Genius Brands International (NASDAQ:GNUS) is down over 38% in the past month. In fact, since July 22, GNUS stock has dropped 46% from $1.93 to $1.04. I had warned investors then that the stock was likely to fall in my article “Beware Shareholder Dilution With Genius Brands Stock.”
At the time I wrote that GNUS stock was likely worth to between 10 cents and 12 cents per share. Therefore, even today I believe that investors should stay away from this stock.
In fact, there is more to lose today on a percentage basis. What I mean is that the potential fall to 12 cents, as I predict, will involve a greater percentage loss than the drop from $1.93 to $1.04.
Where Genius Brands Finances Stand Now
The company reported its Q2 earnings results on Aug. 14. As expected, they were underwhelming. The company lost money head over feet, and there is every reason to believe this will continue.
It’s always better to read the company’s 10-Q report. This shows that it lost $2.376 million in operating income, and including net financial income, it lost $2.66 million in the quarter.
Moreover, the 10-Q showed that in the first half it generated a negative free cash flow of $2.33 million. But in addition, the company raised a total of $60 million in equity and warrant issues and spent $4 million on repayments.
Therefore, the company now has $54.4 million in cash on hand. The net cash, after debt that has to be paid, is about $49.4 million.
However, Genius Brands issued many new shares, now over 219 million, up from 21 million at the end of 2019. As a result, the net cash amounts to about 22.56 cents per share.
If the company keeps losing $2.33 to $2.5 million a quarter, or $10 million a year, it could survive four years or so. But the problem, Genius Brands is likely to make some acquisitions.
Those acquisitions will have to make money for the company, but there is no guarantee of that. So far that has not been the case. Moreover, it is also likely to spend a big portion of the money it has raised in TV or movie production costs. Again, so far the company has not made any net income in these endeavors.
What to Do With GNUS Stock
The CEO’s recent earnings presentation does not present any information on when the company will get profitable.
Here is the closest that the CEO comes to explaining his strategy: “…it is important for our shareholders to recognize that we are not in a business that reaps fruits overnight and to temper their expectations.” Moreover, he explains that the company is building intellectual property, “The same way that Disney, Marvel, or Warner Brothers has done.”
He also talked about a 3-minute egg not being cooked in one minute and having planted “seeds” that he has “confidence” will “pay off.”
This strategy won’t fly in the long run. Investors need to know when cash flows will turn positive based on its revenue drivers. There is no way now for an analyst to project this, given its cash balance and the burn rate.
Therefore, we must value GNUS stock solely on its net liquid assets, not its forecast free cash flows, which are negative. As I pointed out, this adds up to about 23 cents per share.
At least there is one set of good news. The value of GNUS stock has risen from 12 cents to 23 cents per share. But this still implies a fall of over 74% from today’s prices.
Even if the stock falls to 2 times its net liquid position, or 46 cents per share, it still implies a minimum drop of 56% from here. That is nothing to look forward to for most investors.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: Penny Stocks – How to Profit Without Getting Scammed