Hindenburg Research on Genius Brands
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Since early May, and even accounting for yesterday’s plunge, shares of small TV production company Genius Brands International Inc (NASDAQ:GNUS) have appreciated in value by more than 20x on relatively mundane news. We think the stock will drop as quickly as it skyrocketed.
- The company itself appears to agree with us, believing its shares are worth $0.35 to $1.20 per share, 83%-95% below current levels, based on three financing rounds it completed at those prices last month alone.
- Retail investors seem entirely unaware that ~131 million shares and share equivalents issued from recent financing rounds will become available to trade within an estimated 2-4 weeks. We walk
bagholdersreaders through how this upcoming wall of selling pressure could send the high-flying shares back to $1.50 within a month. - The stock currently trades at a fully diluted market cap of ~$1.56 billion, affording it a ludicrous revenue multiple of 1,201x based on its $1.3 million in annualized revenue. The company has generated losses every quarter for almost 10 straight years.
- We also walk readers through issues with the actual business. For example, the company hasn’t disclosed that its flagship show, Rainbow Rangers, has not yet been renewed for a new season on key network Nick Jr., and it is unclear whether it will be.
- Rainbow Rangers aired 26 times per week when it first debuted on Nick Jr. in 2019. Now, the show only airs ~9 times per week, at 3:49am EST during weekdays and Saturdays and twice Sunday mornings between 6am and 7am; hardly primetime.
- The company’s other key show is Llama Llama, based on a popular series of children’s books. But the company doesn’t actually own the intellectual property to Llama Llama – instead merely licensing it. The company has refused to disclose the economic terms of the deal, but the lack of reported revenue indicates the terms are not economical.
- Stock runs are always fueled by exciting stories, but the ending is almost always written in the boring fine print. We think Genius Brands will crash spectacularly due to obvious market mechanics that its retail investor base are likely unfamiliar with – even in the frothiest of markets.
Genius Brands’ Meteoric Stock Price Rise
In early May, children’s television production company Genius Brands International issued a press release announcing it was merging its two existing TV channels into one, to be called the “Kartoon Channel”. It also announced plans to integrate 3,000 episodes of acquired content “including hit programs form (sic) key content suppliers around the world.”
The company declared its new TV channel to be the “economic vaccine for COVID-19.”
The press release included no numbers about revenue implications and seemed to be a rather run-of-the-mill corporate streamlining announcement, devoid of material positives. Nonetheless, the news lit the spark for what would become a momentous stock run. Genius’ shares closed the day of the announcement at $0.48, a 52% increase from the prior day’s close, on over 34 million shares of volume, roughly 30x normal levels.
Day traders determined that the company was now “Netflix for Kids” and, with the benefit of some upward momentum, a confirmation bias feedback loop quickly turned Genius into the hottest speculative stock on the market.
Since the day of its Kartoon announcement, Genius Brands has climbed as high as $12 per share on almost 400 million shares of volume traded in a single session. With over 220 million fully diluted shares outstanding, the stock currently trades at a market cap of ~$1.56 billion. [1] [Pg. S-2, Pg. 1]
Retail stock forums from Reddit to StockTwits have been alight with countless rocket ship emojis and giddy traders gloating over paper gains. Robinhood users owning the name have jumped from about 5,000 to over 140,000, according to RobinTrack.
Reality Check: Even the Company Only Thinks Its Shares Are Worth $0.35 to $1.20, Representing Downside of 83%-95%
The price at which a company sells its own stock to fund its business can be a key indicator of what management thinks its stock/company is actually worth.
Obviously, a management team isn’t going to issue stock at low prices if it thinks its valuation will move higher in short order. Companies have a vested interest in issuing shares when their valuation looks favorable, in order to minimize the dilutive effects of issuing new equity.
With that in mind, the company raised 3 financing rounds from May 7th to 12th at prices ranging from $0.35 to $1.20, 83%-95% below current levels as of this writing.
This means that in addition to management tacitly putting a $1.20 price target on its own stock, management would likely to go to the market and attempt to sell more stock at the company’s current valuation – if the stock wasn’t slated to get demolished in the short term, which we believe it is.
Reality Check: 131 Million Shares Are Likely to Hit The Market Within 2-4 Weeks, Creating a Massive Amount of Selling Pressure
Just as an exciting story is always the fuel to a massive stock run, the tragic ending is often written in the mundane fine print.
A review of Genius Brands’ recent multitude of stock offerings makes clear that its financial backers are likely weeks away from be able to sell a wall of stock that is almost assuredly going to send shares sharply lower.
