A July 21 press release from a legal firm investigating Genius Brands (NASDAQ:GNUS) and some of its statements leading up to the launch of the media company’s Kartoon Channel app caught my attention. What happens on this front could be very bad for GNUS stock.
I usually don’t pay attention to press releases from law firms stating they’re investing this or that company. For the most part, they turn out to be ambulance chasers. However, this press release from Scott+Scott Attorneys at Law LLP, a shareholder rights and consumer rights litigation firm, seemed to be short and sweet and to the point.
“[Scott+Scott] is investigating whether Genius Brands International, Inc. (“Genius Brands” or the “Company”) (NASDAQ: GNUS) or certain of its officers and directors violated federal securities laws,” the July 21 release stated.
“On June 15, 2020, Genius Brands launched the ‘Kartoon Channel!’ an app which the Company touted as ‘Netflix for Kids.’ Our investigation concerns whether Genius Brands made false and misleading statements and omitted material information in connection with the launch of the Kartoon Channel! App.”
In the past, I’ve seen some publicly-traded children’s media companies go to rat poop, despite the best intentions of management. WildBrain (OTCMKTS:WLDBF), formerly known as DHX Media, is but one example, so I’m not about to say the world of children’s media is an easy business environment because it’s not. It’s darn competitive.
The Stan Lee Universe
However, the industry is known for putting on a good show in the effort to generate buzz for new and up-and-coming properties. It’s one thing for Andy Heyward, the company’s chief executive officer (CEO), to boast about Genius Brands in the shareholder letter, it’s another to have allegedly made misleading statements that artificially push up the company’s share price for the benefit of insiders.
“Let me be clear. In Stan Lee Universe, we are building out the next MARVEL, based on the creations of the man who built the original Marvel… Stan Lee,” Heyward stated in the company’s July 15 press release.
“We are doing so through the single most widely distributed comic book publisher, Archie Comics, and its visionary Publisher, Jon Goldwater, under the creative leadership of the most respected and accomplished authority in comic books today, Michael Uslan.”
Reading this, who wouldn’t be excited about the company’s future. We’re talking Stan “freaking” Lee. It’s got to be a winner, right? The problem is that Heyward, Uslan and the rest of Genius Brands’ management still have to execute their plan.
GNUS Stock Has Quite the Valuation
The company’s 2019 financials show just $5.91 million in revenue, with an operating loss of $6.51 million. That’s hardly the stuff of legends.
As I write this, GNUS stock is trading below $2.
My InvestorPlace colleague, Mark Hake, recently wrote about the seriously dilutive effect of the company’s $13.75 million convertible financing in March, which appears to be good for almost no one except the investors that bought into this deal. Upon closer inspection, I couldn’t agree more.
The notes came with warrants to purchase 65.5 million shares at 26 cents a share within five years of the March 17 closing. On May 15, the existing shareholders voted to lower the exercise price of the 65.5 million warrants to 21 cents, with the proviso that shareholders could vote to further reduce the exercise price in the future.
On June 23, the $13.75 million in convertible notes were converted into 65.5 million shares of GNUS stock, bringing the number of shares outstanding to 217.6 million.
At the current share price, it has a market cap of almost $400 million for a company with less than $6 million in annual revenue. That’s 67 times sales. You can buy Netflix (NASDAQ:NFLX) for just 10 times sales.
From where I sit, this entire situation appears to be ready to get a lot worse before it gets better. As I say in the headline, where there’s smoke, there’s fire.
Like my colleague, I just don’t think Genius Brands is a good investment at this point. Should it start generating some real revenue and put to bed some of the concerns, Scott+Scott is investigating; then I think you’ve got a case.
If you’re one of the investors who bought over $11 in early June, I feel for you. I can’t tell you what to do with your stock, but right now, it looks like you’re in for a long wait to make yourself whole.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.