Earnings Transcript for GNUS - Q3 Fiscal Year 2017

Operator: Greetings, and welcome to Genius Brands International Incorporated Third Quarter 2017 Financial Results and Business Update Call. At this time all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Michael Porter. Thank you. Mr. Porter, you may begin.

Michael Porter: Thank you, operator. Good afternoon and welcome everyone to the Genius Brands International 2017 third quarter financial results and business update conference call. Joining me on the call today is Mr. Andy Heyward, the Company's Chief Executive Officer; and Ms. Rebecca Hershinger, the Company's Chief Financial Officer. Before we begin I will read the Safe Harbor statement. Certain statements in this conference call constitute forward-looking statements within the meaning of the federal securities laws. Words such as may, might, will, should, believe, expect, anticipate, estimate, continue, predict, forecast, project, plan and can or similar expressions of statements regarding the intent, belief or current expectations are forward-looking statements. While the company believes these forward-looking statements are reasonable, undue reliance should not be placed on any such forward-looking statements which are based on information available to us as of the day of this call. The forward-looking statements are based on current estimates and assumptions and are subject to various risks and uncertainty, including without limitations, those set forth in the company's filings with the SEC. The Company expressly disclaims any obligation to update or alter the statements whether as a result of new information further, or otherwise, except as required by law. It is now my pleasure to turn the call over to Andy Heyward, Chairman and CEO, of Genius. Good afternoon, Andy, and please go ahead.

Andy Heyward: Thank you, Michael. Good afternoon, everybody. I'm Andy Heyward, Chairman and CEO of Genius Brands International. Michael, before we start I am going to ask you to put your phone on mute, because we hear your breathing in the microphone there. To begin our call this afternoon, I'm going to say a few brief words about our business before turning it over to Rebecca Hershinger, our CFO, who is going to discuss financial results for the third quarter. Then before taking questions, I will conclude our prepared remarks by talking about the outlook for the company. As many followers of and investors in the company can attest I have talked at length about the two core pillars of value for our company. Those pillars are the creation and monetization of our brands and the creation and monetization of the Kid Genius Channel. Each of these is valuable in its own right but the combination of the two represents a powerful dynamic that has been a cornerstone of our industry for many many years. The third quarter was one of continued positive progress for both the brands and the channel. Following Rebecca's remarks, I am going to talk in more detail about both the aspects of our business as each had a decidedly different profile than they did just a year ago. On the brand side, we currently have 434 distinct episodes of animated content that have been completed or are in production and we have 104 distinct episodes in preproduction or development. This is compared to 284 and 234, respectively, I haven't done the math but I am going to guess that’s about -- looking at about 75% jump in our content catalog in the last year. Similarly, the Kid Genius Channel has a very different profile compared to a year ago. Currently the channel is in 60 million homes compared to 20 million homes a year ago. Monthly views today are totaling roughly 2 million today, as compared to 125,000 a year ago. Another important metric for the channel is the content we have licensed for the channel from third parties. Like any channel programmer, our goal is to create a vibrant experience for the viewer by having a robust line of programs. Complementing Genius' roster of program, we have licensed 796 episodes, that’s up from only 25 episodes a year ago. Finally, we announced -- and I should add that these episodes are all consistent with the ethos of the channel and of the company. Finally, we announced an important development for our channel business at the end of the third quarter. At the end of September, Kid Genius Cartoons Plus! Launched on Amazon Prime. This represents the company's foray into the subscription video on demand business, as Kid Genius Cartoons Plus! It's now available on Amazon Prime's 80 million subscribers at a monthly fee of $3.99 that we share with Amazon. In a few moments, I am going to share additional details about the business but first I will turn the call over to Rebecca Hershinger, our CFO, who will discuss our third quarter results. Rebecca, you are up.

