Genius Brands International, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Genius Brands International Second Quarter 2022 Business Update Call. At this time, all participants are on a listen-only mode. I would now like to turn the call over to David Waldman, Investor Relations. David, please go ahead.

Thank you. Good afternoon, everyone, and welcome to Genius Brands Second Quarter 2022 Financial Results and Investor Update Conference Call. On the call with us this afternoon is Andy Hayward, Chairman and CEO of Bob Denton, Chief Financial Officer, and Michael Hirsch, CEO of WOW. The company issued a press release this morning. If you have not received a copy, you can view it on the company's website at gnusbrands.com. Before I turn the call over to Genius Brands CEO Andy Hayward, I would like to remind you that this call, certain statements constitute forward-looking statements within the meaning of the federal securities laws. Words such as may, might, will, should, believe, expect, anticipate, estimate, continue, predict, forecast, project, plan, intent or similar expressions or statements regarding intent, belief, or current expectations or forward-looking statements. While the company believes these forward-looking statements are reasonable, undue reliance should not be placed on any such forward-looking statements, which are based on information available to us on the date of this call. These forward-looking statements are based upon current estimates and assumptions and are subject to various risks and uncertainties, including risk factors set forth in the risk factors section of the company's most recent annual report on Form 10-K, in the company's subsequent filings with the Securities and Exchange Commission. Thus, actual results could differ materially from those reported. The company expressly disclaims any obligations to update or alter statements, whether as a result of new information, future events, or otherwise, except as required by law. Following their prepared remarks, the company will field a number of questions that investors have submitted in anticipation of the call. I'd now like to turn the call over to Genius Brand CEO, Andy Hayward. Please go ahead, Andy. Thank you.

