Kartoon Studios Inc. (TOON) Earnings Call Transcript & Summary

Greetings, and welcome to the Genius Brands International Business Update Call. It is now my pleasure to introduce your host, David Waldman, Investor Relations. Thank you, sir. You may begin.

Thank you. Good morning, everyone, and welcome to Genius Brands' Business Update Conference Call. On the call with us this morning is Andy Heyward, Chairman and CEO; as well as Bob Denton, Chief Financial Officer, Mike Jaffa; General Counsel and Senior Vice President of Business Affairs; and Jon Ollwerther, General Manager for Kartoon Channel! and Executive Vice President of Business Development. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (844) 589-8760 or [email protected]. Before I turn the call over to Genius Brands CEO, Andy Heyward, I would like to remind you that this call, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Genius Brands International, Inc. are, as such, forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from those anticipated by Genius Brands at this time. In addition, other risks are more fully described in Genius Brands' public filings with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov. On August 14, 2020, the company filed its Form 10-Q for the second quarter of 2020 with the SEC, and the company anticipates filing its Form 10-Q for the third quarter later today. Both documents as well as the company's registration statement on Form F-3 effective September 15, 2020, and the prospectus supplement dated October 28, 2020, and other public filings include disclosure of many risk factors relevant to our business that could cause actual results to differ materially from projections we may make today. Participants in this call should review those documents, including the risk disclosures in them. I would now like to turn the call over to Genius Brands CEO, Andy Heyward. Please go ahead, Andy.

