Source Genius Investor Presentation Slide Deck
I have been following Genius for years. I was drawn to the story in part because of my success with an investment in Marvel Entertainment when I was a much younger man and in the early stages of becoming a full-time investor/trader when Marvel rose from the ashes of bankruptcy. Marvel is one of the most impactful, profitable investments I have ever made and was most definitely one of the catalysts that led to my trading and investing for a living.
Genius had some similarities to Marvel, and I was impressed with the enthusiasm and passion of the CEO Andy Heyward. You can read the blog post I put out about Genius in 2018 on Seeking Alpha here.
I was early and flat out wrong on that call. A lot of pain followed as the share price declined precipitously below a dollar into penny stock territory.
There are a lot of people that advise others never to add to a losing stock position. I have always believed that it depends on your time frame. Is it a trade or an investment? What is the risk-reward? What have you outlined as your thesis, and what guidelines have you set up to follow.
Genius was always a long-term hold for me knowing that there was a real possibility that my investment could go to zero. Because of that, I was sized appropriately for me to be comfortable with whatever the outcome may be. I added to my position substantially in the penny zone, bringing my dollar cost average down significantly while also giving me a fairly significant chunk of shares. I was rewarded handsomely when it went on a mind-blowing run that was unjustified and led to the stock reaching a completely irrational and ridiculously high valuation. I exited my position entirely, selling the last of my shares for over 6 dollars a share, and amazingly it continued to run up to 12. Eventually the stock started to plummet, I watched as some were adding to their positions, proclaiming that it was a bargain at 6, then again saying it was an unbelievable steal at 3 and they were loading the boat. Those people now post comments that I can not share with you because of the language used. I am sure you can imagine what is being said and how colorful it is being expressed.
Even today, as the stock price settled at $1.45 on Friday. Today is November 28th, 2020.
I scratch my head at the current valuation recognizing that it is still very richly valued and nowhere near what I would consider a bargain or cheap value play. Shares outstanding grew from 10.99 million to 256.43 million in one year. Think about that for a moment. Let it sink in. The outstanding share count has increased by 2450%, but wait; there's more; the fully authorized share count is 410 million with 400 million common stock and 10 million preferred. I, for one, am fully anticipating that when it's all said and done, that will be the Genius outstanding share count over the next year or so.
Source NASDAQ | SEC Filing
Let's take a moment to do the math here.
The stock closed Friday @ $1.45. If we take 256,430,000 X 1.45 that gives you a market capitalization of $371,823,500. That seems about right for a company that reported revenue of two hundred and seventy thousand dollars for the last quarter!! (EXTREME SARCASM HERE)
I have taken a new starter position in Genius with a dollar-cost average of 1.07. I intend to build another sizable position when the opportunity presents itself at price levels that I have identified as potential support resistance areas. Unless something happens that materially changes my point of view or structurally changes within the company, that invalidates my thesis.
I intend to outline my thought process and why I decided to jump back in after weighing the pros and cons of what I know as fact, what my gut feeling is about the potential opportunities/obstacles that lie ahead, and what I feel the risk-reward profile looks like for Genius moving forward.
There has been a lot of criticism recently of Andy Heyward and his over promise and under deliver approach when he communicates with shareholders. In fact, Genius is facing a class-action lawsuit for that very reason, which you can read more about here.
Source NASDAQ | SEC Filing
I have never seen the point of participating in a class-action lawsuit against a company that I own stock in; the only people who are likely to get rewarded are the lawyers while it forces the company to tie up funds and time defending themselves instead of focusing on growing the business and executing the vision to right the ship. If I determine that I made a bad call in a company and that I can not trust management or my thesis gets proven wrong, I take my lumps, learn from the experience, sell my shares and move on.
I think a lot of investors buy stocks without doing their own due diligence, often chasing momentum with FOMO (fear of missing out), buying at nosebleed levels not taking the time to really investigate the company and define their risk-reward, and when the stock plummets, they want to place blame on someone else for their failure to analyze the company and put together a proper trade plan. In most cases, I would suggest that the losses could have been avoided had they just done a bit of homework. Instead, they are looking to recoup the losses by taking legal action against the company.
