Genius Brands: Delight and Enrichment

PRIME SERIES

 

“Llama llama red pajama
Reads a story with his mama.”
 
Llama Llama Red Pajama
Anna Dewdney, Author 

GeniusBrands International (GNUS:  Nasdaq) is a publisher of animated media, specializing in content to delight and entertain young children.  Some investors might not be so thrilled.  At first glance revenue appears uneven. Historically the company has reported net losses and negative returns on equity.  What is more, in recent years the stock price has mostly traded sideways under nominal volume.

A closer look at Genius Brands reveals there is more to the story.  Indeed, the company appears to be at an inflection point, triggered by a pending strategic acquisition that could dramatically change the company’s revenue and earnings profile as well as its competitive position in the children’s media market.  Furthermore, new collaborative relationships with high-profile movie and sports personalities are bringing creative, original titles to the company’s building media portfolio.  In addition to the usual cable and networks the new shows will be delivered via Genius Brands very own Kartoon Channel! launched in June 2020.

Genius Brands accomplishments should generate strong stock price catalysts in the coming months that could lead to shareholder enrichment.  With the stock near its historic low, timing could not be better to get acquainted with the company.

 

Building Portfolio

Genius Brands develops content with a purpose for youngsters from toddlers to tweens, providing educational moments even as the young audience is entertained.  The element of enrichment is unmistakable in Thomas Edison’s Secret Lab, a series featuring a group of friends who have discovered a long-hidden laboratory created by the famed inventor.  As are many of Genius Brands programs the Secret Lab is available on easily accessible channels such as Netflix and XFINITY’s Kid Genius.

Each of the company’s animated series has been crafted into a strong brand that can generate revenue from multiple sources, including broadcast license fees and product sales.  Golden Globe winning actress Jennifer Garner voices a wise, hard working mother with hooves in the company’s Llama Llama series based on the book collection by acclaimed children’s book author and illustrator Anna Dewdney.   Over 50 products have been licensed around the series and are available in at popular retailers such as Kohl’s and Target as well as online at the ubiquitous Amazon platform.  Who can resist a cuddly plush toy llama dressed in red jammies

Indeed, universal attraction is a critical factor in selecting content for the Genius Brand media portfolio.  The fantastical nature of animation gives it wide attraction as well as longevity in the entertainment market, especially for children who live in a world of imagination.   In a recent letter to shareholders, Genius Brands chief executive officer, Andy Heyward, described the revenue-generating potential in content that has appeal across the world’s cultures as well as popularity from one generation to another.   The approach should help the Genius Brands animation portfolio to deliver long-term value to shareholders.

 

Personality Plus!

Who better to enlist for one of the newest additions to the Genius Brands portfolio than athlete, actor and politician Arnold Schwarzenegger?  He is arguably one of the most recognized personalities in the world today and his movie role as The Terminator is likely to keep Arnold in the hearts and minds of kids for generations to come.  Schwarzenegger has already been in the studio as the voice of a superhero and teacher in a new animated show for preschoolers called Stan Lee’s Superhero Kindergarten.  

Even the series title has star power.  The famed comic book writer, editor and publisher Stan Lee was the main creative force behind Marvel Comics.  He co-created numerous popular fictional characters, including superheroes Spider-Man, the X-Men, Iron Man, the Hulk, the Wasp, and Captain Marvel, among others.  SuperHero Kindergarten was one of the Lee’s last creative efforts.  Genius Brands has acquired the rights to the name and likeness of Stan Lee and is working with Stan Lee’s Pow! Entertainment to develop the series.  Genius Brands expects to introduce Schwarzenegger’s Captain Fantastic character to little people sometime in 2021.  

Following closely behind will be another star powered series called Shaq’s Garage, featuring basketball great Shaquille O’Neal.  The animated action-adventure show features a collection of cars and trucks that unbeknownst even to their owner Shaq communicate with a secret language and undertake fantastic missions in the name of justice and diversity.  O’Neal will give voice to a truck named Big Diesel.

 

Channeling Starpower

Shaq’s Garage is scheduled for release in 2022, but not to the usual platforms.  Genius Brand is reserving Shaq’s Garage for its own Kartoon Channel!, which was launched in June 2020.  Kartoon Channel! can be downloads to a mix of devices such as Roku, AppleTV, Amazon fireTV and Samsug smart TVs.  The channel can also be found on video on demand services such as Comcast’s Xfinity, Amazon Prime Video and Sling, among others.  The most recent deal with LG Electronics USA will put the Kartoon Channel! App on LG smart televisions, bringing total the number of devices across the U.S. with Kartoon Channel! access to over 300 million. 

Genius Brand’s management is building Kartoon Channel! as a source for smart and safe entertainment with no violence or negative stereotypes.  The music and humor planned for Shaq’s Garage is expected to be a strong contributor to the platform’s reputation.

Kartoon Channel! is readily accessible by children and it is free.  Nonetheless, there should be plenty of revenue opportunities in advertisements and merchandise that arise from the content.  For example, the colorful characters and fantastic vehicles in Shaq’s Garage should provide inspiration for licensed merchandise from die cast toy cars to costumes to soft toys.  It is notable that retail sales of toy cars and trucks reached $1.3 billion in 2019, while total sales of toys and games in the U.S. alone reached $4 billion.  (Statistica.com)  Grabbing even a small share of this large and growing market bodes well for Genius Brands top line. 

