Genius Brands (NASDAQ:GNUS) raised $13.75 million in a March 2020 convertible financing that is now flooding lots of new shares on the market. Many investors in GNUS stock may not realize that the company’s shares outstanding have more than tripled. That essentially dilutes and reduces each shareholder’s stake in the company.
For example, at the end of 2020’s first quarter, Genius Brands had 49.6 million shares outstanding, based on its latest 10-Q filing with the U.S. Securities and Exchange Commission. But recently, the company has allowed the owners of convertible notes to sell their shares after converting them. The holders of that $13.75 million in notes are now allowed to convert their shares at just 21 cents per share.
That means 65.5 million new shares. But that is not it. The noteholders also have 65.5 million in warrants to buy GNUS stock at 21 cents per share. If they exercise those notes, the company will receive another $13.75 million, but there will be 65.5 million more shares.
So, in total that could increase the number of shares outstanding by roughly 131 million shares. That will bring the total to roughly 176 million shares. This is 3.6 times the number of shares outstanding prior to this financing.
What Does This Mean for GNUS Stock?
This flooding of shares on the market is what Hindenburg Research wrote about. The article title says it all: “A Bagholder’s Guide to Why We Think Genius Brands Will Be a $1.50 Stock Within a Month.” Keep in mind when reading this piece on GNUS stock, that Hindenburg admits it has shorted the stock.
But the firm makes a valid point. The amount of dilution to shareholders does not necessarily make up for the massive dilution in the number of shares.
Moreover, the company has a history of making losses. So there is little confidence that the management will use the extra $13.75 million they get from the warrants in a way to produce any kind of profits.
In fact, the only profits seem to be from the people who paid 21 cents for their shares in the convertible notes and are now able to sell them for almost 10 times that amount. That is because the stock is now trading just below $2 per share.
Hindenburg makes a good point of stating the obvious. The huge amount of shares that are now available to be sold will likely push down the stock.
How Low Can the Stock Fall?
As of March 31, the 10-Q says that Genius Brands had $2.8 million in cash available. This includes $6.1 million from the sale of the $13.75 million in senior secured notes. That alone to me does not make any sense. Even if you take into account that the company was supposed to receive $11 million after selling discounts, there is still $5 million missing.
Let’s give the company the benefit of a doubt. Assuming that $5 million in proceeds show up later, let’s assume that the actual cash balance is now $7.7 million.
Moreover, if we assume that 100% of the warrants exercise this quarter, that brings in another $13.75 million. So, theoretically, in the best case, the company might have $21.5 million available.
However, there are now about 176 million shares outstanding. So if we divide $21.5 million by 176 million shares outstanding, this results in just over 12 cents of cash per share. That amount does not include any debt that the company has on its balance sheet.
Therefore, it is very possible that, if investors come to have no faith in the company’s prospects, it could fall to between 10 cents and 12 cents per share.
What Should You Do With Genius Brands Stock?
Given that its liquidation value is just around 12 cents per share, GNUS stock could trade anywhere between that price and its existing price. However, this does not account for the huge selling pressure on the stock.
I have shown that the exercise of the warrants, although providing much-needed cash, will also put massive selling pressure on the stock price. In addition, it will significantly reduce and dilute the existing shareholders’ stake in the company.
As a result, most people will recognize that GNUS stock is speculative in nature. They will likely wait until it shows significant profits before taking any position.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