Thank you, David, and good morning, everyone. The second quarter was very strong for Genius Brands. We experienced significant top-line growth with record revenues of $21 million, which we now expect to continue and accelerate. The assets currently now in-house and those being acquired and developed, we believe, will lead to recurring positive cash flow, more growth, and sustained profitability. During this last quarter, we've gone from a company with 100 employees to a company of over 900 employees with offices in Los Angeles, New York, New Jersey, Toronto, Vancouver, Munich, and London. We've grown our own or controlled catalog of animated children's programs from 450 episodes to over 3,800 episodes and now have over 22,000 animated children's episodes under license to the Cartoon Channel system. We have grown our cartoon channel distribution footprint from just the U S to now being seen in over 60 territories worldwide via satellite cable and terrestrial, as well as streaming in Europe, the middle East, Africa, Latin America, and Asia. We've gone from a company producing 26 episodes of content at this time last year to producing over 200 half hour episodes with over $135 million of production. and a robust pipeline with significant committed contracts going forward for the next three years and beyond. Our programs are seen not only on our growing cartoon channel, but are additionally licensed to Netflix, Amazon, YouTube, Peacock, Paramount+, HBO Max, and terrestrial and satellite broadcasters worldwide. We completed the transformational acquisition of WOW Unlimited Media, signed a 20-year deal with Marvel Studios and the Walt Disney Company, to license Stan Lee for use in feature films, television productions, and Disney theme parks and experiences. And we are in additional and material conversations with the Walt Disney Company on separate opportunities. Also during this quarter, we partnered with world-renowned chef restaurateur and philanthropist Wolfgang Puck to create an animated children's series and healthy food products licensed from and based on the series entitled Wolfgang Puck Secret Chef Academy. Wolfgang Puck worldwide now generates approximately $650 million in worldwide revenues, and we see an opportunity from the show to partner on similar kitchen and healthy food products now designed for children. In addition, we are pleased to report the highest revenues in the history of the company. Our Q2 revenues of $22.1 million, which is nearly a tenfold increase over the same quarter last year. We believe the continued and accelerating revenue growth is a precursor to earnings, which we are confident will be forthcoming. Our key units and businesses are growing, increasing market share and margin. Meanwhile, the company continues to maintain high levels of cash. The non-exclusive deal we signed to license the name and likeness of Stan Lee to Marvel Studios for movies and television and the exclusive license to the Walt Disney theme parks and attractions to create Stanley merchandise and consumer products to be sold in the Walt Disney theme parks, cruise ships, and other entertainment venues for the next 20 years, all of which Genius Brands will enjoy royalty income from. While the company received a $2.5 million license fee, the bulk of the revenues Genius will see as a result of this agreement we expect to come from royalties that will be generated from Disney's creation and sale of Stan Lee merchandise in the Walt Disney theme parks and theme park experiences for the duration of the 20-year agreement. We also anticipate additional benefits from the ongoing and enriched exposure of the Stan Lee brand, driving retail sales of our own upcoming Stan Lee content and merchandise programs separately. We consider the rights we own and control in the Stan Lee universe to be extremely valuable and we will be announcing significant news prior to Stan Lee's 100th birthday on December 28th this year. As a close friend of Stan's for many years, I can share that this was his personal desire, and we believe it's a privilege to act as a responsible steward of the Stan Lee brand on his behalf. During the past quarter, we continued to make great strides in many segments of our business, which will have a significant impact on the future of the company as well as our financial growth. Also during the quarter, Cartoon Channel, our flagship streaming platform for children, continues to experience monthly growth in downloads, viewership, advertisers, distribution, and most importantly, revenues. We are investing aggressively in Cartoon Channel to secure the best content, the best features, the most robust distribution, and the overall most attractive user experience. We believe Cartoon Channel will be a key driver and tentpole of Genius Brand's revenues and earnings for years to come. Cartoon Channel is now being carried on virtually every major platform in the United States, including Apple iOS, Apple TV, Android TV, Android Mobile, Amazon Prime, Amazon Fire, Roku, Tubi, Comcast, Cox, Samsung Smart TVs, LG Smart TVs, Pluto TV, and the increasingly important YouTube platform. In fact, if you happen to be flying on JetBlue, you'll now see Cartoon Channel carried there as well. Cartoon Channel is now firmly established as a premier viewing destination for kids and families with viewer rankings regularly placing us ahead of our major competitors in both the Apple and the Google app stores. Advertising revenues have continued their solid growth trajectory as we continue to sign up new advertisers and have invested to build out a premium ad sales team led by a proven industry leader, Cindy Kelly, who joined Genius Brands during the quarter and now oversees all advertiser sales. Concurrent with Cartoon Channel as a free product supported by advertising, we launched in the second quarter our commercial-free streaming subscription product at $3.99 a month, the Cartoon Channel Kitiverse. We expect subscription growth to become a critical component of our future revenue streams as it is for all content providers such as Netflix, Disney Plus, and HBO Max. However, whereas several of our competitors have seen declines, Genius subscriber statistics are growing. We're building both on the subscription distribution we have now on Amazon Prime, as well as the subscription network we acquired with the Amoeba channel acquisition in January, and their technology and superb management group. As we continue to roll out the subscription-based cartoon channel, Kitiverse, and its metaversal features, we believe Kidiverse will be a breakthrough, first-of-its-kind offering for kids, including avatars, emojis, games, Kidiverse VR goggles, immersive content, NFTs for kids, collectible digital cards based on many of the channel's popular characters, including Stanley Universe, a digital currency for kids, which we refer to as Kidabucks, child-safe messaging, which we refer to as Messy's, podcasts, music, and more. The combination now of Cartoon Channel as a free ad-supported service and Cartoon Channel Kidiverse, our enriched commercial-free service, enables us to capture those parents who want their kids to have a premium channel for free, as well as those who prefer to have a children's channel without commercials containing enriched features and are prepared to pay a monthly subscription fee. Having an ad-free and a subscription product Grounded always in safe, positive programming for children is the essence of our channel strategy to grow and capture market share worldwide. Okay, let's talk worldwide for a moment. The company made a strategic investment in Your Family Entertainment, the premier German children's entertainment company trading on the Frankfurt Exchange. YFB not only has a 3,000 title catalog of animation, but also an existing global distribution platform now in over 60 markets across Europe, Asia, the Middle East, Africa, and Latin America. Under the leadership of Paul Robinson, who previously was managing director of Disney Channels Worldwide, this channel system is now being rebranded as Cartoon Channel Worldwide and rolling out in virtually every major territory. We are now in more than 60 countries around the world and in various stages of discussion in additional markets with a group of important carriage deals currently pending. We've also witnessed growth in viewership of Cartoon Channel on platforms such as Amazon Prime. We believe this trend will continue as we continuously add attractive new content, markets, and distribution partners to our portfolio. In addition to our owned and produced shows, like Rainbow Rangers and Stanley's Superhero Kindergarten, we continue to acquire timeless, top-performing content from around the world, including Peppa Pig, Paw Patrol shorts, Scooby-Doo, Yu-Gi-Oh!, as well as Roblox and Minecraft-based gaming content. Strong, proven content with positive values that children will want to see will always be a component of our program strategy to increase market share, revenues, and profits. Separate from the rollout of Cartoon Channel and Cartoon Channel Kidiverse, the company acquired the Frederator Channel as part of the acquisition of WoW. The importance of the Frederator Channel As part of Genius' overall distribution business, can't be overstated. The Frederator channel is distributed exclusively on YouTube. It is a platform of over 3,000 producers, which makes up the largest animation platform on YouTube and currently generates an astonishing 1 billion views per month. In itself, Frederator channel is already a profitable service. However, we expect to grow and harness it dramatically more so. as we migrate top-performing YouTube programs from there to Cartoon Channel and Cartoon Channel Kidiverse, unlocking new value for the company and Frederator's producers. It's kind of like the biggest farm league of animation, which we are now bringing up regularly to the big leagues. The combination of Genius Brand's WOW! Frederated channel, Amoeba, and Your Family Entertainment now provides Genius with one of the largest and most desirable children's content catalogs in the world. as well as a fully integrated distribution system and consumer product infrastructure to maximize value. I can't emphasize this point enough as each of the catalogs has tremendous intrinsic value. Most importantly, animation is not only timeless, but an asset that grows in value over time. One needs only to look at the Flintstones, Tom and Jerry, and others that live on forever. Decades later, you still see branded consumer products on store shelves around the world. The more the animation is consumed, the more the value of the portfolio grows over time. Now I want to turn the call over to Michael Hirsch, CEO of WOW, to discuss possibly the most important event in the history of the company, the acquisition and integration of WOW into Genius Brands. Michael, you're up.