Thank you, David. Today's update can be summarized through 5 important pillars of asset creation, that individually and in the aggregate, are actively moving forward and driving long-term value for Genius. They are Kartoon Channel!, Stan Lee Universe, our tentpole animated content brands, the Genius balance sheet and acquisitions, and I will speak to all of them right now. I want to start today with acquisitions by sharing that this morning, we announced the acquisition of ChizComm. With over $100 million in annual aggregated media spend, ChizComm is the largest single purchaser of children's media in North America. They spend more on children's advertising than anyone, including well-known advertisers like Hasbro, Mattel or Lego. The acquisition of ChizComm and ChizComm Beacon Media will be a transformational event for Genius brands. ChizComm today represents more than 30 major toy companies and has worked for some of the most powerful and iconic brands in the children, family media and toy industries. Once again, the acquisition of ChizComm will be a transformational event for Genius Brands. First, the ChizComm marketing agency will enable us to put rocket fuel in the growth of Kartoon Channel!, its viewership and ultimately, Kartoon Channel! revenues. As viewership grows, so does revenues alongside it, and that drives significant value, of course, for Genius. Second, the ChizComm media buying agency will provide us with additional standing as a content provider with our broadcast partners. Third, the ChizComm toy and gaming client base will provide Genius unusual access to the key companies that are the backbone of the children's consumer product business with billions of dollars of revenues and significant part driven by licensing of animated entertainment properties such as those created and offered by Genius Brands. Founded by Harold and Jennifer Chizik, the ChizComm management team is world-class. They have offices in Toronto, New Jersey and Los Angeles. Harold Chizik served as VP of Marketing Services for Spin Master Toys for years before starting the agency alongside Jennifer Chizik. Donna MacNeil, the Company President in Toronto, was publisher of Kidscreen, the leading trade journal in kid's media and highly regarded by everyone in the kid's media business. And Kathleen Campisano previously led the Barnes & Noble Toys and Games buying division with significant growth during a 10-year period before joining as CMO of ChizComm and running U.S. operations. The ChizComm acquisition will be strategic because it will not just be a valuable business in its own right, but it will enhance Genius' existing business of broadcasting, licensing and distribution, thus becoming a virtuous circle. As you know, we've raised capital in recent months in part because we wanted to be able to take advantage of strategic acquisition opportunities to unlock what we believe is significant value for Genius and its shareholders. We are using part of that cash to pay for ChizComm and a portion of the acquisition price is being funded with Genius Brands stock. Just as Pixar, Marvel and Lucasfilm are smart acquisitions that drove value forward for Disney, we equally see ChizComm as accretive, not dilutive and though smaller, of course, in the same vein driving value forward for Genius Brands now and for years to come. The second pillar I want to speak to today and what is going on there is the Kartoon Channel!. Since launching Kartoon Channel! on June 15, we've been laying the groundwork for a powerful kids distribution system and a valuable and growing asset to the company and its shareholders for years to come. By all metrics, we are rapidly moving forward. The aggregating of an unmatched library has been job #1. Our focus now moves to growing the audience. Our marketing team is hard at work executing plans to grow that audience in exciting ways to match the quality of programming we have acquired and are creating. When we launched Kartoon Channel!, we described it as like a Netflix for kids but free. And that hasn't changed. Like Netflix, we are an on-demand streaming programming service. But unlike Netflix, we are free, with no subscription fees. We're advertiser supported. And unlike Netflix, we're exclusively for kids. We expect Kartoon Channel! to become a profit center for Genius Brands going forward for years to come and believe it will prosper because of the caliber of the core content that we put on; the technology of how and where we deliver that content to children; and third, the extremely kid-friendly interface. For those of our shareholders who have not yet visited Kartoon Channel!, I encourage you to go to the site and see one of the many platforms where it is available. We remain focused on having programming for kids that is safe, positive, enriching, diverse, kid-friendly, parent-friendly and advertiser-friendly. Since our launch in June, we've debuted a brand-new architecture, which is now carried on a number of platforms, including Amazon Prime, Amazon Fire, Apple TV, Apple iOS, Android, Android Mobile, Roku, Comcast Cable, COX Cable, Tubi, Dish, Sling and online through kartoonchannel.com. In other words, Kartoon Channel! is now available virtually everywhere. Additionally, we have done a deal with the world's #1 TV manufacturer, Samsung, to carry the Kartoon Channel! app on the smart TVs. Theirs is the leading smart TV app platform, and the Kartoon Channel! app available -- is available on Samsung right now. We're in discussions with other manufacturers, and we expect to announce similar deals in the near future. Kartoon Channel! has seen steady organic growth, and we are finding that viewers are not just staying for a single episode, but they're watching multiple episodes in one sitting. I'm also pleased to report that Kartoon Channel! audience has been extremely well received. We have a 5-star rating in the Apple App Store, for example, versus even Disney+ with a 5 -- 4.5 rating. In September, we launched Kartoon Classroom! to coincide with back-to-school. Kartoon Classroom! is a sub-brand and offering on Kartoon Channel! for a digitally infused learning. We will also soon be launching a Kartoon Classroom! microsite, a website within a website, before the end of the year to help parents, daycare professionals and professional educators reinforce with their kids lessons taught in the shows. Each week, we continue to roll out new and compelling programs. In addition to existing series from the Genius Brands catalog, we are also selecting shorts and promotional episodes of our hit, Rainbow Rangers, also running on Nickelodeon; and