 

Strategic Moves

In November 2020, the company announced plans to acquire ChizComm Ltd., a marketing and media agency specializing in children’s entertainment, toy and gaming content.  As the largest purchaser of children’s media in North America, ChizComm could help transform Genius Brands into a power in the children’s media industry.  Importantly, ChizComm should be a good fit to monetize the content flowing through across Kartoon Channel!.

ChizComm founders, Harold and Jennifer Chizick, and their media team will remain with the company, giving Genius Brands a boost in expertise and recognition in the children’s media and toy markets.  ChizComm claims to handle over $100 million in annual media spend for more than two dozen major toy companies and other widely recognized children’s brands.   Net revenue for ChizComm is estimated to be near $37 million. 

Investors may note the potential in ChizComm media sales and profits to smooth Genius Brands quarterly sales and earnings reports.  That said, nature of program development and distribution cycles will still likely lead to periods of higher expenses followed by spikes in sales for Genius Brand’s television and home entertainment segment.  The company reported $1.2 million in total sales for the first nine months of 2020, compared to $5.2 million in the same period in the previous year.  Revenue in 2019 had been boosted on delivery of season two of the Llama Llama series to Netflix and season one of a series called Rainbow Rangers to Viacom Media Networks. (SEC.gov)  

 

Burnishing the Balance Sheet

The ChizComm deal is expected to close in early 2021.  The $12 million purchase price is payable at the time of closing with $8.5 million in cash and $3.5 million in Genius Brands’ common stock.  Additionally, ChizComm sellers could receive an additional $8 million if performance milestones are reached. 

Paying for plum strategic deals requires financial strength.  Over the last year Genius Brands management has been sprucing up the company’s balance sheet with new equity capital.  The company completed a private placement in May 2020, bringing in $47.5 million in new capital through the sale of common stock.  Another private placement of 37.4 million shares of common stock in October 2020, gained an additional $57.9 million in new capital. 

In June 2020, $13.75 million in notes issued earlier in the year were converted to 65.5 million shares of common stock.  The company also allowed warrant holders to exercise 58.5 million warrants on a cashless basis.  The move led a reduction in total liabilities of $16.1 million at the end of September 2020, compared to $20.3 million at the beginning of the year. 

Coupled with the common stock sales mentioned above total common stock outstanding was reported at 219 million at the end of September 2020, compared to 21.9 million at the beginning of the year.  Subsequent to the October 2020 private placement, shares outstanding are estimated to have increased to 256.4 million. 

 

Portfolio Investments

Shareholders may feel a little dizzy from the dilutive effects of management’s capitalization efforts.  However, plans for deploying that capital should help stop the spin. 

Investors may find Genius Brands is in a sweet spot in the entertainment industry.  The creative team at Genius Brands has a strong track record in successful animation franchises.  In a recent interview with this analyst, CEO Andy Heyward praised the group as having helped create and tee up more megabrand billion dollar brands than any other, including Scooby Doo, Surfs, Ghostbusters, My Little Pony, Transformers, Lion King, Frozen, Toy Story, Batman and others.  With new capital to support them, the team could be expected to deliver more winners.

Following the common stock offering in October 2020, we estimate Genius Brands had a cash kitty totaling $100 million.  Of course, $12 million of the cash is earmarked for the pending acquisition of ChizComm and another $8 million is likely to be set aside for the agreed upon ‘earnout.’ 

Additionally, the company has been using approximately $1.8 million in cash resources to support operations each quarter.  The cash usage rate is likely to increase rather than decline as management steps up promotion of the Kartoon Channel! and pushes forward with new original programming like Shaq’s Garage and Superhero Kindergarten. 

In July 2020, the company confirmed plans to form a joint venture with Pow! Entertainment to be called Stan Lee Universe, LLC.  With a rich portfolio of creations by the legendary Stan Lee at their disposal the partnership should have plenty of material that would merit investment by Genius Brands.  

 

Valuation and Outlook

 A successful businessman as well as a hoops champion, Shaquille O’Neal has taken an equity position in Genius Brands.  O’Neal may be redefining ‘smart money’ with his various endorsements from Papa John’s Pizza to Icy Hot to Reebok.  He has established a credible track record for carefully selecting equities and then applying his prodigious charm to promote the business.  Shaq may be gratified at the chance to earn his acting chops in Shaq’s Garage, but Genius Brands is likely to be the real winner in the arrangement as Shaq helps elevate the visibility of Genius Brands with consumers, investors and potential strategic partners alike.

 In the coming months management who should have plenty to discuss.  With the close of the ChizComm strategic acquisition in the first quarter 2021, there will be new revenue and earnings to disclose as early as the June quarter.  Later in 2021, children will get an introduction to Superhero Kindergarten and its teacher with a charismatic European accent.  KartoonChannel! is also expected to expand throughout the year with new programs and product offers that are certain to generate interest.  There should also be entirely new programming inspired by Stan Lee to introduce in the months ahead as the joint venture with Pow! Entertainment is formalized.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Underwriters of the Prime series in the Small Cap Strategic weblog, where this article was first published, may have a beneficial interest in, serve as agents of, or act as advisors to the companies mentioned herein.