Thank you, Andy. The integration of WOW Unlimited Media consisting of Frederator Networks and Studio and Mainframe Studios into the Genius Brands family has been going extremely well. The transaction was expected to provide immediate and continuing financial benefits along with strong revenues as a result of significant contracted bookings into 2023 and beyond. Indeed, WOW has had a banner year and continues to see revenues increasing at an accelerated pace. We are currently producing over 183 episodes of animated content with production budgets in excess of $100 million. The company operates at a profit on a cash basis, and we expect to see working with Genius to increase our margins and make a significant contribution to the overall Genius bottom line. As a result of the combination, Genius Brands now has an end-to-end animation ecosystem that has produced many profitable titles, including Cocomelon, the number one children's series in the world today, as well as Barbie, It Takes Two, Octonauts, and Globbitus. While many of these are work for hire, we are also now doing our own original content and currently have shows in production for YouTube, Netflix, Sony, and elsewhere. Our series, Team Zenko Go with DreamWorks Animation, just launched its second season on Netflix and And our new series, Bee and Puppycat, will launch on Netflix on September 6th. Bee and Puppycat has had tremendous support on Twitter, with millions of views for our Netflix trailer, as well as other social platforms from the show's enthusiastic fans. It represents a major success for the Frederator approach to developing a show, first on its YouTube platform, and then upon success, migrating it to a more commercial platform that broadens the show's appeal. The addition of captive in-house animation production for Genius Brand is expected to drive significant cost synergies resulting in economies of scale, which will drive increased shareholder value as new brands are produced and brought to market, and eventually to Cartoon Channel and through the Genius Brand licensing organization. This transaction is a transformational event for Genius Brand as the company will continue to execute on its strategy to establish itself as a foremost producer, broadcaster, and licensor of high-quality children's entertainment and children's consumer products on a global basis. There are very few asset classes with the proven and enduring value as animated children's programming, and we are extraordinarily excited about what the future holds for this powerful combination. I would now like to turn the call over to Bob Denton, CFO of Science. to discuss the company's financial results for the quarter.