Llama Llama, also running on Netflix. We've acquired proven and recognized brands, included Angry Birds; Babar; Yu-Gi-Oh; PAC-MAN; Pig On The Hill, which we did in partnership with Pierce Brosnan; and Mellodees from the hugely successful DJ Marshmello. We've also launched the Kartoon Channel! Movie of the Week with our first slate of films, including Stan Lee's Mighty 7, Beauty and the Beast, Snow White, Cinderella, Jack and the Beanstalk, and running this week, Hercules. The reception has been strong, and we will be shortly migrating these to the Kartoon Channel! Friday Night Family Fun Film. Kartoon Channel! now has several thousand episodes that have been acquired of high-quality children's content, with positive values and enriching stories. We have gender-neutral series for boys, for girls, for toddlers and for older kids. And many of which are for parental co-viewing as well. Nickelodeon was launched in 1979. Over the years, it grew and is the single most valuable asset in Viacom, today worth several billion dollars. Cartoon Network and Disney Channel followed similar trajectories for their parent companies, Warner Brothers and the Walt Disney Company. We cannot represent that we will enjoy these same successes, let alone that of Netflix and others, but kids' viewing habits today are migrating to digital networks, to YouTube and to apps, and not just on TV sets but also on computers, game platforms and cellphones. And that aggregation of platforms is where Kartoon Channel! lives because that is where today's kids are. Kartoon Channel! lives off advertising, not subscription fees. And we're excited that if you go to the channel, you will see that we've now brought on prominent kids advertisers, including McDonald's, Lego, Playmobil, and family-oriented advertisers like Wells Fargo. And because we live off advertising, not subscription fees, that is where the synergies with ChizComm Media become so extremely powerful for Genius. Moreover, the addition of marketing and media buying expertise now positions Genius to enjoy those synergies and fuel new opportunities with broadcast clients and toy companies for innovative offerings, reach and engagement in a rapidly evolving landscape as we fuel the growth of Kartoon Channel!. The third pillar I want to talk about today is our tentpole animation brands. There are 4 Genius Brands that I call tentpole animation brands. These are existing animated series and upcoming animated series. First is Rainbow Rangers, second is Llama Llama, third is Stan Lee's Superhero Kindergarten and fourth is Shaq's Garage. We consider these tentpole because they each have the possibility of breaking out and becoming substantial large businesses. Of course, no one knows which will thrive and which will not, so we have a portfolio approach of multiple brands. Our core brands share 3 attributes, which we feel advantage them over other content without them. The first is they are evergreen, which means like a Tom and Jerry or a Flintstones or Scooby Doo, they can live for generations, being relicensed again and again and again long after they've paid out their original cost of production. Second, they're international, which means they're not just products for the U.S. market, but rather also like a Tom and Jerry or Flintstones or Scooby Doo, they can live anywhere. They're global businesses. Third, they all have dual income streams. Not only have they valuable programs which continuously are licensed to broadcast and generate money from license fees, but they have a second income stream in consumer products. The characters have a second life in toys, video games, publishing, apparel, backpacks, sleepwear, bedding, school supplies, costumes and numerous categories of licensed products. In the case of Genius Brands, our core properties will ultimately reside on Kartoon Channel! and drive viewership forward there and build on the value of that asset, similar to Disney core brands like Mickey Mouse, Winnie The Pooh, and Duck Tales, reside on Disney Channel and Disney Channel Plus -- Disney+. Next, Rainbow Rangers. It's playing on Nickelodeon and Kartoon Channel!. Rainbow Rangers is now just coming into the market. Early products from Mattel are in Walmart, in Amazon and Target.com. Going beyond just toys, there are a significant number of licensed products in a variety of categories, many of which are already in the marketplace. The series is broadly distributed, and we are assigning international licensing agents as we speak. Due to COVID-19 and supply channel challenges, this took longer than we would like to see and it's still too early to get a read. However, we are pleased to see things moving forward. Our goal now for Rainbow Rangers is to add additional retail partners, both brick-and-mortar and online, and simultaneously work to build a global presence for the show through Kartoon Channel! and global partnerships. By the end of Christmas season, we'll have a good idea of the performance of product at retail and how big the brand can be. And we look forward to sharing that with you in the new year. Next is Llama Llama, which is on Netflix and Kartoon Channel!. Llama Llama is currently in an exclusive retail promotion with Kohl's with plush toys and books. Initial reports have been strong. We have over 50 Llama Llama licensed products in a broad range of categories. Over 30 million books have been sold since Llama Llama was first introduced, and it continues to be a top-selling series in children's literature. We see this as a brand that will grow and endure for many years. Stan Lee's Superhero Kindergarten will be playing on Amazon Prime and Kartoon Channel!. When Stan Lee created Spider-Man, he said, "With great power comes great responsibility." Years later when he created Superhero Kindergarten, he said, "With great power comes great mess." Stan Lee's Superhero Kindergarten was the last series created by the iconic Stan Lee. And it is simply crazy, superhero, kindergarten fun. It stars Arnold Schwarzenegger as Captain Fantastic, a former superhero now charged with teaching a special group of kids how to develop their superpowers. Starting with Arnold and Stan, there is nothing about this show that is not in the category of excellence. The head writer was the head writer of SpongeBob SquarePants and did some of the best stories ever written in children's television. Iconic film director John Landis, who did Blues Brothers, Three Amigos, Animal House, Coming to America, Beverly Hills Cop III, Trading Places, and Michael Jackson's Thriller, is the voice director for the series. The show is in the middle