In March, the company completed a financing that sold convertible notes and warrants to its own CEO and other investors that collectively convert into ~131 million shares of common stock at a strike price of $0.21. [Pg. 2, Pg. 1]
Most financiers that participate in such private placements buy the stock at a slight discount to market prices. The discount compensates them for the risk of temporarily being unable to sell the shares. Such financiers are often looking to make small arbitrage gains by locking in the difference between the trading price and the discounted price they purchase at. That arbitrage can typically only be truly locked in when shares are registered and the SEC approves a “notice of effectiveness” to sell the shares on the open market.
Given the meteoric rise of Genius Brands’ stock, those financiers are likely sitting on outsized paper gains, waiting for the opportunity to lock in profits from the retail bonanza fueling the stock price. Yesterday, the company filed a prospectus statement that seeks to allow those very holders to sell almost half of those shares. We expect a follow-up filing will cover the remainder.
The timeline for when the SEC approves the “notice of effectiveness” can vary, but based on recent history, it took 10 days for the company’s last S-3 filing to become effective. That suggests an effectiveness around June 14th, coinciding with the company’s planned launch of the Kartoon Network on June 15th.
Once that notice of effectiveness is active, a new wave of selling is likely to pummel the stock as its financial backers rush to lock in profits. Any readers that have not exited by then are, in our estimation, likely to get decimated.
Reality Check: Company Fundamentals Can’t Support the Stock’s Astronomical Price
Readers hoping for the company’s fundamentals to save them are not likely to receive any help.
The company’s annual revenue run rate is ~$1.3 million (last quarter’s revenue was only $335 thousand [Pg. 4]), affording it a ludicrous 1,201x revenue multiple. According to FactSet, the company has lost money every single quarter since 2010 and has consistently tapped the capital markets for cash, often on the back of promotional announcements that routinely end up delayed or abandoned.
Reality Check: The Company’s Business Is Not the Powerhouse Shareholders Might Think It Is, As Seen When Reviewing its 3 Most Important Shows
Some readers might be saying “well sure the fundamentals are terrible but Netflix (and most of the other stocks I like) also have atrocious fundamentals.”
Stocks with an appealing story can perform well for a period of time. But a story with some stock momentum make for a fragile investment foundation.
And the company’s story has major holes. Genius’s top 3 publicized shows are Llama Llama, Rainbow Rangers, and Stan Lee’s Superhero Kindergarten.
To be frank, we don’t think most investors in Genius Brands are terribly familiar with the details of the key television shows they now own, so here is a quick breakdown:
1. Llama Llama is Its Most Popular Show, but the Company Doesn’t Own the Intellectual Property and Only Has a Licensing Deal, With Undisclosed (But Clearly Minimal) Economic Benefit
Llama Llama is a show that airs on Netflix based on the popular children’s book series. These shows are the most popular of the company’s current lineup. However, Genius doesn’t own the intellectual property behind Llama Llama, as it simply “represent(s) their content as a licensing agent” [Pg. 5]
The content deal was announced in 2015, but terms weren’t disclosed. We asked the company for details and investor relations responded with an answer that should alarm anyone looking to understand Genius Brands’ financials:
“WE DO NOT DISCLOSE ANY ECONOMIC INFORMATION ABOUT OUR SHOWS OR PROPERTIES.”
Based on the company’s limited revenue and consistent losses to date it doesn’t appear to be a particularly lucrative contract.
2. Rainbow Rangers—The Company Has Boasted That the Show Is Currently Airing on Nick Jr. True, But It Appears Once Per Day During the Week at 3:49AM EST And Three Times On Sundays. The Show Is Currently Not Yet Slated For a 3rd Season and It Is Unclear Whether It Will Be Renewed.
Rainbow Rangers is another key show for the company, and in this case Genius Brands does own the intellectual property behind the show, making it perhaps the company’s most economically relevant property. It airs on Nick Jr. and has completed 2 seasons to date.
The company made a big deal about its pick-up by Nick Jr. in a January 2019 press release announcing that the show had 455,000 viewers in its premiere:
“WE HAVE JUST RECEIVED THE NIELSEN RATINGS FOR OUR LATEST PREMIERE EPISODE (SUNDAY, JAN. 6) OF RAINBOW RANGERS ON NICK JR., WHICH GENERATED OUR HIGHEST PREMIERE EPISODE RATING TO DATE WITH 455,000 VIEWERS!
