Follow The Smart Money Into Genius Brands International

May.16.14 | About: Genius Brands (GNUS)

Summary

Genius Brands International is a multimedia content and brand management company focused on providing "content with a purpose" for toddlers to tweens.

Genius Brands is run by industry veterans Andy and Amy Heyward, who merged their company, A Squared Entertainment, with Genius in November 2013.

The company announced a $6MM financing round on May 15 to be used to market its various brands and expand its global licensing and distribution business.

Genius Brands has a cadre of heavyweight advisors and board members, including a former Governor of California and the president & co-CEO of American Greetings.

Genius Brands International (OTCQB:GNUS) is a multimedia content and brand management company focused on providing "content with a purpose" for toddlers to tweens. The company is run by entertainment industry veterans Andy & Amy Heyward, who recently merged the company they co-founded in 2009, A Squared Entertainment (www.a2entertain.com), with Genius Brands (www.babygenius.com), and announced a $6MM private placement on May 15 that gives them approximately two years of capital to execute their business plan and create a potentially large amount of shareholder value.

The legacy Genius business, formerly run by Klaus Moeller, aims squarely at parents of children up to age five wanting to positively stimulate their children with mentally and musically interactive toys. The Baby Genius business had approximately $2.5 million in revenues in 2013, down from over $6.5 million in 2012, which is why investors and the Board of Directors demanded a change.

Enter the husband-and-wife Heyward team, who gear their content toward an audience of kids ages 6 to 11 years old. Andy, 64, is a multi-Emmy winning producer of children's entertainment, who has made more episodes of kids' television than any other producer (5,000+), many of which are household names. Some of his past work includes Ghostbusters, Inspector Gadget, Strawberry Shortcake, Alvin and the Chipmunks, Care Bears, Super Mario Brothers, Hello Kitty, Sonic the Hedgehog, Captain Planet, G.I. Joe, Madeline, Sabrina the Teenage Witch, Liberty's Kids, Carmen Sandiego, the Archies and dozens more. Meanwhile, Amy, 46, has spent more than 20 years creating, managing and launching some of the most valuable brands in the world. She was one of the original members of the Disney Cruise Line executive team, and was an integral part of the creation of this successful Disney business. She later became director of global marketing at McDonald's, where she helped grow its "young adult" business. She's also had stints at the Los Angeles Times, Hasbro Toys and Universal Studios Florida. Net-net, Andy and Amy Heyward have the chops for creating and delivering both the attractive characters for gaining audience share, and the managerial skills for monetizing the exposure.

These two complimentary company founders have wisely pushed their content through every format available - broadcast TV, online, mobile/tablet, books, video-on-demand, home video and subscription services. The strategy takes one creative investment and produces more than seven profit streams from it, over and over, while the "merchandise" opportunities include revenues from electronics, toys, games, apparel, accessories and publishing.

From the company's most recent 10-K filing:

"We create, market and sell children's videos, music, books and other. We license the use of our intellectual property, both domestically and internationally, to others to manufacture, market and sell products based on our characters and brand. We own, control, distribute and seek to build animated content and brands aimed at kids, and then license the brands and characters onto various products, including toys, publishing video games, music, apparel and soft goods. In most cases, we create our own original content. In other cases, we partner with existing rights holders to develop an idea or an existing brand."

A few other GNUS highlights:

  1. The company has Warren Buffett, Gisele Bundchen, Martha Stewart and Stan Lee video partnership shows, and the Oracle of Omaha has even done TV interviews promoting his Secret Millionaires Club product!
  2. Genius introduced its Warren Buffett's "Secret Millionaires Club" brand and product lines to an estimated 40,000 Berkshire Hathaway (BRK.A, BRK.B) shareholders attending its annual meeting on May 3.
  3. Baby Genius® is the #1 children's on-demand property on Comcast, with 60M+ downloads and over 500,000 VOD users/month. It also has over 14 million views on the Baby Genius® YouTube Channel, which is growing at over 600,000 views per month.
  4. Three notable Board of Directors members include former California governor, Gray Davis, president & co-CEO of American Greetings Corporation, Jeff Weiss, and Lynne Segall, publisher and senior vice president at The Hollywood Reporter.

