In today's world of investing the key part to any investment seems to be timing. The days of buy and hold seem to have evaporated. The main reasons for this are that every quarterly result seems to be able to change market caps of any stock by 25% overnight. The reality of the situation is no investment should ever change that much based on one quarterly report unless unknown information that is fundamental to the companies long term survival is reported. Given this environment, it is not only essential to buy companies with solid long term strategies but also make sure the timing is correct. With this in mind I decided it was time to revisit a company that I had previously published an article on almost two years ago called Genius Brands International (NASDAQ:GNUS). The company has been busy and finally seems to be on the cusp of turning into a cash flow generating machine with a lot of upside potential going forward. Therecent deal announced with Sony (NYSE:SNE) is called transformational by the company.
Genius Brands was formed two years ago when Andy Heyward and his wife Amy Heyward took their existing company and reverse merged it into a shell company. They renamed it after their flagship brand Kid Genius and raised money. Their goal is to provide Entertaining & Enriching 'Content & Products with a Purpose' for Toddlers to Tweens. Some of their better known properties are Warren Buffett's Secret Millionaire Club and Thomas Edison's Secret Lab. They have also branched into other areas with brands such as Psycho Bunny, From Frank and Llama Llama to just name a few. One of their key strategies going forward is to be able to monetize their content through distribution of other merchandise such as toys and clothing. Much like some of the bigger players do with brands like Star Wars.
With any small cap investment one of the most important aspects is their financial condition. Most are always trying to raise money to make it to a cash flow positive position. Fortunately Genius Brands has already raised money and from their recent conference call will be sitting on $7M in cash and are anticipating being cash flow positive in the second quarter of 2016 which starts next month. Looking back over the last quarters the burn rate has been very consistent at about $1 million per quarter. Margins also have been very high at typically around 90%. I would expect this trend to continue as their revenues are going to be based on very high margin items. The 10K will be out by the end of March and all these numbers should be confirmed in that filing.
There are multiple catalysts over the next few months that could greatly change the dynamics of how this stock is seen by investors. All of the following items listed below can be found in the 8-K SEC transcript filing from the conference call:
a) 10 year agreement between Sony and Genius Brands
b) Genius Brands now has access to all of Sony's retail outlet space for distribution
c) Access to Sony's kids content to generate new content for these brands
d) Will jointly develop with Sony original children's programming
In addition to the Sony deal their Comcast children's channel has grown in leaps and bounds since launching in October. Current viewers are up to over 300K according to the CC transcript from above. This growth is expected to continue and so far there have been no commercials. This will slowly start to change in Q2 when limited commercials are started. This will be another important revenue stream going forward. While it won't be another Nickelodeon or Disney channel it is not hard to imagine this generating 100% margin cash flow in the very near future. Plus it is a low cost advertising avenue for their own products.
Another significant catalyst is the amount of SKUs that will be available on Amazon over the next few quarters. Currently launched in October with 46 SKUs on Amazon the expected number of SKUs over the next few quarters will climb to over 1000. Those kinds of numbers can drive significant revenue growth and cash flow positive results in the near future.
A final catalyst could be its new property called Space Pop. This series is a cross between Spice Girls and Star Wars and aimed at girl tweens. It will launch in q3 and be followed by the launch in q4 of the retail side. There is said to be two major retail partners onboard and this could be a company maker by itself.
One of the risks with Genius Brands is the competition. They are playing against some of the giants in the industry like Disney (NYSE:DIS) and Mattel (NASDAQ:MAT). Both established powerhouses with large dedicated teams to address these same markets. While teaming with Sony will certainly help there are no guarantees they can successfully compete against them.
Some of the risk is countered by the fact Genius Brands has both cash and assets worth twice the current value of the stock. With $7M in cash their market cap is almost all based entirely on its cash position. Given that they are moving very quickly towards a cash flow positive state that should not go down unless they acquire additional properties. The real key to why this is a risk free investment at the current price of around 75 cents is the film library. They own 86 shorts of 30 minutes that are each valued at a minimum of $200K. This is almost $17 million in assets that if sold today would give shareholders well over a dollar per share in valuation. Keep in mind that is just the film replacement costs and does not take into account any merchandising based on those series which can be substantial. Throw in the cash position and no other valuation of its other properties and this becomes one of the most undervalued microcap plays out there and there really are no other plays like it in the space.
While there is certainly a bright light showing up on the horizon the timing on this investment could still be 3-6 months out. The quarter 2 reporting won't be for at least 4 more months. A lot can happen in 4 months and there are no guarantees they will meet their goals. Most microcap stocks promise but typically underperform. If that is the case I would not expect much movement of the stock price. On the other hand if they can meet their commitments then this will become a high growth and high margin play that can actually succeed in the microcap space. One other important factor is that management owns over 40% of the shares outstanding which makes them very aligned to getting the job done and making this company into a real player. Certainly the new Sony deal also is trending them in that same direction.
Disclosure: I am/we are long GNUS.