As a shareholder that held Genius stock for years, I participated in every conference call, engaged with management/investor relations. In the past, I have voiced my opinion with management that Andy is great at selling the sizzle but never seems to deliver the steak. I was very frustrated, and while I did appreciate Andy's enthusiasm and passion, it became evident that the company's prospects were more of a fantasy than reality.
Rainbow Rangers was anticipated to be a big hit in Andy's view, and while it is not a complete failure after 3 years in, I certainly would not consider it to be a smash hit. Andy loves to throw around the timeless value of cartoons and often mentions Tom and Jerry, The Flintstones, Scooby-Doo, and a handful of other iconic brands as examples of success. He neglects to mention the thousands of cartoons that have failed over the years and disappeared into non-existence.
Andy sets the bar high for expectations, and unfortunately, at least for now, he has failed to deliver. That is very clear after the numbers presented from last quarter's earnings report.
As referenced above, the latest quarter's total revenue came in at $273,992.00. That is pretty horrendous by any measure. This is with Rainbow Rangers starting their third season on Nickelodeon, Llama Llama starting its third season on Netflix, and let us not forget the "Kartoon Channel digital network" that Genius launched in June that Andy has referred to as (keywords here) "what could" become the new "Netflix" for kids. Is Andy wrong for saying that? I realize it is not looking very encouraging at the moment. However, I don't think anyone could or should have expected that Genius would flip the switch and PRESTO instant Netflix for kids. Only time will tell if that becomes a reality. It is way too early to claim one way or another; it could take several years before proven to be false or fact. I do not think that Andy is intentionally trying to dupe investors with malicious intent for the record. I firmly believe that he wants to create an iconic brand that will withstand the tests of time and becomes his legacy. With two new franchises co-created with proven elite talents like Arnold Schwarzenegger and Shaquille O'Neal, I think they are headed in the right direction and wonder what other high profile talented stars might they be working with?
I have learned a lot through my engagement with management and studying the industry. Early on, I had assumed that Genius was paid a pretty penny to produce and then distribute their wonderful, imaginative cartoon creations to Nickelodeon, Netflix, and other international distribution platforms. The reality is they actually get paid very little. There is so much content out there looking for a home, and if you are not one of the elite studios with proven money-making franchises and a stable of smash hits, you would be lucky to get your production costs covered.
The real money for content creators ultimately comes from manufacturers that license the content creator's intellectual property rights to place on their products. Think toys, clothing, makeup, coloring books, cereal boxes, vitamins, etc... If you have a smash hit on your hands, companies will crawl out of the woodwork looking to license your content.
Unfortunately, when you have an unproven franchise trying to pre-load potential partners for licensing products, you don't have a lot of leverage. Royalties and upfront commitments may not be as lucrative as anticipated and difficult to come by. Even if you successfully land some great product partners, the franchise still has to resonate with the intended audience and become a smash hit to justify the manufacturers following through on their product commitments. One of Genius's issues with "Rainbow Rangers" isn't that it is a complete flop, but it also isn't a tremendous hit. You don't see any viral videos out there of people waiting for hours in the cold to get their hands on a Rainbow Rangers doll.
Genius has some nice properties but none of them have become massive hits. They are building a library of content, and I am confident that eventually, they will have a home run smash hit. In the meantime, they are venturing off into new platforms like the "Kartoon Channel" digital network. This is smart and hopefully results in additional revenue streams through advertising, and it gives Genius their own platform to release new content on.