$6 Million Financing

Chardan Capital Markets served as the placement agent for the $6MM offering, and the investment was led by Wolverine Asset Management LLC, a global institutional investor headquartered in Chicago. Andy and Amy Heyward personally invested in the round, along with various family offices and smaller institutional investors.

"Since merging with A Squared Entertainment, Genius Brands has been growing rapidly. The proceeds of this placement will be used to market our brands, expand our global licensing and distribution business, and accelerate our business plan. With existing cash along with the current placement, the company is in an extremely strong position, and is very excited about bringing our brands to the marketplace. We are also very excited to be working with the Special Equities Group at Chardan, to continue to build awareness and shareholder value," said Andy Heyward, Chairman and CEO.

Competition

The biggest players in this field are all well-known behemoths like Disney (NYSE:DIS), Mattel (NASDAQ:MAT), which owns Fisher-Price, among other children's brands, Viacom (NASDAQ:VIAB), the parent company of Nickelodeon, and Time Warner (NYSE:TWX), owner of Cartoon Network. GNUS has many other competitors, small and large, which is why its "unique focus on dedicating itself to content with a purpose is an important differentiator and distinct advantage in an endless sea of kids' entertainment properties," according to the 10-K.

In fairness, Disney is almost everything at this point: real estate, entertainment, media, technology, vacation travel, etc. Meanwhile, Mattel is a closer comparison, because it is mainly a toy company, sporting a market cap over $13 billion on trailing 12-month sales of nearly $6.5 billion. Genius differentiates itself with its "content with a purpose," aiming to be "as entertaining as it is enriching," according to the Management's Discussion and Analysis section of the 10-K:

"We create and distribute products which we believe are entertaining, educational and beneficial to the well-being of infants and young children under our brands."

Risk Factors

This is a micro-cap stock, so it's a risky investment. GNUS stock has limited liquidity, trading on the OTCQB, and despite $28,914,238 in paid in capital as of 12/31/13, the company has never shown a profit. Additionally, the children's entertainment space is crowded - Genius competes with numerous content creators for distribution and retail shelf space that is largely now dedicated to the larger studios. Cutting through the noise in an ultra-competitive business segment is never easy!

In the author's eyes, one of the largest risk factors comes down to the difficulty of determining and anticipating pop culture trends around media and movies, fashion and technology. "Content with a purpose" sounds great in theory, but will the brands and products Genius creates catch on? Here's some relevant disclosure language from the "risk factors" section of the 10-K:

"Successful movies and characters in children's literature affect play preferences. Trends in media, movies, and children's characters change swiftly and contribute to the transience and uncertainty of play preferences. Almost all of our products and product lines are based on the Baby Genius brand and related brands. We respond to trends and developments by modifying, refreshing, extending, and expanding our product offerings on an annual basis. However, we operate in extremely competitive industries where demand for children's attention is dynamic. If the interest of children trend away from our current brand or products toward other offerings based on current media, movies and characters, and if we fail to accurately anticipate trends in popular culture, movies, media, fashion, or technology, our products may not be accepted by children, parents, or families and our revenues, profitability, and results of operations may be adversely affected."

From a cap structure perspective, as of April 8, 2014, there were 6,029,828 shares outstanding, and the new $6MM round has a fixed $2/share conversion rate, which means 3 million more shares are now in the capital structure. The capital infusion, however, gives the company roughly 24 months of runway to execute the business plan, and also puts it on the path to up-listing to the Nasdaq, which seems likely to occur in the not-too-distant future.

Summary

Genius Brands has so many seeds planted in a fertile and growing children's market that its revenue will scale if just one of its multiple properties hits the popularity bell with kids. While that seems like a decent bet considering the proven success of the founders, there are no guarantees, and there's a tremendous component of luck in catching "lightning in a bottle." In other words, hitting on a pop-culture trend is never easy. But with $6 million in cash in the bank, advisors and board members like Warren Buffett and other entertainment industry heavyweights, it doesn't take a genius to see the potential of GNUS stock!

Disclosure: I am long GNUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.