Kartoon Studios(TOON) - 2025 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The company's unaudited Q1 2025 financial statements show revenue growth to $9.5 million but a $6.6 million net loss, with declining assets and negative working capital Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Current Assets | | | | Cash | $2,263 | $7,879 | | Accounts Receivable, net | $7,562 | $11,982 | | Total Current Assets | $25,128 | $34,664 | | Total Assets | $71,701 | $85,467 | | Current Liabilities | | | | Accounts Payable | $5,963 | $11,954 | | Production Facilities, net | $7,376 | $9,220 | | Total Current Liabilities | $26,835 | $33,440 | | Total Liabilities | $41,644 | $49,007 | | Total Stockholders' Equity | $30,057 | $36,460 | - The company's working capital turned negative, from $1.2 million as of December 31, 2024, to negative $1.7 million as of March 31, 2025[39] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total Revenues | $9,504 | $6,078 | | Production Services | $6,572 | $2,763 | | Content Distribution | $1,981 | $2,329 | | Total Operating Expenses | $12,583 | $12,372 | | Loss from Operations | $(3,079) | $(6,294) | | Net Loss | $(6,591) | $(7,064) | | Net Loss Attributable to Kartoon Studios, Inc. | $(6,526) | $(7,045) | | Net Loss per Share (Basic & Diluted) | $(0.14) | $(0.20) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $(1,822) | $3,845 | | Net Cash Provided by (Used in) Investing Activities | $(1,186) | $2,560 | | Net Cash Used in Financing Activities | $(2,567) | $(7,891) | | Net Decrease in Cash and Restricted Cash | $(5,613) | $(1,332) | | Beginning Cash and Restricted Cash | $8,385 | $4,095 | | Ending Cash and Restricted Cash | $2,772 | $2,763 | Notes to Unaudited Condensed Consolidated Financial Statements - The company announced a $30.0 million joint venture with Catalyst Venture Partners for a new "Winnie-the-Pooh" project, with Catalyst providing full production financing[35] - The company recorded a $3.6 million loss on the revaluation of its equity investment in Your Family Entertainment AG (YFE) due to a decrease in YFE's stock price, with ownership at 44.8% as of March 31, 2025[61][98] - The company has two operating segments: Content Production and Distribution, generating $8.6 million in revenue, and Media Advisory and Advertising Services, generating $0.9 million in revenue for Q1 2025[120][121][123] - In Q1 2025, four customers accounted for 85.1% of total revenue, and three customers accounted for 53.2% of total accounts receivable, indicating significant customer concentration risk[52][53] - Subsequent to the quarter end, the fair value of the YFE investment continued to decline, with the share price dropping from €1.81 on March 31, 2025, to €1.19 on May 14, 2025[128] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 56% revenue growth to Production Services, despite tightened liquidity with a $5.6 million cash decrease and negative working capital, expecting future needs to be met by cost reductions and other initiatives Revenue by Segment (in thousands) | Revenue Source | Q1 2025 | Q1 2024 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Production Services | $6,572 | $2,763 | $3,809 | 138% | | Content Distribution | $1,981 | $2,329 | $(348) | (15)% | | Licensing and Royalties | $84 | $100 | $(16) | (16)% | | Media Advisory and Advertising Services | $867 | $886 | $(19) | (2)% | | Total Revenue | $9,504 | $6,078 | $3,426 | 56% | Operating Expenses (in thousands) | Expense Category | Q1 2025 | Q1 2024 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Marketing and Sales | $186 | $444 | $(258) | (58)% | | Direct Operating Costs | $6,684 | $4,325 | $2,359 | 55% | | General and Administrative | $5,713 | $7,603 | $(1,890) | (25)% | | Total Expenses | $12,583 | $12,372 | $211 | 2% | - The company's liquidity position weakened, with cash and restricted cash decreasing by $5.6 million to $2.8 million as of March 31, 2025, resulting in negative working capital of $1.7 million[145][149] - Management believes future cash needs can be met through cost reductions, working capital optimization, licensing advances, and potentially external sources like IRS tax credits or capital raises[148] - Other Expense, net, increased significantly to $3.4 million from $0.6 million in the prior year, primarily due to a $3.6 million loss on YFE equity revaluation and a $0.9 million loss on a debt settlement with YFE[144] Quantitative and Qualitative Disclosures About Market Risk The company is exempt from providing market risk disclosures due to its status as a "smaller reporting company" - The company is exempt from providing quantitative and qualitative disclosures about market risk because it qualifies as a "smaller reporting company"[163] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2025, due to a material weakness in IT General Controls, with a remediation plan expected to be completed in Q2 2025 - The CEO and CFO concluded that disclosure controls and procedures were ineffective as of March 31, 2025[165] - The ineffectiveness is due to a material weakness in Information Technology General Controls (ITGC), specifically related to inadequate design of user access controls and inadequate segregation of duties[166] - A remediation plan is in progress, including transitioning some administrative responsibilities to a third-party service provider, with completion expected in Q2 2025[167] PART II - OTHER INFORMATION Legal Proceedings The company faces ongoing legal proceedings, including a securities class action related to 'Rainbow Rangers' statements, stayed shareholder derivative actions, and a Section 16(b) lawsuit regarding alleged short-swing profits - In the ongoing securities litigation, most claims were dismissed, but a Section 10(b) claim regarding March 2020 'Rainbow Rangers' cartoon statements proceeds[172] - Several shareholder derivative lawsuits alleging breaches of fiduciary duty remain stayed pending the resolution of the main securities class action[179] - The company is a nominal defendant in a Section 16(b) lawsuit seeking to recover alleged short-swing profits from investors, with cross-motions for summary judgment pending[180] Risk Factors Key risks include a history of net losses, significant customer concentration, potential adverse impacts from U.S. trade policy changes, and a substantial stock overhang from outstanding shares and warrants - The company has a history of operating losses, incurring a net loss of $6.6 million for the three months ended March 31, 2025[185] - The business faces significant customer concentration risk, with four customers representing 85.1% of total revenue in Q1 2025[189] - Potential changes in U.S. trade policy, including tariffs on foreign-produced content, could adversely affect the business due to its animation production operations in Canada[187] - A large number of shares available for sale from stock, warrants (24.2 million), and options could create an "overhang" effect, potentially causing the stock price to decline[190][191] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported during the period - None[192] Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter - No directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter[195] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications under Sarbanes-Oxley Act Sections 302 and 906 - The report includes required certifications from the Chief Executive Officer and Chief Financial Officer[199]