"***Genius Brands International to Launch "Kartoon Channel" Digital Network Across Amazon Prime, Apple TV, Comcast, Cox, SelectTV, DISH, Sling TV, Tubi, Xumo and More
Kartoon Channel is a digital channel for kids 2-11-years-old to access over 4,000 episodes of premium entertaining, enriching and educational content anytime, anywhere in a safe environment. The rebranded channel will now feature content from Genius Brands' programming catalog and from creators around the world, including Warren Buffett's Secret Millionaires Club, Thomas Edison's Secret Lab, Baby Genius, Martha Stewart & Friends, Stan Lee's Mighty 7, Gisele Bündchen's Gisele & The Green Team, Gummi Bears, Shark Academy, DaJammies, Amber the Ambulance, Dino the Dinosaur, Ethan the Dump Truck, IncrediTales, OneZeez, Super Geek Heroes, and many more.
"The hallmark of Kartoon Channel is 'Smart and Safe.' All programs are carefully curated to not only be entertaining and enriching, but also to ensure there is no violence, no negative stereotypes, no inappropriate language, and no excessive commercialization. We are extremely focused on providing positive, purposeful content that parents can always know will provide safe viewing for their children," said Genius Brands International Chairman & CEO Andy Heyward."***
Source: Press Release May 6th, 2020
While I love the idea, in theory, of better for you, positive and purposeful enriching content, I do have concerns that the content or lessons taught could be viewed as boring or politically motivated, leaning too far in one direction or just in general to far fetched and unrealistic. I know that this is a sad thing to say, but I consider it a potential risk.
Let me ask you this. How many times have you laughed so hard that it brought tears to your eyes when someone did something politically correct? How many Super Hero movies Marvel has produced would be successful with zero violence and no inappropriate language? What do we even need heroes for if we don't have any villains or bad guys?
I realize and think most people would agree that it would be amazing and wonderful to live in a world where we have no diseases, bullies, violence, racism, social injustice, sarcasm, or bad people but do we really want to teach kids unrealistic ways to address the issues they are likely to face while growing up? In my view, we should teach them that bad things happen, that there are and will likely always be bad people. Teach them how to defend themselves, learn to laugh at themselves, understand sarcasm, gracefully accept failure, and recognize it as a stepping stone to success as long as they keep trying. Teach them to have empathy but not get overly offended at every little thing that someone else might say or do? I am very concerned that we, as a society, are becoming fragile and thin-skinned.
Hear me out on this, when I reflect on "Tom and Jerry," one of the iconic cartoons Andy mentions regularly, I recall that there wasn't any lesson taught. The characters didn't even talk! It was just a cute, smart mouse that continually found ways to terrorize or outsmart a cat that wanted to eat him. If I recall correctly, there was also a big burly bulldog that Tom and Jerry would team up against. It was funny and entertaining to watch a little mouse sneak up behind a big bulldog and give him a swift kick in the rump. Then poke him in the eyes and pull his bottom lip up over his eyeballs. In today's society, everything is so scrutinized. Whether people want to admit it or not, the things that we find really funny are often things that occur at someone's expense. It will prove extremely difficult to create a smash hit that educates and entertains, especially if it is not based in reality. It is easy to create a fantasy world where all the solutions are peaceful, and everyone sings kumbaya, all day, every day, but that is not reality and most likely extremely boring. Genius will need to walk a fine line with what they teach their viewers while simultaneously making it funny and entertaining enough to become a huge success.
Case in point "Warren Buffett's Secret Millionaires Club" I am certain that there are many parents out there who would love to have their kids learn from one of the greatest and most successful investment minds of our lifetime. Why wouldn't they?
How many kids are chomping at the bit wanting to watch and learn from Mr.Bufffett?
How many kids even know who Warren Buffett is? Has anyone ever seen a kid throwing a tantrum because he/she really wants to watch "Warren Buffets Millionaires Club?" Genius has owned the property for years. Mr. Buffett's program is a fantastic unique cartoon that is unlikely to ever become a smash hit billion-dollar franchise. There is nothing wrong with that, and there will always be a place for content like it, but it will never be a gamechanger for Genius. Sometimes simple is just better, as is the case with "Tom and Jerry."