Rebecca Hershinger: Thank you, Andy. I am Rebecca Hershinger, Chief Financial Officer of Genius Brands International. I will now review our financial results for the third quarter. This review and all of our financial statements unless otherwise noted are prepared in accordance with U.S. GAAP. Beginning with our financial position, I will point out two metrics that highlight the continued investment in our business and the activity around our brands. First, to augment Andy's earlier discussion of our growing library of monetized book content, our investment in film and television costs increased to $4.2 million, as of September 30, 2017, compared to $2.2 million as of December 31, 2016. Second, highlighting the activity around our brands our total deferred revenue balance increased to $5.1 million as of September 30, 2017 from $3.1 million as of December 31, 2016, reflecting the expansion of the Sony distribution rights from domestic to worldwide in January of this year, as well as advances and minimum guaranteed royalties collected from our content in production such as Llama Llama and Rainbow Rangers. These advances and minimum guaranteed royalties are recorded as deferred revenue until such times they convert to top line revenue, once all revenue recognition criteria have been achieved. Turning to our statement of operations the third quarter was one of positive momentum. Total revenue increased from $120,486 for the three months ended September 30, 2016 to $256,501 for the three months ended September 30, 2017. That represented a 113% increase. This increase was primarily due to content and consumer product license activity related to our Thomas Edison Secret Lab and Space Pop properties, combined with advertising revenues related to our Kid Genius Channel without similar activity in the prior period. For the nine months period ended September 30, 2017, revenue totaled $650,000, showing a modest improvement compared to the prior period of $648,000. This modest increase was due to period over period improvement in both television and home entertainment revenue, and licensing and royalties revenue, related to Space Pop, offset by fewer content distribution licenses related to Thomas Edison Secret Lab compared to the prior period. As we have noted in our filings, fluctuations in television and home entertainment business can naturally occur period over period based on sales activity and the related achievement and satisfaction of revenue recognition criteria. The criteria includes the start of a license period and delivery to and acceptance by the customer of the completed content among other criteria. As such, these fluctuations can make period over period comparisons difficult. Marketing and sales expenses decreased $133,912 for the three months ended September 30, 2017, compared to the prior year period, primarily due to increased promotional spending in the prior period related to the launch of Space Pop. Marketing and sales expenses decreased $324,816 for the nine months ended September 30, 2017 compared to the prior year period, primarily due to modest decreases in spending related to sponsorships and promotions during the quarter pursuant to our Space Pop marketing plan as well as fees paid to a consultant for the execution of a distribution contract in the prior period without similar activity in the current period. Direct operating cost include costs of our product sales, non-capitalizable film cost and film and television cost amortization expense, as well as participation expense related to certain agreement with various animation studios, post-production studios, writers, directors, musicians and other creative talent, with which, depending on their agreements, we could be obligated to share net profits of the properties on which they have rendered these services. During the three months ended September 30, 2017, we recorded film and television cost amortization of $29,848, and participation expense of $11,996 compared to prior period expenses of $23,011 and zero dollars, respectively. These increases related to increased television and home entertainment revenue related to Thomas Edison Secret Lab and Space Pop in the current period, compared to the prior period. During the nine months ended September 30, 2017, the de minimis increases in direct operating cost in the prior period reflect the related modest increases in total revenue over the same period. General and administrative costs for the three months ended September 30, 2017, decreased $239,213 compared to the same period in 2016. This change resulted primarily from decreases in share based compensation, offset by modest increases in salary and wages. For the nine months ended September 30, 2017, general and administrative expenses decreased $553,060 compared to the same period in 2016. This change resulted from, again, decreases in share based compensation expense offset by increases in professional fees, salaries and wages and bad debt expense. In aggregate, the combination of these revenues and operating costs result in improvements in our loss from operations, period over period. For the three months ended September 30, 2017, loss from operations improved to just over $1.1 million from $1.5 million during the prior period. Again, for the nine months period ended September 30, 2017, our loss from operations improved to $3.7 million from $4.6 million in the prior period. With that, I will now turn the call back over to Andy who will conclude our prepared remarks about the company.

Andy Heyward: Thank you. Well, as Rebecca noted, the third quarter showed positive operational trends coupled with activity around our brands that are currently in production and development, and it's reflected in our increasing deferred revenue balances, as well as the continued investment in core assets of the company. As I said in my opening remarks, our library of monetizable content continues to grow as we continue post-production on Llama Llama, but I shouldn’t take as we continue post-production because we have really completed post-production on Llama Llama right now and began production on Rainbow Rangers. The excitement around both of these series is very strong. We anticipate that Llama Llama with is built in audience based on the iconic book series, as well as our partner Netflix which is going to do a tremendous amount of promotion around it, is going to resonate with parents and children alike. We are poised to capitalize on the excitement via our consumer products and merchandizing business. The brand will go -- its anticipated to go live on Netflix January 26. Similarly, we believe that Rainbow Rangers with its pedigree talent roster and strong positive messaging for preschool children will be also a commercial success. We have already seen evidence of this excitement on our key industry trade shows and markets, licensing [expo] [ph] this past summer in MIPJunior and MIPCOM this fall. Not to mention our previously announced agreements with MIPJunior and Mattel. No less important than the content itself is the continuing expansion of the Kid Genius Channel. Not only does the channel increase exposure to all of our brands to support the consumer products and the merchandizing side of the business, but it diversifies our revenue streams. In addition to the positive reaction to our brands that our sales team experienced at MIPJunior and MIPCOM, the channel garnered a similar response of third party producers who recognize the value of another channel of distribution for their content. The business model of being both a creator of content as well as a participant in a channel of distribution is nothing new, it's existed in our industry for literally decades. Genius is poised to capitalize on this model. We couldn’t be more excited for the future holds for the company and shareholders. Before we take questions, I want to let the listeners know that if there is any follow up comments or questions, feel free to contact Michael Porter at Porter Levay Rose, our investor relations firm. And I think those of you, probably almost everybody knows how to reach Michael, but his number is 212-564-4700. Operator, we are now ready to take a limited number of questions pertaining to the matters discussed on this call and in our 10-Q and, of course, we are unable to discuss any information or business plans which are not publicly available. Thank you.

