Children’s entertainment company Genius Brands (NASDAQ:GNUS) went on a wild ride earlier this summer. GNUS stock rallied from less than 50 cents to a peak of more than $10 in share in June.
At the time, traders rushed to call the company’s new Kartoon Channel app the Netflix (NASDAQ:NFLX) for kids. That comparison may have been fanciful though. In any case, the moment ended quickly.
Already, shares have collapsed back to $1.20 each. And after a dismal Q2 earnings report, it became clear that the recent excitement was more hype than reality. The company’s revenues remain a pittance, and operating losses are large. At the end of the day, traders pinned way too many expectations on a small TV company with largely unknown programming.
And, even at this greatly reduced share price, the odds still favor further declines for Genius in coming months. However, there was one positive in Genius’ otherwise downbeat Q2 earnings report.
Massive Loss Isn’t As Bad As It Looks
Just glancing at Genius’ Q2 results, you might conclude the company was in a dire situation. It reported losses per share of $4.88, which is an awfully big number for a company whose stock trades at $1.20. On that basis, it lost its entire market cap three times over in a single quarter.
All told, the company lost – and this isn’t a misprint – $383 million on the quarter. Not good.
However, the better news is that the vast majority of that was due to non-cash costs. Namely, the company took a $209 million charge due to warrant revaluation expenses. And it wrote off another $172 million due to conversion option revaluation expenses.
While financial charges like that do have a material cost to long-term shareholders, they don’t reflect on the business’ underlying profitability going forward.
Operating Results Aren’t Great, Though
The company’s overall loss from actually running the media business came in at $2.4 million over the past three months. That doesn’t sound too bad. The issue is that there is still virtually no revenue.
Genius brought in $561,000 of revenue over the past three months. That was up only modestly from Q2 2019’s $464,000. For all the excitement about the company launching tons of apps, programs and merchandise products, it hasn’t showed up in the company’s financial results yet.
Overall, you’ve got a problem here given the scant revenues. Even with the plunge in Genius’ stock since June, the company still has a market capitalization of more than $100 million. That’s a large figure for a company whose flagship programs are Llama Llama and Rainbow Rangers. Needless to say, neither of these are highly sought-after pieces of intellectual property. And, as you can tell from Genius’ tiny revenues, Nick Jr. and other cable channels don’t have to pay much to license this content.
In fact, last quarter, Genius brought in just $163,000 in licensing and royalties revenue. The idea that its TV shows are a cash cow simply isn’t grounded in any factual basis. This could always change in the future, but for now, Genius is far from becoming an influential media enterprise.
GNUS Stock Verdict
The good news is that Genius was able to use the stock spike earlier this summer to its benefit. After its various fundraising efforts, Genius now finds itself with $54 million of cash in its treasury as of June 30. That will give the company years of liquidity, at least at its current burn rate. To its credit, the company has no long-term debt either, so that is another plus for its financial situation.
So now Genius will have the chance to build a viable media business. Judging by the last decade of results, however, it could take a while. Genius’ revenues peaked back in 2012 at $7 million for the year and have stayed well below that figure since then. Licensing a show or two on cable TV is hardly the foundations of a $100 million+ market cap business.
Could Genius eventually turn into a successful operation? Sure. Are the odds of it good? Not really. I suspect that most interest in the stock is a leftover from Genius’ brief but exhilarating run earlier this summer. As that momentum fizzles out, GNUS stock should continue drifting lower.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
