UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-QSB
--------------------------------
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to _______________
Commission file number 000-27915
GENIUS PRODUCTS, INC.
---------------------
(Name of small business issuer as specified in its charter)
NEVADA 33-0852923
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11250 EL CAMINO REAL #100
SAN DIEGO, CA 92127
(Address of principal executive officers)
(858) 793-8840
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
There were 16,320,867 shares outstanding of the registrant's Common Stock as of
May 14, 2003.
Transitional small business disclosure format (check one): Yes [ ] No [X]
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GENIUS PRODUCTS, INC.
INDEX
PAGE
PART I Financial Information 3
Item 1 Financial Statements 3
Condensed Consolidated Balance Sheet at March 31, 2003
(unaudited) 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2003
and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flow
for the Three Months Ended March 31, 2003
and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3 Controls and Procedures 8
PART II Other Information
Item 1 Legal Proceedings 9
Item 2 Changes in Securities and Use of Proceeds 9
Item 3 Defaults Upon Senior Securities 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 5 Other Information 9
Item 6 Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31,
- --------------------------------------------------------------------------------
2003
-------------
ASSETS
Current assets
Cash and equivalents $ 233,992
Accounts receivable, net of allowance for
doubtful accounts and sales returns of $87,270 248,606
Inventories 321,286
Prepaid royalties 157,486
Prepaid Expenses 195,401
-------------
Total current assets 1,156,771
Property and equipment, net of accumulated depreciation
of $127,683 135,208
Production masters, net of accumulated amortization of
$146,905 557,095
Patents and trademarks, net of accumulated
amortization of $25,468 84,456
Deposits and other 36,138
-------------
$ 1,969,668
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 337,129
Accrued payroll and related expenses 46,245
Debentures payable 50,750
Accrued other expenses 25,977
Deferred Income - Advance royalties 355,839
-------------
Total current liabilities 815,940
Redeemable common stock 472,066
Commitments and contingencies --
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares
authorized: 15,931,503 shares outstanding 15,931
Additional paid-in capital 16,617,287
Stock subscription receivable (2,683,454)
Accumulated deficit (13,268,102)
-------------
Total stockholders' equity 681,662
-------------
$ 1,969,668
=============
The accompanying notes are an integral part of these statements.
3
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------
2003 2002
------------- -------------
REVENUES
Product sales $ 541,512 $ 480,756
Licensing 20,990 --
Video royalties 60,000 5,600
------------- -------------
Total revenues 622,502 486,356
Returns, Discounts and Allowances (71,955) (32,966)
------------- -------------
Net revenues 550,547 453,390
------------- -------------
COSTS AND EXPENSES
Cost of revenues 265,919 214,939
Sales and marketing 203,607 86,901
Product development 111,805 80,823
General and administrative 441,161 499,002
------------- -------------
Total costs and expenses 1,022,492 881,665
------------- -------------
Loss from operations (471,945) (428,275)
Interest income 1,207 345
Interest expense (8,047) (7,125)
------------- -------------
Loss before provision for income taxes (478,785) (435,055)
Provision for income taxes 800 800
------------- -------------
Net loss $ (479,585) $ (435,855)
============= =============
Basic and diluted loss per common share:
Net loss per share $ (0.03) $ (0.05)
============= =============
Basic and diluted weighted average shares 15,890,544 8,971,768
============= =============
The accompanying notes are an integral part of these statements.
