Genius Brands International (GNUS 1.12%) investors haven't had much to smile about in 2021. Shares in the small-cap children's entertainment company have fallen 50% from their 52-week high, and more declines are likely as management continues to burn cash and issue more shares -- a painful combination.
Let's explore two reasons why it might be time to jump ship.
1. Second-quarter earnings are a mixed bag.
Genius Brands licenses multimedia content for toddlers and tweens with its flagship network, Kartoon Channel!, available on major online media platforms like Amazon Prime, Alphabet's Google Play, and Roku. It also earns revenue from media advisory services, advertising, and other related businesses.
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Second-quarter sales jumped 318% year over year to $2.34 million based on a surge in licensing and royalties. Genius Brands also boasts a 909% increase in unique users on Kartoon Channel! (to 21 million) and strength in other "tentpole" assets like Rainbow Rangers, which became available on ViacomCBS' Paramount+ in August.
But despite the impressive top-line results, Genius Brands is struggling to create value because of its out-of-control spending. Total operating expenses more than tripled to $9.9 million, leading to an operating loss of $7.6 million in the period. The losses could expand as Genius Brands invests in new content such as Shaq's Garage, which began production in the second quarter and is expected to air on Kartoon Channel! next year.
2. Management is too expensive
Shareholders benefit when companies use their cash to create assets that will drive revenue (and hopefully profits) in the future. But it is much harder to measure the positive impacts of executive compensation. And Unfortunately, Genius Brands is spending most of its money on the latter.
As of the second quarter, general and administrative expenses increased 200% year over year to $7.1 million -- or 72% of operating expenses. A whopping $5.6 million of that figure comes from share-based compensation, which is a way of paying executives with equity.
While share-based compensation saves on cash, that money isn't free because it dilutes existing shareholders' claims on earnings. Plus, it's hard to justify Genius Brands paying its executives so handsomely while long-term investors face massive losses. The company's number of shares outstanding stands at 300 million as of Aug. 16 compared to just 79 million this time last year.
Cheap for a reason
Penny stocks are tempting because their dirt cheap prices and volatility offer the potential for quick multibagger returns. But Genius Brands is an example of why you should think twice before betting on these companies. The children's entertainment network boasts some compelling intellectual property, but it seems unable to create value for investors because so much of its money goes toward paying management.
