||||||||
| 2024 | 2023 | Change | ||||||||||
| (in thousands) | ||||||||||||
| Net Cash Used in Operating Activities | $ | (1,127 | ) | $ | (20,168 | ) | $ | 19,041 | ||||
| Net Cash Provided by Investing Activities | 7,902 | 69,418 | (61,516 | ) | ||||||||
| Net Cash Used in Financing Activities | (6,444 | ) | (52,829 | ) | 46,385 | |||||||
| Effect of Exchange Rate Changes on Cash | 155 | 34 | 121 | |||||||||
| Net Increase (Decrease) in Cash | $ | 486 | $ | (3,545 | ) | $ | 4,031 | |||||
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Net Non-cash Expenses
Items necessary to reconcile from net loss to cash used in operating activities included net non-cash expenses of $5.9 million for the nine months ended September 30, 2024 as compared to net non-cash expenses of $37.6 million for the nine months ended September 30, 2023. The net decrease of $31.7 million in non-cash expenses was primarily due to the absence of the recognition of $21.6 million in impairment expenses of film and television costs, long-lived assets, intangible assets and goodwill, a decrease in warrant incentive expense of $12.7 million, a decrease of realized losses from marketable securities of $3.6 million, and a decrease in share-based compensation of $1.5 million. The decreases were partially offset by the nine months ended September 30, 2023 reconciling non-cash items of $8.9 million related to gains from revaluations of warrants.
Change in Operating Activities
The net change in operating asset and liability activities provided by operating activities of $8.1 million as of September 30, 2024 compared to the net change in operating asset and liability activities used by operating activities of $6.0 million as of September 30, 2023 was primarily due to an increase in net receipts of tax credits during the current year of $7.4 million as credits were received for production completed in the prior year, a decrease in deferred revenue of $8.0 million, an increase in accounts receivable, net of $2.6 million and a $2.9 million increase in accounts payable due to timing.
Change in Investing Activities
The decrease in cash provided by investing activities of $61.5 million was primarily due to a decrease in proceeds from the sales and maturities of marketable securities of $60.1 million during the nine months ended September 30, 2024 as a result of selling less marketable securities during the current period.
Change in Financing Activities
The decrease in cash used in financing activities of $46.4 million was primarily due to a decrease in repayments of our margin loan of $67.4 million, partially offset by less proceeds drawn from the margin loan and production facilities of $13.2 million, higher repayments during the current period, compared to proceeds from bank indebtedness during the prior year period, resulting in a net increase of cash used in financing of $2.8 million, and higher repayments of production facilities in the current year of $3.7 million.
Material Cash Requirements
We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. Our material cash requirements from known contractual and other obligations primarily relate to our debt and lease obligations and our employment and consulting contracts. The aggregate amount of future minimum purchase obligations under these agreements over the period of next five years is approximately $25.3 million as of September 30, 2024, of which $5.0 million could be owed within one year. Included in the amount that could be due within one year is the margin loan current balance of $1.1 million and revolving demand facility current balance of $0.6 million.
We plan to utilize our liquidity (as described above) to fund our material cash requirements.
As of September 30, 2024, we had $1.1 million in commitments for capital expenditures, related to equipment leases.
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Critical Accounting Estimates
The preparation of the financial statements and related disclosures in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2023 Annual Report, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2023 Annual Report describe the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures, as defined in Rule 13a-15(e), were not effective at the reasonable assurance level due to material weaknesses in our internal control over financial reporting which were disclosed in our 2023 Annual Report. Our management, including our Chief Executive Officer and Chief Financial Officer, has also concluded that as of December 31, 2023, March 31, 2024, and June 30, 2024, our disclosure controls and procedures, as defined in Rule 13a-15(e), were not effective at the reasonable assurance level due to material weaknesses in our internal control over financial reporting which were disclosed in our 2023 Annual Report.
Material Weakness in Internal Control over Financial Reporting
As disclosed in Item 9A, “Controls and Procedures” of our 2023 Annual Report, our management identified the following material weaknesses in our internal control over financial reporting:
| • | Inadequate design of user access provisioning/deprovisioning controls and inadequate segregation of duties on certain controls or processes; |
| • | Lack of specialized experts related to income tax areas; and |
| • | Inappropriate application of accounting standards related to warrant modifications |
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Notwithstanding the identified material weaknesses, our management believes the unaudited condensed financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with GAAP.