4
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
- ----------------------------------------------------------------------------------------
2003 2002
------------ ------------
Cash flows from operating activities
Net loss $ (479,585) $ (435,855)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 52,394 34,396
Bad debt expense 17,270 55,999
Common stock issued for services 41,000 131,329
Stock options granted to non-employees for services 52,888 --
Stock issued for compensation -- 180,000
Interest expense on redeemable common stock 6,289 6,410
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 20,849 (176,160)
Inventories (61,027) (69,194)
Prepaid royalties 9,038 (111,778)
Prepaid expenses and deposits (144,091) (96,212)
Increase (decrease) in:
Accounts payable 105,057 (419,633)
Deferred income (50,000) 350,000
Accrued payroll & related items 2,086 (112,645)
Accrued expenses 4,905 --
------------ ------------
Net cash used by operating activities (422,927) (663,343)
------------ ------------
Cash flows from investing activities
Patents and trademarks (1,029) (35,640)
Development of production masters (90,216) (56,273)
Purchase of property and equipment (1,829) (29,780)
------------ ------------
Net cash used in investing activities (93,074) (121,693)
------------ ------------
Cash flows from financing activities
Borrowings on notes payable -- 62,505
Proceeds from issuance of common stock 4,000 1,894,579
------------ ------------
Net cash provided by financing activities 4,000 1,957,084
------------ ------------
Net increase (decrease) in cash and equivalents (512,001) 1,172,048
Cash at beginning of period 745,993 27,998
------------ ------------
Cash at end of period $ 233,992 $ 1,200,046
============ ============
Non-cash investing and financing activities:
Payment of loans by issuance of common stock -- 62,505
Common stock subscribed -- 645,817
Exercise of options with notes receivable -- 1,778,000
Conversion of debenture to common stock 10,000 --
The accompanying notes are an integral part of these statements.
5
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Genius
Products, Inc. have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission.
The information furnished herein reflects all adjustments, consisting of only
normal recurring accruals and adjustments which are, in the opinion of
management, necessary to fairly state the operating results for the respective
periods. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The notes to the condensed financial statements should be read in conjunction
with the notes to the consolidated financial statement contained in the
Company's Form 10-KSB for the year ended December 31, 2002. Company management
believes that the disclosures are sufficient for interim financial reporting
purposes. Certain items in the prior year financial statements have been
reclassified to conform to the current year presentation.
NOTE B: COMMON STOCK
During the three months ended March 31, 2003, we issued a total of 60,823
shares. We issued (a) 5,715 unregistered shares at a price of $.70 per share for
net proceeds of $4,000 in private placements, (b) 10,000 shares at a price of
$1.00 per share for the conversion of a $10,000 debenture, issued under Rule
3(a)9 of the Securities Act and (c) 45,108 shares at prices ranging from $.85 to
$1.03 per share for services. Of the shares issued for services, 27,777
unregistered shares were issued under Section 4(2) of the Securities Act and the
balance were registered on Form S-8 Registration Statement No. 333-97769. The
5,715 unregistered shares were issued under Rule 506 of Regulation D of the
Securities Act.
NOTE C: SUBSEQUENT EVENTS
In April 2003, we sold 335,716 shares of our common stock to investors at a
price of $.70 per share in a private placement and received $235,000. Each
purchase included a warrant to purchase one share of our common stock at an
exercise price of $1.40 for each share purchased.
NOTE D: STOCK BASED COMPENSATION
Stock options issued under stock-based compensation plans are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. No
stock-based employee compensation cost is reflected in the net loss, as all
options granted under these plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. In accordance with
Financial Accounting Standards Board ("FASB") No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB NO.
123, the following table illustrates the effect on net loss and loss per share
if we had applied the fair value recognition provisions of FASB Statement No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employee
compensation.
Pro forma adjustments to our consolidated net loss and loss per share are as
follows:
For the Quarter Ended
March 31,
2003 2002
---------- ----------
Net Loss as reported $(479,585) $(435,855)
Deduct: Total stock-based compensation expense determined
Under the fair value based method for all awards (1,648) (266,616)
---------- ----------
Pro forma net loss $(481,233) $(702,471)
========== ==========
Basic and diluted net loss per common share $ (.03) $ (.08)
========== ==========
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTE
A TO THE FINANCIAL STATEMENTS INCLUDED ABOVE. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR THE COMPANY'S FUTURE
FINANCIAL PERFORMANCE AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS, LEVELS OF ACTIVITY,
PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS.
