Kartoon Studios(TOON) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Q1 2024, highlighting decreased revenues but a significantly improved net loss due to lower impairment charges Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $41,011 | $57,109 | | Total Assets | $93,330 | $111,436 | | Total Current Liabilities | $34,885 | $45,640 | | Total Liabilities | $46,856 | $58,175 | | Total Stockholders' Equity | $46,474 | $53,261 | Condensed Consolidated Statement of Operations Highlights (in thousands, except per share data) | Account | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Total Revenues | $6,078 | $14,189 | | Total Operating Expenses | $12,372 | $36,185 | | Loss from Operations | $(6,294) | $(21,996) | | Net Loss Attributable to Kartoon Studios, Inc. | $(7,045) | $(23,828) | | Net Loss per Share (Basic & Diluted) | $(0.20) | $(0.74) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $3,845 | $(5,165) | | Net Cash Provided by Investing Activities | $2,560 | $14,648 | | Net Cash Used in Financing Activities | $(7,891) | $(12,157) | | Net Decrease in Cash | $(1,332) | $(2,667) | | Ending Cash | $2,763 | $4,765 | Notes to Condensed Consolidated Financial Statements These notes detail the company's structure, IP holdings, liquidity assessment, and a post-quarter capital raise, alongside segment performance - The company is a global content and brand management company that creates, produces, licenses, and broadcasts multimedia animated content for children, owning significant IP, including a controlling interest in Stan Lee Universe, LLC[27][31] - Despite a net loss of $7.1 million for the quarter and an accumulated deficit of $725.6 million, management has concluded that the company has sufficient marketable securities and investments to fund operations for the next 12 months[42] - Subsequent to the quarter end, on April 23, 2024, the company completed an initial closing of a registered direct offering, selling 3.9 million shares of common stock and 100,000 pre-funded warrants for aggregate gross proceeds of approximately $4.0 million[34][127] Revenue and Net Loss by Operating Segment (in thousands) | Segment | Revenue Q1 2024 | Revenue Q1 2023 | Net Loss Q1 2024 | Net Loss Q1 2023 | | :--- | :--- | :--- | :--- | :--- | | Content Production & Distribution | $5,192 | $13,233 | $(6,739) | $(23,274) | | Media Advisory & Advertising Services | $886 | $956 | $(306) | $(554) | | Total | $6,078 | $14,189 | $(7,045) | $(23,828) | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section analyzes Q1 2024 financial results, noting a significant revenue decrease offset by reduced operating expenses due to non-recurring impairment charges, and discusses liquidity Business Overview and Strategy This section outlines the company's strategic focus across its four business segments, emphasizing content distribution scaling, production efficiency, Stan Lee IP leverage, and media advisory expansion - Content Distribution: Focus on scaling networks like Kartoon Channel! and Frederator, and using AI tools to reduce operating costs such as dubbing and video upscaling[133] - Production Services: Mainframe Studios is adopting a more flexible approach by collaborating with outsource partners and utilizing AI to streamline processes[134] - Licensing & Royalties: The company sees significant potential in its Stan Lee assets to drive both digital and physical consumer products[135] Results of Operations Q1 2024 total revenue decreased by 57% to $6.1 million, primarily due to a 72% decline in Production Services, while total operating expenses decreased by 66% due to non-recurring impairment charges Revenue by Segment (in thousands) | Revenue Source | Q1 2024 | Q1 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Production Services | $2,763 | $9,886 | $(7,123) | (72)% | | Content Distribution | $2,329 | $3,301 | $(972) | (29)% | | Licensing & Royalties | $100 | $46 | $54 | 117% | | Media Advisory & Advertising Services | $886 | $956 | $(70) | (7)% | | Total Revenue | $6,078 | $14,189 | $(8,111) | (57)% | Operating Expenses (in thousands) | Expense Category | Q1 2024 | Q1 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Marketing and Sales | $444 | $245 | $199 | 81% | | Direct Operating Costs | $4,325 | $11,285 | $(6,960) | (62)% | | General and Administrative | $7,603 | $9,225 | $(1,622) | (18)% | | Impairment of Property and Equipment | $– | $120 | $(120) | (100)% | | Impairment of Intangible Assets | $– | $4,023 | $(4,023) | (100)% | | Impairment of Goodwill | $– | $11,287 | $(11,287) | (100)% | | Total Expenses | $12,372 | $36,185 | $(23,813) | (66)% | Liquidity and Capital Resources As of March 31, 2024, the company held $2.8 million in cash and $9.4 million in marketable securities, with improved operating cash flow, and management believes these resources are sufficient for the next twelve months - As of March 31, 2024, the company had cash of $2.8 million and available-for-sale marketable securities with a fair value of $9.4 million[147][148] - Working capital was $6.1 million as of March 31, 2024, compared to $11.5 million as of December 31, 2023, with the decrease primarily due to a decrease in the cash and marketable security position[152] Comparison of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $3,845 | $(5,165) | | Net Cash Provided by Investing Activities | $2,560 | $14,648 | | Net Cash Used in Financing Activities | $(7,891) | $(12,157) | Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," the company is exempt from providing quantitative and qualitative disclosures about market risk - As a "smaller reporting company," the company is not required to provide quantitative and qualitative disclosures about market risk[167] Controls and Procedures Management concluded disclosure controls were effective, but internal controls over financial reporting were not due to identified material weaknesses, for which a remediation plan is underway - Management concluded that disclosure controls and procedures were effective for the quarter ended March 31, 2024[168] - Management concluded that internal controls over financial reporting were not effective as of March 31, 2024, due to identified material weaknesses[172] - Material weaknesses identified include: inadequate design of user access controls and segregation of duties; lack of specialized experts for income tax; and inappropriate application of accounting standards for warrant modifications[173][176] - A remediation plan is in process, which includes enhancing review procedures, reorganizing the accounting team, implementing new financial systems, and improving documentation and oversight[174][177] PART II - OTHER INFORMATION Legal Proceedings The company is involved in several legal proceedings, including a securities class action lawsuit with a recent appellate reversal, related stayed derivative lawsuits, and a separate short-swing profits action - In a securities class action lawsuit, an Appellate Court affirmed in part and reversed in part a prior dismissal, remanding the matter to the U.S. District Court for further proceedings on the plaintiffs' remaining claims[183] - Several stockholder derivative lawsuits remain stayed pending the outcome of the securities class action[184] - The company is a nominal defendant in an action seeking recovery of alleged short-swing profits from certain investors under Section 16(b) of the Exchange Act, and discovery is now open after the court denied a motion to dismiss[185] Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023 - There have been no material changes to the Risk Factors set forth in the company's Annual Report on Form 10-K for the year ended December 31, 2023[187] Other Disclosures (Items 2-6) This section confirms no unregistered equity sales, no defaults on senior securities, no mine safety disclosures, and no Rule 10b5-1 trading arrangement changes by directors or officers - Item 2: No unregistered sales of equity securities and use of proceeds[188] - Item 3: No defaults upon senior securities[189] - Item 5: During the quarter, none of the Company's directors or officers adopted, modified or terminated a Rule 10b5-1 trading arrangement[191]