Management’s Plan to Remediate the Material Weakness
We continue to be committed to maintaining a strong internal control environment. In response to the identified material weaknesses, management has taken comprehensive actions to strengthen its internal controls and has been and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated.
Our plans for remediation include, but are not limited to, the efforts summarized below, which have been or are in the process of being implemented:
| • | Enhanced procedures for formal documented review and approval of journal entries; |
| • | Reorganized the accounting team members to ensure proper segregation of duties; |
| • | Implemented core financial reporting and financial close software systems; |
| • | Performed risk assessment procedures and improved the documentation of internal processes and controls; |
| • | Improved documentation over complex financial transactions; |
| • | Implemented additional procedures over assessment of cybersecurity and information technology general controls; |
| • | Increase the extent of oversight and verification checks included in operation of user access controls and processes; and |
| • | Continue to enhance review over financial reporting, financial operations, internal controls including segregation of duties; as well as improve tax analysis and fair value estimates. |
We will not be able to conclude whether these efforts will fully remediate the material weakness until the updated process has operated for a sufficient period of time and management has concluded, through testing, that such controls are operating effectively.
Changes in Internal Control over Financial Reporting
Other than the remediation efforts described above, there was no change in our internal controls over financial reporting that occurred during the quarter ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
As of September 30, 2024, there were no material pending legal proceedings to which the Company is a party or as to which any of its property is subject other than as described below.
Securities Litigation. As previously disclosed, the U.S. Court of Appeals for the Ninth Circuit issued an opinion earlier this year affirming in part and reversing in part the District Court’s prior dismissal of the securities litigation. The case was remanded to the District Court for further proceedings. In early June 2024, the District Court directed Defendants to file a renewed motion to dismiss focused on the matters that remain in the case. Consistent with that order, Defendants filed their renewed motion on July 29, 2024, and it is fully briefed. The District Court took the motion under submission on the briefs, and the parties are now awaiting the District Court’s decision.
As previously disclosed, the Company, its Chief Executive Officer Andy Heyward, and its former Chief Financial Officer Robert Denton were named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Central District of California and styled In re Genius Brands International, Inc. Securities Litigation, Master File No. 2:20-cv-07457 DSF (RAOx). Lead plaintiffs alleged generally that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by issuing allegedly false or misleading statements about the Company, initially over an alleged class period running from March into early July 2020. Plaintiffs sought unspecified damages on behalf of the alleged class of persons who invested in the Company’s common stock during the alleged class period. Defendants moved to dismiss lead plaintiffs’ amended complaint; and in a decision issued on August 30, 2021, the Court dismissed the amended complaint but granted lead plaintiffs a further opportunity to plead a claim.
In September 2021, lead plaintiffs filed a second amended complaint, naming the same defendants. The new complaint alleged again that the Company made numerous – depending on how one counted, more than two dozen -- false or misleading statements about the Company’s business and business prospects, this time over an expanded alleged class period that extended into March 2021; they again alleged that these misstatements violated Section 10(b) and 20(a) of the Exchange Act. Lead plaintiffs again sought unspecified damages on behalf of an alleged class of persons who invested in the Company’s common stock during the expanded alleged class period. In November 2021, the defendants filed a motion to dismiss the second amended complaint. On July 15, 2022, the Court issued a decision dismissing the second amended complaint in its entirety and with prejudice. On August 12, 2022, lead plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. After a full briefing of the appeal, a panel of the Court of Appeals held oral argument on the appeal on November 6, 2023, and took the matter under submission.
On April 5, 2024, the Appellate Court issued its opinion, affirming in part and reversing in part the decision of the District Court. The Appellate Court affirmed the dismissal of certain claims pertaining to Company statements where it found that Plaintiffs failed to adequately plead a 10(b) cause of action but reversed the lower court’s dismissal of claims related to four of the Company’s alleged misstatements, finding that, in three of those instances, the Plaintiffs adequately pleaded loss causation, and in one instance adequately alleged a misleading statement. The Court of Appeals did not address other elements of any claims based on these four complained-of statements, noting that the District Court should address those issues on remand. The matter was remanded to the District Court in May 2024. By order entered June 4, 2024, the Court directed the defendants to file a renewed motion to dismiss on a schedule to be proposed by the parties. As noted, Defendants filed that motion on July 29, 2024. Under an agreed, and court-ordered, briefing schedule, briefing of the motion extended into October 2024, and the District Court took the motion under submission without a hearing. The parties are awaiting the District Court’s decision. The Company cannot predict the timing or outcome of the renewed motion to dismiss Plaintiffs’ remaining claims based on the four remaining alleged misstatements, or the outcome of the case more generally.