THE PREMIERE EPISODES ARE BROADCAST ON SUNDAYS AT 11:30 AM, AND THE ENCORE EPISODES ARE BROADCAST MONDAY THROUGH FRIDAY IN THE AFTERNOON.
AND, THE STRONG AND GROWING VIEWERSHIP ON NICK JR. POINTS TO AN INCREASING APPETITE BY KIDS FOR RAINBOW RANGERS AND THE COMING TSUNAMI OF PRODUCTS AT RETAIL.” THE PRESS RELEASE SAYS.
Then, the company stated in March 2020 that it was airing 26 times per week, giving it broad coverage in apparently favorable time slots:
“MONDAY-FRIDAY, FOUR AIRINGS PER DAY, AND SIX AIRINGS ON THE WEEKENDS. THE ANIMATED ACTION-ADVENTURE SERIES PREMIERED ON NICK JR. IN NOVEMBER 2018 WITH FIVE AIRINGS PER WEEK AND HAS CONSISTENTLY ACHIEVED HIGH RATINGS WITH ITS TARGET DEMO OF GIRLS 2–5-YEARS-OLD.”
But the Rainbow Rangers schedule now says otherwise. Most weekdays look like this schedule, from yesterday, where the show has one time slot on Nick Jr. at 3:49AM EST.
Several platforms show us the same, indicating it airs 9 times per week, instead of 26: each morning at 3:49am and then twice additionally on Sunday mornings at 6:00a and 6:30a EST. We emailed the company to ask about its current number of airings and have not heard back as of this writing.
As Genius Brands’ CEO said in the March 2020 press release regarding the show being aired 26 times:
“NEEDLESS TO SAY, LEADING BROADCASTERS LIKE NICKELODEON DON’T MAKE SCHEDULE CHANGES OF THIS MAGNITUDE WITHOUT GOOD REASON…”
He has not commented thus far on the “good reason” for the show airing in the witching hours of early morning only 9 times per week.
Similarly, there is no indication that a Season 3 has been picked up by Nick Jr. We e-mailed both Nick Jr. the company to try to get confirmation of a Season 3 but investor relations simply stated that negotiations were “underway”.
We find it surprising that Nick Jr. is still in negotiations. Other shows such as “PAW Patrol” “Blues Clues” and “Bubble Guppies” were already announced as being picked up by Nickelodeon in February. Season 2 of Rainbow Rangers was ordered in April of 2019 in preparation for its release in October. We are now in June 2020 with no word on the series heading into the fall.
3. Stan Lee’s SuperHero Kindergarten Is Targeted to Air in Q1, After Almost 10 Years of Apparent Delays. In the Interim, Stan Lee Has Passed Away.
Stan Lee’s Superhero Kindergarten, starring Arnold Schwarzenegger, is another show being created by the company targeting to be aired in Q1 2021.
The company has been attempting to launch the show since as early as 2011 on a major network. In the interim, legendary comic book writer Stan Lee sadly passed away in November 2018.
The company announced recently it would be launching the show on Amazon. No economic terms were disclosed, but the company hyped that it would be “plutonium in a bottle” for shareholders.
Amazon produces some of its own content, but the announcement made no indication that Amazon was paying Genius Brands for the show. For most Amazon Prime content, Amazon pays content suppliers a per hourly rate based on viewership, or they split the rental or subscription revenue.
In other words, the company is likely simply posting its content on Amazon and self-marketing the show, a far less exciting achievement than suggested. It is not entirely clear how it intends to reach kindergarten audiences given that Stan Lee is no longer with us and Arnold Schwarzenegger likely has little brand recognition among young children.
All told, we just don’t see the company magically growing into its current absurd valuation, and the shareholders waiting to register 131 million shares for sale are likely acutely aware of this.
Conclusion: Why We Think Genius Brands Will Be a $1.50 Stock Within a Month
There are several factors that we expect will send shares down rapidly in short order:
- A massive slew of ~131 million shares that are coming available for sale, likely within weeks, that currently represent a nominal value of $917 million in selling pressure as of current prices (which, realistically, we do not expect to hold up).
- The availability of options, allowing investors to hedge and/or position ahead of the pending selling pressure.
- The reversal of retail momentum. New traders are notoriously focused on the next shiny object, and when Genius Brands loses its luster it is likely to quickly get dropped to the curb in favor of other junky story stocks.
Disclosure: We are short shares of Genius Brands International Inc (NASDAQ:GNUS)
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[1] Includes fully diluted reported share count and shares convertible through recent convertible notes financing.