Organization and Business |
6 Months Ended |
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Jun. 30, 2023 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Organization and Business | Organization and Business Organization and Nature of Business
Kartoon Studios, Inc. (formerly known as Genius Brands International, Inc.; “we,” “us,” “our,” or 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. These streaming services are available on Apple TV, Apple iOS, Android TV, Android mobile, Amazon Prime, Amazon Fire, Tubi, Roku, Comcast, Cox, Dish/Sling, Xumo, Pluto, Samsung Smart TVs, LG Smart TVs, as well as YouTube, among other platforms. The Company's in-house owned and produced animated shows include Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama starring Jennifer Garner, 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, HBO Max, Paramount+, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.
Through the Company’s investments in Germany’s Your Family Entertainment (“YFE”), a publicly traded company on the Frankfurt Exchange (RTV-Frankfurt), it has gained access to one of the largest animation catalogues in Europe with over 50 titles consisting of over 1,600 episodes, and a global distribution network which currently covers over 60 territories worldwide.
Through the ownership of Wow, the Company has 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”) and its Channel Frederator Network, the largest animation focused multi-channel network on YouTube with over 2,500 channels.
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”).
The Company also owns Beacon Media Group (“Beacon”), the largest media buying service for children in North America. Beacon represents over 30 major toy companies, including Playmobile, Bandai Toys, Bazooka and Moose Toys.
In addition, the Company owns the Canadian company Ameba Inc. (“Ameba”), which distributes SVOD service for kids and has become the focal point of revenue growth for TOON Media Networks’ subscription offering.
The Company and its affiliates provide world class animation production studios a catalogue representing thousands of hours of premium global content for children, a broadcast system for delivering that content and an in-house consumer products licensing infrastructure to fully exploit the content.
On June 23, 2023, the Company was renamed Kartoon Studios, Inc. On June 26, 2023, the Company transferred its listing to NYSE American LLC (“NYSE American”). In connection with listing on NYSE American, the Company voluntarily delisted from the Nasdaq Capital Market (“Nasdaq”). The Company’s common stock began trading on NYSE American under the new symbol “TOON” on June 26, 2023.Recent Developments
Common Stock
On February 6, 2023, the Company’s board of directors approved a 1-for-10 reverse stock split of the Company’s outstanding shares of common stock. The reverse stock split was effected on February 10, 2023 at 5:00 p.m. Eastern time. At the effective time, every 10 issued and outstanding shares of the Company’s common stock were converted into one share of common stock. Any fractional shares of common stock resulting from the reverse stock split were rounded up to the nearest whole post-split share and no shareholders received cash in lieu of fractional shares. The par value of each share of common stock remained unchanged. The reverse stock split proportionately reduced the number of shares of authorized common stock from 400,000,000 to 40,000,000 shares. The reverse stock split also applied to common stock issuable upon the exercise of the Company's outstanding warrants and stock options. The reverse stock split did not affect the authorized preferred stock of 10,000,000 shares. Unless noted, all references to shares of common stock and per share amounts contained in this Quarterly Report on Form 10-Q have been retroactively adjusted to reflect a 1-for-10 reverse stock split.
Exercise of 2021 Warrants and Issuance of New Warrants
On June 26, 2023, the Company entered into warrant exercise inducement offer letters (the “Letter Agreements”) with certain existing institutional and accredited investors pursuant to which such investors agreed to exercise for cash certain warrants issued by the Company in January 2021 (the “2021 Warrants”) to purchase 2,311,550 shares of common stock (the “Exercise”). To induce the Exercise by holders of the 2021 Warrants, the Company also amended the exercise price of the 2021 Warrants from $23.70 per share (as adjusted pursuant to a 1-for-10 reverse stock split of our outstanding shares of common stock effected on February 10, 2023) to $2.50 per share pursuant to the terms of the 2021 Warrants. In consideration for the Exercise, the exercising holders received warrants to purchase up to 4,623,100 shares of common stock, and The Special Equities Group, LLC, a division of Dawson James Securities, which acted as the warrant solicitation agent for the Exercise, received a warrant to purchase up to 161,809 shares of common stock (collectively, the “Warrants”). Prior to closing of the Exercise, the Company had 32,755,748 shares of common stock outstanding. Following the repricing of the 2021 Warrants, certain 2021 Warrants were exercised for an aggregate of 2,311,550 shares, resulting in 35,067,298 outstanding shares. Therefore, the issuance of 4,784,909 shares of common stock upon exercise of the Warrants would have constituted an excess of 19.99% of the outstanding shares of common stock of the Company (determined as of the date of, and without regard for, the issuance of the Warrants and the shares issued upon exercise of the repriced 2021 Warrants). The Warrants will be exercisable at any time at a price per share of $2.50 upon approval by the Company’s shareholders of (a) a proposal to approve an amendment to the articles of incorporation to increase the authorized shares of common stock from 40,000,000 shares to 190,000,000 shares with a corresponding increase in the total number of authorized shares of capital stock of the Company from 50,000,000 shares to 200,000,000 shares (the “Share Increase Proposal”) and (b) approve, in accordance with 713(A) of the NYSE American Company Guide, the issuance of more than 19.99% of the Company’s outstanding common stock upon the exercise of the Warrants (the “Warrant Exercise Proposal” and together with the Share Increase Proposal, the “Proposals”). The Company is holding its annual shareholder meeting on August 25, 2023, at which the Company will seek the shareholders approval of the Proposals. The Warrants have a term of exercise of five years from the date of Shareholder Approvals. Pursuant to the Letter Agreements, the Company filed a registration statement on Form S-3 covering the resale of the shares of common stock issuable upon the exercise of the Warrants on July 26, 2023, which registration statement is currently pending with the Securities and Exchange Commission (“SEC”).