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Shareholder Derivative Actions. Since the Company’s last quarterly report, there have been no developments in the shareholder derivative actions involving the Company. Related to the securities class action, the Company’s directors (other than Dr. Cynthia Turner-Graham, Michael Hirsh, and Stefan Piech), together with Messrs. Heyward and Denton and former director Michael Klein, have been named as defendants in several putative stockholder derivative lawsuits. As previously disclosed, these include a consolidated proceeding pending in the U.S. District Court for the Central District of California and styled In re Genius Brands Stockholder Derivative Litigation, Case No. 2:20-cv-08277 DSF (RAOx); an action filed in the Los Angeles County Superior Court captioned Ly, etc. v. Heyward, et al., Case No. 20STCV44611; and an additional case pending in the U.S. District Court for the District of Nevada, styled Miceli, etc. v. Heyward, et al., Case No. 3:21-cv-00132-MMD-WGC. While the allegations and legal claims vary somewhat among the derivative actions, they all generally allege that the defendants breached fiduciary duties owed to the Company. The plaintiffs, all alleged stockholders of the Company, purport to sue on behalf and for the benefit of the Company. Accordingly, the derivative plaintiffs seek no recovery from the Company. Instead, as a stockholder derivative action, the Company is named as a nominal defendant. Pursuant to agreements among the parties, the courts in all of the derivative lawsuits have stayed proceedings pending the outcome of the securities litigation. As the Company cannot predict the outcome of the securities litigation, it is likewise unable to predict the outcome of the shareholder derivative lawsuits.
Section 16(b) Litigation. As previously disclosed, the Company is also a nominal defendant in an action filed on January 11, 2022, in the U.S. District Court for the Southern District of New York and styled Todd Augenbaum v. Anson Investments Master Fund LP, et al., Case No. 1:22-cv-00249 AS. The action, which again purports to be brought on behalf and for the benefit of the Company, seeks the recovery under Section 16(b) of the Exchange Act of supposed short-swing profits allegedly realized by roughly a dozen persons and entities that participated as investors in certain of the Company’s private placements of securities in 2020. Plaintiff Augenbaum, who purports to be a Company stockholder, filed his lawsuit after issuing a demand to the Company’s Board of Directors asking that the Company sue the investor defendants. The Company rejected the demand in late December 2021, and Mr. Augenbaum sued a few weeks later, as Section 16(b) permits him to do. No Company officer or director is among the defendants. The defendant investors filed motions to dismiss the action. After full briefing, the court, by order entered March 30, 2023, granted the motion to dismiss with leave to amend. Plaintiff subsequently filed his First Amended Complaint on May 1, 2023. Defendants moved to dismiss again. After a full briefing and oral argument, the Court (with a new judge now sitting) denied the motion to dismiss by order entered on January 24, 2024. The parties then engaged in extensive fact discovery, which closed in October 2024. The parties are now proceeding with expert discovery, and dispositive motions are expected to be filed before year-end. The Court has not set a trial date. As noted, Plaintiff seeks no relief from the Company; indeed, he seeks monetary relief for the Company. In any event, the Company cannot predict the outcome of the case.
In connection with the Augenbaum lawsuit, two of the investor groups named as defendants (the “demanding defendants”) have made a demand on the Company for indemnification pursuant to terms of an indemnity provision of the securities purchase agreements under which they invested in the Company. The Company believes the indemnity provision to be inapplicable and has rejected the demands. The Company and the demanding defendants have entered into standstill agreements and the parties have agreed to defer resolution of the indemnification matter pending resolution of the underlying litigation. In addition, the Company’s placement agent for the offerings at issue, Special Equities Group (“SEG”), was subpoenaed by Mr. Augenbaum. Pursuant to its placement-agent agreement with the Company, which covers a relationship broader than the offerings at issue, SEG demanded indemnification from the Company for its legal fees to comply with that subpoena. While reserving its rights, the Company believes that SEG has an indemnity claim under the governing placement agent agreement that likely has more merit than the demanding defendants’ demands. The Company cannot predict whether other parties may issue indemnification demands, or the outcome of any future proceedings that might arise concerning the such demands.