THE THREE MONTHS ENDED MARCH 31, 2003
Product sales are primarily music (Baby Genius) sales to wholesale
customers. We also recognize licensing revenue related to licensing the Baby
Genius trademark and royalties related to the distribution of our line of
videos. Sales returns, discounts and allowances are product sales related and
are primarily on music.
Total revenues increased 28% ($136,146) to $622,502 for the three
months ended March 31, 2003, as the result of increased sales of the Baby Genius
music products, and both licensing revenue and royalties recognized on the
videos sold by a third party in the current period that did not occur in the
first quarter of 2002. Music product sales increased 43% in the three months
ended March 31, 2003, to $499,111, as compared to $349,687 in the same period in
the prior fiscal year due to a wider distribution of our products and the
addition of a new significant customer. Other product revenue declined to
$42,401 in the quarter ending March 31, 2003 as compared to $136,669 in the
quarter ending March 31, 2002. Licensing revenues were up due to the agreement
signed in June 2002 with Global Icons, LLC, to license our brand names.
Royalties on our videos and DVD's, which have been recognized since the third
quarter of 2002 under the production and distribution agreement reached in
February 2002, were less than anticipated in the quarter ended March 31, 2003.
Discussions are continuing with Warner Home Video on improving the sales of our
videos and DVD's. Several methods for improvement have been identified and are
being implemented that we anticipate could lead to increased distribution and
higher royalties for the rest of 2003. However, there can be no assurance that
these efforts will be successful. Sales returns, discounts and allowances
increased significantly in the current three month period because we have
reserved for a higher amount of returns at March 31, 2003, based on our
experience in 2002 with our current customers. In the first quarter of 2002,
sales of other products that have a lower rate of returns also contributed to
the lower reserve at March 31, 2002.
Costs of revenues consist primarily of the costs of products sold to
customers and packaging and shipping costs. Cost of revenues also include
commissions paid on licensing and expenses related to the video royalty
agreement. The cost of revenues for the three months ended March 31, 2003 were
48% of net revenues as compared to 47% in the same quarter in 2002. This
reflects the increased music product sales of three-pack and five-pack units in
the current year quarter as compared to more single CD units that were sold in
the first quarter of 2002. Single CD's have higher margins than multiple CD
units. Offsetting this was the addition of licensing revenue and royalties in
the current year period, which have still lower costs associated with them, and
were insignificant or did not occur in the first quarter of 2002.
Sales and marketing expenses consist primarily of costs for personnel
and promotional activities. Sales and marketing expenses increased by 134% to
$203,607 for the three months ended March 31, 2003 as compared to $86,201 for
the same quarter in 2002 as the result of increased sales personnel expenses and
increased advertising and consulting expenses.
Product and web development expenses consist primarily of costs for
personnel involved in the development of our products. As a result of increased
personnel and related costs, product development expenses increased by 38% to
$111,805 in the first quarter of 2003, as compared to $80,823 in the quarter
ended March 31, 2002. We are continuing to develop new products as evidenced by
expenditures for product development that are reflected in the $90,216 that was
capitalized in the quarter ending March 31, 2003. We currently anticipate that
product development expenses will be incurred at this higher level for the
remainder of 2003 as we develop new audio products under license from others.
7
General and administrative expenses consist of payroll and related
costs for executive and administrative personnel, professional services and
consulting fees, and other general corporate expenses. General and
administrative expenses decreased by 12%, to $441,161 for the three months ended
March 31, 2003, as compared to $499,002 for the year earlier period. This
decrease was primarily due to higher costs associated with the issuance of
options and warrants to non-employees in the prior year first quarter, offset by
smaller increases in professional fees and investor relations expenses in the
quarter ended March 31, 2003. The year earlier period reflected our use of
options to obtain services and funding prior to raising significant working
capital in the first quarter of 2002.