Bob? Thanks, Michael. As Andy mentioned earlier, total revenues for the quarter ended June 30, 2022, were $22.1 million, the largest quarterly revenues in the history of the company, an increase of $19.7 million, or 843% from $2.3 million in the same quarter last year. These increases are primarily due to the addition of Amoeba in January and the acquisition of WoW at the beginning of the quarter. Expenses for the quarter increased primarily due to an increase in direct operating costs, an increase in general administrative expenses, including the one-time charge of professional fees associated with the acquisition of WOW and its subsidiaries, an increase in incentive compensation expense, which is a non-cash expense, and the inclusion of WOW's general and administrative expenses for the three months ended June 30, 2022. The net loss attributable to Genius Brands for the quarter ended June 30, 2022, was $13.3 million, or $0.04 per share, compared to $7.1 million, or $0.02 per share, for the three months ended June 30, 2021. This increase is directly related to the increase in expenses noted above. Turning to the balance sheet, as of June 30, 2022, we had current assets of $150.3 million, including cash, cash equivalents, and marketable securities of $105.2 million, working capital of $63.6 million, and total stockholders' equity of $143.1 million. We are closely managing our cash balances, which we consider the most important indicator for the company as we integrate and build our combined businesses and increase our assets with the goal of increasing earnings and becoming cash positive. Our acquisitions and investments are indications of our commitment to continue creating top-tier children's content, creating a global and enduring animation catalog, and the expansion of our cartoon channel distribution system. We believe that it is the best and smartest deployment of our capital, and that in the long term, it will ultimately yield the most value for our shareholders. I would now like to turn the call back over to Andy for some final comments. Andy?

Thank you, Bob. First, I want to thank all of our investors for participating in the call today and for your support over the years as we've transformed Genius. into a powerhouse within the children's entertainment industry. We are growing across key units, increasing market share, building timeless assets, and all signs point to that momentum continuing and accelerating. We are now in year two since the launch of Cartoon Channel, and as I said at the beginning, top-line revenue growth this quarter of more than 800% to over $22 million broke all records. We will continue to make decisions to grow our asset base and reach sustainable, and growing profitability. As we continue to build on this substantial progress, I look forward to speaking with everyone again and keeping you informed of initiatives, how we are building best programs for children, licensed products from those programs, and the most effective distribution programs. But as they say, the best is yet to come. Last but not least, I am particularly excited about our upcoming series, Shaq's Garage, and the strong vehicle-based consumer products program that we anticipate will come from it. Shaq's Garage is a series we are very proud of because it has extraordinary entertainment, which we think will be a huge performer, but also it shows extremely positive value to kids in a diverse and responsible world. Shaquille O'Neal has been personally hands-on throughout, and he's very committed to the positive storytelling that the series will embrace. alongside the humor and hijinks. The pilot episode will enjoy a sneak peek on Cartoon Channel, effective immediately. It's up now and lasting for 48 hours. I encourage everyone to go see it. And not only see Shaq, but also his co-star, Rob Gronkowski. Now, we want to take this opportunity to answer questions that were previously submitted to the company.

David, I think you have the questions too. Yep.

Thank you, Andy. Sorry. In our conference call announcement press release, we suggested interested parties submit their questions in advance. We'd like to address those questions for you now. Some of them were duplicative, so we did our best to reconcile those where possible. If you have further questions after the call, please feel free to follow up with Investor Relations, and we'll be sure to respond as quickly as possible. Our first question from investors is the following. Given the company's revenue growth, at what point do you expect to turn profitable?

Good question. We're not prepared to give formal guidance right now, but as we continue to grow, we do expect to turn profitable in the not distant future and generate quite significant cash flow. In the meantime, we're carefully managing expenses, expect to generate significant cost synergies from the WOW acquisition, and the path to sustained and reliable and continuing earnings. is from the build-out of our global animation catalog and our global distribution system. We're building genius to become a dominant force in kids' entertainment, and in order to do that, we must invest wisely to maximize long-term value for our shareholders.

Thank you, Andy. Our next question is, how are you managing the rapid growth now to a company of over 900 people? Good question.

Our board member, Tony Themopoulos, has graciously agreed to now serve as vice chairman of the Genius Brand Board of Directors. Tony brings a distinguished career of experience coming from being president of ABC Entertainment and ABC Broadcast Group, chairman of United Artists Pictures, and president of Steven Spielberg's Amblin Television. Tony will not only lead our Greenlight Committee, but will also focus on unifying the many pieces of the company now and working with all of the units to help ensure they stay on their growth and earnings targets. We're very fortunate to indeed have his wisdom and experience. He's already instituted protocols and disciplines. He's been working with Bob Denton and Mike Jaffa to help ensure we hit our targets, and good governance remains a top priority.

Great. Thank you, Andy. The next question is, what are the company's plans to buy back stock?

I would say that given the volatility in the markets, and the importance of preserving capital. We've not undertaken a buyback up to this point, but we have and will continue to evaluate all our options, of which that is one.