Demand Letter. The Company received a demand letter from Dawson James Securities (“Dawson”) on or about April 22, 2024, alleging it was owed commissions and fees arising from the Company’s offering of securities announced on April 18, 2024. The Company disputes Dawson’s asserted entitlement to commissions and fees.
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In all of the above-mentioned active proceedings, the Company has denied and continues to deny any wrongdoing and intends to defend the claims vigorously. The Company maintains a program of directors’ and officers’ liability insurance that, subject to the insurers’ reservations of rights, has offset a portion of the costs of defending the securities class action litigation, and that the Company expects will afford coverage for some costs of the other shareholder litigation should any of those cases proceed.
| Item 1A. | Risk Factors |
We have incurred net losses since inception.
We have a history of operating losses and incurred net losses in each fiscal quarter since our inception. During the nine months ended September 30, 2024, we generated total revenues of $23.2 million and incurred a net loss of $15.0 million, while for the same period the previous year, we generated total revenue of $35.3 million and incurred a net loss of $51.7 million, respectively. For the year ended December 31, 2023, we generated total revenues of $44.1 million and incurred a net loss of $77.1 million, while for the previous year, we generated net revenue of $62.3 million and incurred a net loss of $45.6 million. These losses, among other things, have had an adverse effect on our results of operations, financial condition, stockholders’ equity, net current assets and working capital.
We will need to generate additional revenue and/or reduce costs to achieve profitability. We are generating revenues derived from our existing properties, properties in production, and new brands being introduced into the marketplace. However, the ability to sustain these revenues and generate significant additional revenues and reduce our expenses or achieve profitability will depend upon numerous factors some of which are outside of our control.
There is uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt about our ability to continue as a going concern.
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, we have financed its operations primarily through revenue generated from operations, loans and sales of our securities, and we expect to continue to seek and obtain additional capital in a similar manner. We have 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, we do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. Our ability sell securities registered on our registration statement on Form S-3 is limited until such time the market value of our 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 we can sell, under certain circumstances, will be limited by the NYSE American rules and regulations. There can be no assurance that we will be able to continue to raise funds through the sale of shares of common stock or issuance of debt. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of its existing stockholders 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 us, we will seek to reduce overhead costs and reduce its weekly cash obligations in the short term as needed. In addition, we can look to divest or bring in equity partners for our various divisions and bring in near term capital. No adjustments have been made to the presented condensed consolidated financial statements as a result of this uncertainty.
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We have incurred indebtedness that could adversely affect our operations and financial condition.
As of September 30, 2024, we and our subsidiaries have production loan facility obligations of approximately $8.7 million and advances outstanding of $0.6 million under our senior secured revolving credit facility. As of December 31, 2023, we and our subsidiaries have production loan facility obligations of approximately $15.3 million and advances outstanding of $2.9 million under our senior secured revolving credit facility. We also had an outstanding margin loan of $0.8 million secured by our marketable investment securities as of December 31, 2023. The facilities are guaranteed by us and the security reflects substantially all of our tangible and intangible assets including a combination of federal and provincial tax credits, other government incentives, production service agreements and license agreements. The facilities and the margin loan are generally repayable on demand and are subject to customary default provisions, representations and warranties and other terms and conditions.
Our level of debt could have adverse consequences on our business, such as making it more difficult for us to satisfy our obligations with respect to our other debt; limiting our ability to refinance such indebtedness or to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements; requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes; increasing our vulnerability to economic downturns and adverse developments in our business; exposing us to the risk of increased interest rates as certain of our borrowings are at fixed long term rates and or variable rates of interest; limiting our flexibility in planning for, and reducing our flexibility in reacting to, changes in the conditions of the financial markets and our industry; placing us at a competitive disadvantage compared to other, less leveraged competitors; increasing our cost of borrowing; and restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our existing and future indebtedness and exposing us to potential events of default (if not cured or waived) under covenants contained in our debt instruments.
We are currently in default under financial covenants under our revolving demand facility.
We were not in compliance with a financial covenant under the revolving demand facility as of September 30, 2024. 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 violations 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.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period under Rule 144, or shares issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and, in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. In general, under Rule 144, a non-affiliated person who has held restricted shares of our common stock for a period of six months may sell into the market all of their shares, subject to us being current in our periodic reports filed with the SEC.