of production, and we will deliver first episodes teased next month. Arnold and John are in the recording studio weekly, doing their voice recordings. And we all agree they are, if I can say, fantastic. We have very high expectations for both the series and major consumer products worldwide. And we are currently in discussions with a major retailer to carry the toy line. The last series I want to take a moment to discuss is our recently announced Shaq's Garage. Shaq's Garage features a group of insanely imaginative vehicles owned by Shaquille O'Neal that get into larger-than-life adventures. For a long time, we've been talking to Shaquille about doing an animated series together, and we finally found the right concept. Let me describe it as Toy Story meets Hot Wheels meets Shaquille O'Neal. Shaq's Garage has the most amazing vehicles anyone has ever imagined. Not unlike Toy Story, nobody but our audience knows they are actually alive, with real personalities and real voices. Not even Shaq himself who only sees them at the beginning and ending of each episode before and after each adventure, unknowing that they lead lives as amazing as his own. We chose to do this series, first and foremost, because it was an opportunity to tell heartwarming stories with adventure, comedy, music and diversity. We also saw it as an opportunity in success to take an ownership position in a major category of the toy industry, vehicle play. It's no small fact to mention that Mattel's Hot Wheels does almost $1 billion annually in die-cast vehicle sales. The Disney movie Cars did several billion dollars of sales itself over a 4-year period in the die-cast vehicle category. We think that Shaq's Garage has every possibility to become a hit animated series and an important player in the vehicle play category, taking substantial market share with it. Shaquille is not just an NBA legend. He's one of the most sought after and successful businessmen in the country and beloved across all sectors. He's selective of the companies he gets in business with and has promotional and sponsorship relationships, including American Express, Kellogg's Frosted Flakes, Papa John's Pizza, Carnival Cruises, The General Insurance, et cetera, et cetera. We're proud to be among them, and that Shaquille O'Neal has now become a significant shareholder of Genius Brands. Shaq is fully committed to promoting Shaq's Garage using all of his fan base, social media and promotional tools to turn the series and the licensing program into a major success. The last pillar, I would say Pillar #4, I want to talk about is Stan Lee Universe. When we first announced the transaction to acquire the rights to the Stan Lee name, his likeness, his signature, consumer products and intellectual property rights, we described it as one of the last great prizes in Hollywood. Today, we believe this more than ever. After all, Stan Lee was the creator of more billion-dollar properties than anyone ever, including Spider-Man, X-Men, Iron Man, Black Panther, Guardians of the Galaxy, Captain America, Captain Marvel, The Incredible Hulk, Thor, The Avengers, so many more. In fact, Stan Lee created 5 of the top 12 box office hits of all time, including the #1 box office hit of all time, Avengers: Endgame. We have important things coming forth with this one-of-a-kind asset, and I am authorized to share today that we are now working with Marvel Studios on an important Stan Lee initiative, which we will be announcing shortly. Like everything that Stan Lee ever touched, I can assure all our shareholders, it will be significant, and the announcement will be worth the wait. The last pillar I want to talk about is our balance sheet. The balance sheet of Genius Brands is immaculate. We have 0 debt, a fact that very few companies anywhere can state. We have a war chest of over $100 million sitting in cash. As we seek smart acquisitions to accelerate the company's growth, we will use our cash, our shares and our balance sheet cautiously and judiciously to create value for our shareholders. We are building an important business, and the cleanliness of our balance sheet is one of our most important tools. Our shareholder base has expanded from individual retail shareholders to include a broad array of funds, including many premier funds, such as Vanguard; BlackRock; and CalPERS, the California Public Employees Retirement System, among our top 15 shareholders. Genius Brands has exceptional liquidity and regularly trades volumes in excess of 20 million shares per day. We attribute this to the passion and loyalty of our shareholders. Without your support, none of our accomplishments would have been possible. The management team of Genius Brands and our Board of Directors believe in the future of our company. None of us has sold a single share of the company's stock because we believe in the value being created and the prospects for growth that we are putting in place. We also recognize that value doesn't come overnight and there will be volatility along the road. But we continue to build assets, increase our animated program catalog, our size, grow our channel footprint, invest in acquiring top-tiered animated content, invest in growing our licensing business, and lastly, investing in our people. In Genius Brands' senior management, we have some of the most accomplished people in children's media, who have joined us from the senior ranks of iconic companies like Disney, Warner Brothers, Hasbro, Marvel and major retail outlets. When all is said and done, we're committed to building value by making timeless animated entertainment for children that is positive, diverse and enriching. We distribute the content worldwide. We license it on to consumer products, which delight and entertain children. Regardless of COVID, regardless of interest rates, regardless of political parties or elections, kids around the world continue to watch cartoons. As we build our catalog and we look at the pioneers in children's entertainment who came before us, we're reminded that animated programming for children is an enduring business of global value. I will now turn the call back to David Waldman, Investor Relations, who will read aloud questions that were submitted in advance. Some of the questions were duplicative, so we did our best to combine where possible. We also didn't have time to read aloud every question. If we didn't get to your question or you feel it was not addressed, feel free to follow-up with Investor Relations, and we will be sure to respond as quickly as possible. David, will you proceed with the questions we've received via e-mail?