Even with all the lack of success, I have not lost complete faith in Andy. I may disagree with his tactics and some of the actions he has taken. However, he is the largest shareholder of Genius stock. He bought a significant amount of shares in the open market @ over 3 dollars a share. Insider open market participation is something I like to see from the executive team of any company I am considering investing in. I also recognize that Andy has had the luxury of option grants, warrants, and preferred stock that make the blow from dilution and share price destruction more palatable than it would be for the average retail shareholder.
Regardless, Genius now has 100 million in cash and no debt. That is by far the most money the company has ever had for as long as I have been following them. If you had told me 8 months ago that you were going to short Genius, I would have said it is probably a decent bet. I thought there was a 60/40 chance they were going to go belly up. Today, with 100 million in the bank and "Super Hero Kindergarten" debuting in the first quarter of 2021 the risk is more prevalent to the upside, in my humble opinion. I want to be clear here; I do not think that the share price is justified here, and if it runs to two bucks next week, you couldn't or shouldn't short it for a quick hit. I think there will be plenty of opportunities, both long and short, to extract money from the markets with GNUS stock. I think the stock will be very volatile over the next weeks, months, and years ahead. Until their model is proven and their vision is verified with definitive results.
Taking it here for a long term short position, the most you can make is 100 percent, and that is if Genius shuts its doors and files for bankruptcy. That is not going to happen when they have 100 million in the bank. If they start executing, and all the pieces start falling in place as a long term short, your potential loss is infinite.
Another potential risk is that Genius buys a company for a ridiculous amount of money that wipes out the cash position. Andy had this to say when he proposed increasing the amount of common stock from 233 million shares to 400 million.
"I want to make sure that all our shareholders understand exactly why we have proposed this amendment and why we are confident it is in the shareholders' interests. The purpose of these new shares will be to take advantage of unusual current opportunities to acquire assets in the consolidating entertainment space, which will be accretive to the company.
Normally, people associate the issuance of shares with dilution; however when the dilution is accretive, the benefit to the company is exceeded by the acquisition of the asset and is greater than the dilutive effect. That is the primary purpose of having these new shares available. I speak not only as your Chairman and CEO, but as one of the largest shareholders in the company. My interests are fully aligned with those of our shareholders of common stock. We have only one class of voting stock, it is common stock and mine is the exact same as all other shareholders.
I have often spoken about the caliber of our management team, and its pedigree from the top of the most successful companies in Hollywood. I also want to draw attention to the pedigree of your Board of Directors. We have the former Managing Director of Entertainment at J.P. Morgan, one of the largest banks in the world, with a leading global media mergers and acquisitions practice. We have the former Governor of California, the former President of ABC Entertainment, and the former Head of Entertainment for Bear Stearns."
In this current economic environment, I have to give Andy credit to raise the cash and clean up the balance sheet even though it resulted in shareholder dilution. I also have to recognize the high caliber talent he has brought to the creative team as well as the board of directors and executive team.
Margaret Loesch, former President of Marvel Productions Loesch, was the founding president and CEO of Fox Kids Networks Worldwide, growing the channels across all metrics, where it was eventually sold to the Walt Disney Company for $5.5 billion, David Neuman, formerly President of Walt Disney Television and Touchstone Television, Lloyd Mintz formerly @ Hasbro, Inc. as the Vice President of Domestic Corporate Licensing, Marc Rosenberg, Former Head of Marketing at Hasbro Toys and Tiger Electronics, Michael Jaffa served as Head of Business Affairs at DreamWorks Animation Television,John Landis, legendary multi-award-winning director and producer of blockbuster hits such as Trading Places, Animal House, Blues Brothers, Three Amigos, Beverly Hills Cop 2, Coming to America, and the Honey I Shrunk The Kids TV series, Michael Uslan producer of the Batman films and was the first instructor to teach an accredited course on comic book folklore at any university, Karen McTier, former Executive Vice President of Worldwide Consumer Products at Warner Bros. Entertainment Group of Companies and one of the most accomplished Consumer Products executives in Hollywood.