As of September 30, 2024, approximately 37,303,946 shares of common stock are outstanding and unrestricted, out of the 39,555,161 shares of common stock issued, meaning they exclude shares held by insiders and can be freely traded on the open market. As of September 30, 2024, there were 6,926,952 warrants outstanding. Lastly, as of September 30, 2024, there are 953,640 shares of common stock underlying outstanding options granted, 2,385,247 shares, including vested and unvested, of common stock underlying outstanding restricted stock units (“RSUs”) and 1,832,734 shares reserved for issuance under our Kartoon Studios, Inc. 2020 Incentive Plan.
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To date, our revenues have come from a limited number of customers, making us dependent on those few customers.
During the three months ended September 30, 2024, we had four customers, whose total revenue exceeded 10% of the total condensed consolidated revenue. These customers accounted for 77.2% of the total revenue.
During the nine months ended September 30, 2024, we had three customers, whose total revenue exceeded 10% of the total condensed 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.
The loss of, or a significant reduction of business from, any of our primary customers will have a material adverse effect on our business, financial condition, and results of operation unless we are able to replace such customers with other primary customers.
We have identified material weaknesses in our internal control over financial reporting. Failure to remediate the material weaknesses or any other material weaknesses that we identify in the future could result in material misstatements in our financial statements.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, our management is required to report on the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Annually, we perform activities that include reviewing, documenting and testing our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to achieve and maintain an effective internal control environment, we could suffer misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could result in significant expenses to remediate any internal control deficiencies and lead to a decline in our stock price.
We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We cannot provide assurance that we have identified all, or that we will not in the future have additional, material weaknesses in our internal control over financial reporting. As a result, we may be required to implement further remedial measures and to design enhanced processes and controls to address deficiencies. If we do not effectively remediate the material weaknesses identified by management and maintain adequate internal controls over financial reporting in the future, we may not be able to prepare reliable financial reports and comply with our reporting obligations under the Exchange Act on a timely basis. Any such delays in the preparation of financial reports and the filing of our periodic reports may result in a loss of public confidence in the reliability of our financial statements, which, in turn, could materially adversely affect our business, the market value of our common stock and our access to capital markets.
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) Unregistered Sales of Equity Securities
We did not sell any equity securities during the quarter ended September 30, 2024 in transactions that were not registered under the Securities Act other than as previously disclosed in our filings with the SEC.
(b) Use of Proceeds
Not applicable.
(c) Issuer Purchases of Equity Securities
Not applicable.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
During the quarter ended September 30,
2024, none of the Company’s directors or officers
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| Item 6. | Exhibits |
EXHIBIT INDEX
| 3.1 | Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K, filed with the SEC on March 31, 2021) |
| 3.2 | Certificate of Change to the Articles of Incorporation of the Company, filed with the Secretary of State of the State of Nevada on February 9, 2023 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on February 10, 2023) |
| 3.3 | Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on August 19, 2019) |
| 3.4 | Amended and Restated Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock, filed with the Secretary of State of Nevada on November 21, 2019 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on November 21, 2019) |
| 3.5 | Certificate of Designation of Series B Preferred Stock (Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on April 12, 2022) |
| 3.6 | Articles of Merger of Kartoon Studios, Inc. into the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 27, 2023). |
| 3.7 | Certificate of Designation of Series C Preferred Stock of the Company, dated September 25, 2023 (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 8-A, filed on September 25, 2023) |
| 3.8 | First Amendment to the Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on September 25, 2023) |
| 3.9 | Certificate of Change to the Articles of Incorporation of the Company, filed with the Secretary of State of the State of Nevada on November 9, 2023 (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the SEC on November 14, 2023) |
| 31.1* | Section 302 Certification of Chief Executive Officer |
| 31.2* | Section 302 Certification of Chief Financial Officer |
| 32.1** | Section 906 Certification of Chief Executive Officer |
| 32.2** | Section 906 Certification of Chief Financial Officer |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted in inline XBRL and included in exhibit 101). |
__________
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Kartoon Studios, Inc. | ||
| November 14, 2024 | By: | /s/ Andy Heyward |
| Andy Heyward | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| November 14, 2024 | /s/ Brian Parisi | |
| Brian Parisi | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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