Liquidity
As of June 30, 2023, the Company had cash and cash equivalents of $4.8 million, which decreased by $2.6 million as compared to December 31, 2022. The decrease was primarily due to cash used in financing activities of $27.9 million, primarily due to repayment of the margin loan, net proceeds, offset by the cash received from the warrant exchange and $10.6 million used in operating activities. The cash used was offset by cash provided by sales and maturities of marketable securities of $34.2 million.
As of June 30, 2023, the Company held available-for-sale marketable securities with a fair value of $49.5 million, which decreased by $34.2 million as compared to December 31, 2022 due to sales and maturities during the six months
ended June 30, 2023. The available-for-sale securities consist principally of corporate and government debt securities and are also available as a source of liquidity.
The Company borrowed an additional $8.6 million from its investment margin account during the six months ended June 30, 2023 and repaid $41.8 million primarily with cash received from sales and maturities of marketable securities. During the six months ended June 30, 2023, the borrowed amounts were primarily used for operational costs. The interest rates for the borrowings fluctuate based on the Federal Funds Rate plus 0.65%. The weighted average interest rates were 0.67% and 1.66% on average margin loan balances of $44.2 million and $27.1 million as of June 30, 2023 and December 31, 2022, respectively. The Company incurred interest expense on the loan of $0.6 million and $0.2 million during the three months ended June 30, 2023 and June 30, 2022, respectively. The Company incurred interest expense on the loan of $1.3 million and $0.2 million during the six months ended June 30, 2023 and June 30, 2022, respectively. The investment margin account borrowings do not mature but are collateralized by the marketable securities held by the same custodian and the custodian can issue a margin call at any time, effecting a payable on demand loan. Due to the call option, the margin loan is recorded as a current liability on the Company’s condensed consolidated balance sheets. As of June 30, 2023 and December 31, 2022, the Company’s margin loan balances were $27.6 million and $60.8 million, respectively.
The Company is subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility, revolving equipment lease line and treasury risk management facility that have an aggregate total outstanding balance of $6.7 million USD ($8.9 million CAD). The Company was in technical violation of two financial covenants requiring a minimum fixed charge ratio and a maximum senior funded debt to EBITDA ratio as of June 30, 2023. 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 treasury risk management facility can be called at anytime by the lender as per the original terms of the facilities. The risk of the lender demanding repayment can be deemed greater due to the breach of covenants, however, at the time the financial statements were available for issuance, the lender has not provided the Company with a formal notification of a covenant breach.
Historically, the Company has incurred net losses. For the three months ended June 30, 2023 and June 30, 2022, the Company reported net losses of $15.2 million and $13.3 million, respectively. For the six months ended June 30, 2023 and June 30, 2022, the Company reported net losses of $40.0 million and $17.9 million, respectively. The Company reported net cash used in operating activities of $10.6 million and $17.5 million for the six months ended June 30, 2023 and June 30, 2022, respectively. As of June 30, 2023, the Company had an accumulated deficit of $681.4 million and total stockholders’ equity of $87.5 million. As of June 30, 2023, the Company had current assets of $91.6 million, including cash and cash equivalents of $4.8 million and marketable securities of $49.5 million, and current liabilities of $77.2 million. The Company had working capital of $14.4 million as of June 30, 2023, compared to working capital of $28.6 million as of December 31, 2022.
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