Okay, thank you. Our next question, is Genius Brands affected by interest rates, energy, or inflation?

Good question. Well, we're not really an energy consumer. You don't use energy to build animated cartoons. We use creative energy. So if I could be a little whimsical, I would say we could be said to be an energy supplier, not a user. Interest rates, we have minimal exposure to interest rates. We have a lot of cash in the company right now. And while we do have some production-based borrowing, that's not really a factor for us.

Great, thank you. Our next question is, Does Genius have exposure to China through its productions or otherwise?

Good question. We enjoy good relations because of our Superhero Kindergarten series now being broadcast with our Chinese partner, Alibaba, on their Youku platform. That's the most robust kids platform in China. And for the best of my knowledge, we're the only American supplier of children's content to Alibaba. We are paid cash for our programs we sell to China in U.S. dollars. At the same time, our exposure to commercial pressures from China is minimal because we've migrated the bulk of our animation production from Chinese animation studios to Indonesia and the Philippines, where pricing is currently much more favorable and production quality remains high.

Thank you. Our next question, can you provide an update on Shaq's Garage and what you think sets it apart from other productions?

I've talked a little bit about it earlier, but the current plan for Shaq's Garage is to begin delivering episodes in the fourth quarter of this year. All of the scripts are written. Both Shaquille and Rob Gronkowski have recorded 90% of their voices. The show we consider to be a paw patrol with cars. It's very cool. The music is very cool. The stories are aspirational and fun. More cool cars than you could ever imagine. We're also excited about a show within a show that will appear in many of the episodes. It's a segment called Baby Shark. I'm not going to say more about it now, only that if you like Baby Shark, you're going to love Baby Shark. We're going to do a sneak peek of the first episode. It'll be on for 48 hours only. It's up now on Cartoon Channel.

Great. Thank you. Our next question is, given the growing importance of ESG, what, if any, steps is Genius taking, including environmental measures?

Okay. So our management has decided to take a leadership role in the entertainment industry on how we can best protect the environment as corporate citizens as we tell stories to depict positive environmental steps for our children. Our chief diversity officer, Michael Riley, has now been given the additional role and responsibility of chief environmental officer, and the company has put a number of specific initiatives in place to make us a more environmentally friendly company and a leader in social responsibility overall. These range from carpooling incentives, adding LED energy lights, saving lights, to having environmental lessons in our shows for the kids to learn from. We have an all-company electronic recycling day coming shortly. We have toxin reduction programs, and we have a conservation program promoting company-wide steps of reduce, reuse, and recycle. These are all on our website starting today for all our clients and shareholders to see. We understand the importance of stepping forth on environmental issues. We embrace this responsibility in the stories we tell as well as broadcast on our channels and the impact it has on children as well as the concrete steps that we've taken to make the company more environmentally friendly. We believe that our company will continue to grow and flourish, not in spite of our commitments to sustainability and social responsibility, but because of it.

Next question, David. Great. Thank you. Can you talk about the merchandising strategy and when we can expect to see toys and other products on the shelves?

The kids' merchandise business is unpredictable, but every year there are some very, very big hits. We don't know which of our characters, if any, will catch fire, but we believe we have several very good shots. Many of our brands have pre-sold marquee value and existing businesses associated with them that will drive sampling. Wolfgang Puck, for example, as I said earlier, is currently a $650 million a year business. We would be very excited to have a kids' version, which is a fraction of that. Stan Lee merchandise will be coming very shortly, and you can expect a significant announcement on that in the near future. The Disney merchandise of Stan Lee, which will appear in the parks and theme park experiences, will be forthcoming on their schedule. I believe they're very enthusiastic about this and look forward to having Stan be an important part of their Marvel experience. We have a variety of brands with different activities at different stages, including Llama Llama as an ongoing staple, and Rainbow Rangers, which we are going to reboot with a new master toy licensee because we believe in it. Shaq's Garage, we think, is a natural on many fronts. It has the same play as some very successful products like Hot Wheels, Pixar's Cars, and Paw Patrol. However, we think the creative premise is very special and differentiated. There are a number of products now coming out of Federator and Mainframe, which we have the potential to become significant in merchandising for us as well. being Puppycat, which was first incubated on YouTube and has developed a large audience and will debut next month on Netflix as one of them.

Great. Thank you, Andy. That does conclude the questions. We appreciate everybody's support and we look forward to providing further updates.

Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.