Interest expense is primarily incurred on debentures and redeemable
common stock. The net loss for the quarter ended March 31, 2003 of $479,585 was
higher than the net loss of $435,855 for the quarter ended March 31, 2002, in
spite of increased revenue and lower cost of revenues due to the higher return
allowance in the current period and increases in sales and marketing and product
development expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three months ended March 31,
2003 was $422,927, primarily due to the net loss and increases in prepaid
expenses and inventories. This was offset by an increase in accounts payable,
depreciation and amortization, and stock option costs. In the quarter ended
March 31, 2002, net cash used in operations of $663,343 was primarily the result
of the net loss and the reduction in accounts payable, offset by an increase in
deferred income and stock issued for compensation.
Net cash used in investing activities in the quarter ended March 31,
2003 was $93,074, primarily as the result of the development of production
masters. In the quarter ended March 31, 2002, net cash used in investing
activities was $121,693, as the result of the development masters and
expenditures for patents and trademarks and property and equipment.
Cash flows from financing activities of $4,000 and $1,957,084 in the
three month periods ending March 31, 2003 and 2002, respectively, were primarily
from the sale of our common stock.
At March 31, 2003, we had cash balances of $233,992. In April 2003, we
received $235,000 from investors for the purchase of our common stock. In May,
we expect to receive an additional $385,000 from investors for the purchase of
our common stock, based on commitments we have received. We believe that these
amounts will fund our operations until the third quarter of 2003, at which time
we anticipate that we may be operating profitably as the result of an increase
in revenues from our new "Kid Genius", "Guess How Much I Love You(TM)", "BOZO
the Clown", and other well known brand name products that we expect to obtain a
license for the audio rights.
Our "Kid Genius" and "Guess How Much I Love You(TM)" audio products are
expected to begin selling in the second quarter of 2003, and the remaining
products are planned for sales in the third quarter of 2003. The development of
the well known brand name products will require significant funds in order to
develop the music and artwork, as well as prepayments relating to the licensing
rights and to purchase inventory. In order to fund these amounts, including the
prepayments required, which may vary, we may need to delay significant vendor
payments or offer discounts to major customers for faster payment of accounts
receivable, or seek to obtain funds from additional investors through the sale
of our common stock.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, Genius Products,
Inc. carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of Genius Products,
Inc.'s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that Genius Products, Inc.'s disclosure controls and
procedures are effective in timely alerting him to material information relating
to Genius Products, Inc. required to be included in our periodic filings with
the Securities and Exchange Commission.
8
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of conducting business, we are involved in various
litigation. There has been no material change in legal proceedings from those
disclosed previously in our Form 10-KSB for the year ended December 31, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2003, we issued a total of
60,823 shares. We issued (a) 5,715 unregistered shares at a price of $.70 per
share for net proceeds of $4,000 in private placements, (b) 10,000 shares at a
price of $1.00 per share for the conversion of a $10,000 debenture, and (c)
45,108 shares at prices ranging from $.85 to $1.03 per share for services. Of
the shares issued for services, 27,777 unregistered shares were issued under
Section 4(2) of the Securities Act. The 5,715 unregistered shares were issued
under Rule 506 of Regulation D of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) REPORTS ON FORM 8-K
Filed April 3, 2003, regarding operating results for 2002.
9
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GENIUS PRODUCTS, INC.,
a Nevada Corporation
May 15, 2003 By: /s/ Klaus Moeller
---------------------------------------
Klaus Moeller, Chief Executive Officer,
Chairman of the Board and Interim
Chief Financial Officer
10
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Klaus Moeller, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Genius
Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 15, 2003 By: /s/ Klaus Moeller
------------------------------
Klaus Moeller
Chief Executive Officer
11
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Klaus Moeller, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Genius
Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 15, 2003 By: /s/ Klaus Moeller
----------------------------
Klaus Moeller
Chief Financial Officer
12