Source Genius Brands International (gnusbrands.com)
I do not intend to give you a thorough, detailed background on each person Andy has assembled to his team, but you can see why Andy has brought them on board after just a glance at the highlights from their past accomplishments. Andy also promoted tech media visionary Jon Ollwerther to the post of Vice President, Business Development
Jon Ollwerther and I have had many discussions about Genius. Several of them were not conversations that most executives would want to have with frustrated, disgruntled, opinionated shareholders. His promotion in my view is well deserved. He never dodged my call and always got back to me within a reasonable time frame if he was unavailable. Jon is a sharp, hardworking, empathetic, genuine professional that recognizes the shortcomings Genius has had in the past. He would contact me at night or on the weekend to discuss Genius's publicly disclosed developments and address any concerns I may have had as a stakeholder. Having that interaction with Jon gives me some insight into how passionate and committed he is. That kind of work ethic makes me feel more comfortable as an investor.
Genius recently completed a joint venture with POW entertainment to establish "Stan Lee Universe." I am a huge Stan Lee fan. I grew up reading his comic book creations, getting hooked on the characters that evolved out of his brilliant mind. Stan Lee is the reason my investment in Marvel worked out as well as it did. Marvel has had multiple, billion-dollar-plus hit movies, and every one of them was a Stan Lee creation.
"Stan Lee Universe will assume worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and his IP creations past*, present, and going forward." Andy Heyward, Chairman & CEO of Genius Brands, said that, "In all of Hollywood, there is no greater prize. This is the Holy Grail. Stan Lee Universe is a once in a lifetime asset drawn from over 100 original, heretofore unexploited properties, created by the most successful creator of intellectual property of our time."
Source Genius Brands International Announces Transaction to Create "Stan Lee Universe":: Genius Brands International, Inc. (GNUS) (gnusbrands.com) https://ir.gnusbrands.com/press-releases/detail/1078/genius-brands-international-inc-issues-shareholder-letter
That may sound like more hype from Andy to some, but I am 100 percent aligned with Andy. I do not know how many total characters there are in the library. Only that it is over 100. I firmly believe in my mind, heart, and soul that there are at minimum 5 potential billion-dollar franchises in that library. It would only take one, billion-dollar franchise to make the current market valuation of Genius a non-issue. Imagine if they had 5 billion-dollar franchises. Where would the valuation be then? It is also possible that Genius gets scooped up by a larger media company but it would be wise to wait until they have one or two billion-dollar brands under their belt.
The announcement that sealed the deal for me and made me jump back into the stock was during the conference call explaining the Chizzcom acquisition (which was a smart move on its own merit) details when Andy said this.
"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."
After the call, the letter was sent out to shareholders, which was basically a recap of the call. There is a lot of good stuff in the letter. However, seeing the confirmation in black and white of a tie-up between Marvel and Genius to work on a "Stan Lee initiative" superseded everything else for me. I do not know what the "initiative" is. I can only speculate, and I could be way off base. That is why I only took a small starter position. It could (keyword) be something material and meaningful like a movie project or new series for Disney+ from the "Stan Lee Universe" library. It could (keyword) also turn out to be something that will have zero material impact and once again disappoint the street when it gets revealed.
In Summary, I think there are valid points for both bulls and bears concerning Genius. I think the stock is overvalued at current levels; there are potential catalysts in the near term and long term. A lot has to go right for Genius to grow into its current valuation. There may be big drawdowns in the stock price, and if it cracks below a buck, I would expect to see shorts pile on. That could result in Genius staying in pennyland territory for quite a while. Even though Andy has stated that he does not plan to do a reverse split, the market may force it to happen if Genius can't stay above a buck. I would welcome the opportunity to grab shares under a dollar and build my position.
Latest Genius Investor Presentation
If you are considering getting involved in Genius stock, I would not recommend going ALL IN short or long. Be prepared for a bumpy ride and play it size appropriate for the risk involved. I am looking forward to seeing how the Genius story unfolds, and as it does, I will be making moves accordingly. If you liked this article, please give me a follow Twitter, or Linkedin. If you have any comments or questions, please do not hesitate to reach out.