Operator: [Operator Instructions] Our first question comes from the line of Ron Betten of Wells Fargo Advisors. Please proceed with your question.

Ronald Betten: You have been buying back stock for yourself and that’s usually a very good sign when management is buying their own shares. Can you give us any guidance or what your plans are and why and, obviously it's a strong statement that you believe in the company but can you expand upon that.

Andy Heyward: I am not sure how much I am at liberty to discuss at this moment about that. Obviously, I think the stock is at a tremendous bargain at the price I was buying it at, which was 3.5 bucks. And I can't say it now that’s going to continue or not. Keep watching for the form 4s and you will see.

Operator: Okay. Our next question comes from the line of Ishfaque Faruk, West Park Capital. Please proceed with your question.

Ishfaque Faruk: Very quickly on the DHX Media content deal. You guys got a nice portfolio of some major brands from that deal. Do you expect a much broader number of subscribers because of a larger content library from the Prime deal?

Andy Heyward: Well, you have to have a robust offering to be competitive. In our particular case we have a certain profile that has always been defining the company and that’s the profile of content that we sought to acquire and did acquire. Originally we called it content with a purpose and by that we mean it's content that has some enrichment to it. Sometimes there is something educational involved, even a curriculum. It's certainly, it's all content that you will never find anything negative. You won't find inappropriate language, you won't find negative stereotypes, you won't find violence. You won't find things that are imitable behavior that would be objectionable for a parent. And the programs that we acquired were ones that we were familiar with which we believe would lend themselves to fitting into an environment that parents and caregivers, teachers, grandparents, people who subscribe to these channels and put their kids in front of these channels, can feel comfortable with.

Ishfaque Faruk: All right. And one more for Rebecca. Rebecca, in terms of your TV and home entertainment revenues, it went up a lot. What were the components of that this quarter?

Rebecca Hershinger: Sure. There was a number of different licenses primarily related to Thomas Edison and Space Pop. We did have a few look back at some of the press releases. We had a sizable offering in Latin America related to Thomas Edison.

Ishfaque Faruk: And those were the main drivers of the revenues during the quarter?

Rebecca Hershinger: Exactly.

Operator: [Operator Instructions] Our next question comes from the line of Joe Reda of Special Equities Group. Please proceed with your question.

Joe Reda: So, obviously, the Amazon deal could be a game changer for the company in 2018. Could you walk us through, maybe the process of how Amazon is going to attract subscribers? You are a small company, you only have a limited budget but they are much bigger company. What are their plans to get subscribers?

Andy Heyward: Okay. Good question. Let me start off by saying that Amazon only has two subscription channels that they are putting forth. One is PBS KIDS, the other is ourselves. PBS KIDS, if you are not familiar with it, basically stops at four year olds. Our goes up to probably about 12 year olds. It's a much broader offering of content that we have. The subscriber that they are -- the customer that they are looking for is not the child, the customer is the parents who is the subscriber, who is buying this channel for their child. And if you have ever bought anything on Amazon, you know that’s a company of data scientists. They know everything about your buying habits, your demographics, all of your tastes and interests from any purchases that you have made with them. And they felt, and fortunately for us that this was the exact profile that would perform with their customer base. We are going to be doing a number of marketing initiatives with them. That will be the organic marketing that is done with and co-op marketing that is being done with Amazon. And that just went live this week and we just started with it and I encourage any of you, if you haven't been on to the channel, go and take a look. It looks terrific. And Amazon is doing a tremendous amount of organic promotion to their customer base and we are participating in that with them. In addition to that we have our own separate initiatives that are going on in the outside, that are going to be done with mommy bloggers, with influencers and places that we are going to be able to reach the moms that would subscribe to this channel and we will be continuing that noise with it.

Joe Reda: Okay. Great. Because, obviously, Wall Street will finally recognize your stock once they start to see some subscriber growth.

Andy Heyward: Yes, I think you know we have already stated that come the beginning of the year, we will start having numbers on the subscriptions on the channel and we will be able to share those with you. We are highly enthusiastic about where this is going. We have had lot of anecdotal feedback already. It's been very positive and there is very, very little like this out there. Parents are increasingly concerned about the, what I call the empty calories that are out there for their kids. Kids are doing more and more and more viewing. With the age compression, three-year olds know how to use a Smartphone and a tablet and to find what they want, where they want it. We live in a video on demand environment. And parents who are concerned about what their kids are seeing, this is a very attractive product for them.

Operator: There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Andy Heyward: I don’t know if Michael Porter has something to say. We said everything. Thank you to everybody and we are very excited where we are going and keep watching.

Operator: This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.