Yes. Thank you, Andy. Our first question is, what are your expectations for revenue over the next few years? And when do you expect the company to be profitable?

Bob Denton. Good morning. This is Bob Denton, the Chief Financial Officer. As forecasted and disclosed throughout the year, 2020 is a transition year for Genius Brands. The third quarter was non-eventful. We are in the process of updating our 3 and 5-year projections, which will include the recently announced new property, Shaq's Garage, amongst others, and the recent acquisition of ChizComm. We plan to have that process completed by the end of the year. We look forward to a promising 2021 and beyond.

Great. Our next question is, what is the status of the shareholder lawsuits?

Thanks, David. Good morning. This is Michael Jaffa, the company's General Counsel. We can't comment on pending litigation. I can however say that we believe that the cases are completely without merit. We have retained experienced litigation counsel and that we intend to vigorously defend ourselves against these claims.

Great. Thank you. Our next question, has Andy or senior management or any members of the Board sold any of their shares?

This is Andy. No. Neither myself, senior management nor any Board member has sold a single share since the founding of the company.

Our next question, where is Rainbow Rangers now being broadcast? We have seen it on Nickelodeon, but then it was off. We see it now on Kartoon Channel!.

It's currently being broadcast on both Nickelodeon and Kartoon Channel!. It's anchoring the Girls Rule block on Nickelodeon Jr. on Sunday mornings. It's also on Kartoon Channel! where week in and week out, it is the #1 performing series. It was rested on Nick while we were delivering new episodes, which have now been done. Networks typically rest series and rotate shows, even very successful ones, around the schedule.

Great. Thank you. Our next question, shareholders are concerned about dilution. What are your plans to raise additional capital?

This is Bob Denton again. We have no plans to raise capital.

Thank you. Our next question, which stores do you expect to carry merchandise for the holiday season?

We have a variety of products that are in different categories across Rainbow Rangers and Llama Llama. They are in Walmart. They're in Target. They're in Amazon. They're in Kohl's. They're in Barnes & Noble.

Great. Thank you. Our next question, what is being done to standardize the Kartoon Channel! experience across platforms?

Morning, and thank you, David. This is Jon Ollwerther, the Head of Network for Kartoon Channel! and Business Development for the company. Kartoon Channel! is platform agnostic. We want kids and families to have the same exciting and fun experience across all platforms and be available where ever kids and families consume content. As many of you know, we've made significant upgrades to our in-app experience since our June launch. We will continue to optimize the experience going forward. And we will be introducing additional features and distribution as we build.

Thank you. Our next question, could there potentially be a quarterly or biannual dividend for long-term holders?

This is Bob Denton again. We currently have no plans to pay dividends. As disclosed in our public filings, we will continue to reinvest profits back into the company for the foreseeable future.

Thank you. Our next question, you mentioned Rainbow Rangers was on track to become a new heavyweight preschool brand within the next 2 years. Has COVID-19 altered that outlook? Or does the team still feel that Rainbow Rangers brand is on track?

This is Andy again. The show continues to perform well. We've sold it not only in the U.S. but worldwide. It's on Nickelodeon Latin America, Cartoonito in Italy, Noga in Israel. It's on in China. It's on in New Zealand, Australia, Canada, many other territories. We have a few hundred licensed products under contract, and many of them are in the marketplace right now. The key products come from Mattel and Fisher-Price. They've had manufacturing and supply chain issues due to COVID. However, product is now on shelf. And we'll have a very good idea by the end of Christmas season, and we'll share at that time how big this will be.

Thank you. Our next question, do you have any plans for a reverse split in the future?

No, we don't.

Thank you. Our next question, how do you plan to address the decline in share price?

We can't control share price. There's been a lot of short selling in our stock. But over time, we know we are creating valuable unique assets. And we are confident that will ultimately be reflected in the stock price.

Thank you. Our next question, is Genius in talks with Verizon or other cable or satellite operators to have Kartoon Channel! included in their offering?

David, Jon Ollwerther here. We do currently offer Kartoon Channel! on, Comcast, COX, Dish and Sling in a number of different forms. Having said that, Kartoon Channel! is focused on growth of consumer engagement and growth of distribution. And while I won't go into specifics today, we are in ongoing dialogue with a number of different types, distribution platforms and partners.

Thank you. Our next question, how much working capital do you have on hand as of today?

As of today, we have just over $100 million in cash and a slightly higher number for working capital.

Thank you. What is the company doing to advertise or promote Kartoon Channel!? What are we doing to grow our social media outreach?

So today, we're doing social media marketing, influencer marketing, advertising on YouTube and display advertising. Additionally, we'll be leveraging the star power of our talent from our shows and also our partners on those shows. And finally, we'll be leveraging ChizComm's expertise to grow Kartoon Channel!.

Thank you. Our next question, besides Shaq's Garage and Superhero Kindergarten, there has been speculation that there are more famous actors who are going to be part of Genius Brands. Can you give us more insight into plans going forward?

I'm sure you know that we have Jennifer Garner as well, that was neglected to be mentioned on Llama Llama, playing the voice of Mama Llama. No, we can't. There's -- we can't talk about any famous actors until it's been announced.

Thank you. Our next question, does the company have any plans to get sold?

We get approached regularly, but now is not the time. We're acquiring other assets, and we put a team together that's second to none. And at the current time, we are not planning to be sold.

Thank you. Unfortunately, we are -- we ran out of time. So our last question is, do you have any plans for a financial series for kids?

Well, actually, we do have a financial series for kids. It's called Warren Buffett's Secret Millionaires Club. And it's on Kartoon Channel! right now. It stars Warren Buffett. He plays his own voice. He created the curriculum. It's packed with lessons of financial literacy for kids, and we have all kinds of guest stars in the show regularly. They range from Bill Gates to Shaquille O'Neal, who was a guest star in the show. It's a wonderful show. I'm very proud of it. All of us are. And I encourage anybody who has kids of that age to watch it.

Great. Thank you. That concludes our Q&A for today. Andy, I'll now turn the call back to you for any concluding remarks.

Well, I'd like to thank everyone for joining us today. We're more encouraged than ever about the outlook for the business and look forward to building upon the 5 pillars I mentioned earlier in the call: Kartoon Channel!, Stan Lee Universe, our animated content brands, the Genius balance sheet and acquisitions, including the transformative, important acquisition of ChizComm we announced this morning. We've assembled an outstanding team with some of the best and most accomplished talent from across the industry. We're very proud to work with them.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.