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 September 30, 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 (IRS Employer
of incorporation or organization) Identification No.)
11250 EL CAMINO REAL, SUITE 100
SAN DIEGO, CA 92130
(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 19,229,395 shares outstanding of the registrant's Common Stock as of
November 17, 2003.
Transitional small business disclosure format (check one): Yes [ ] No [X]
GENIUS PRODUCTS, INC.
INDEX
PAGE
PART I Financial Information 3
Item 1 Financial Statements 3
Condensed Consolidated Balance Sheet at September 30, 2003 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Operations for the Nine Months
Ended September 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flow for the Nine Months
Ended September 30, 2003 and 2002 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 Controls and Procedures 12
PART II Other Information
Item 1 Legal Proceedings 13
Item 2 Changes in Securities and Use of Proceeds 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
2003
-------------
ASSETS
Current assets
Cash and equivalents $ 131,563
Accounts receivable, net of allowance for doubtful accounts and
sales returns of $163,280 572,231
Inventories 581,942
Prepaid royalties 328,338
Prepaid expenses 572,039
-------------
Total current assets 2,186,113
Property and equipment, net of accumulated depreciation of $151,221 129,318
Production masters, net of accumulated amortization of $291,523 996,189
Patents and trademarks, net of accumulated amortization of $29,192 80,732
Deposits and other 136,138
-------------
$ 3,528,490
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 569,647
Accrued payroll and related expenses 45,622
Debentures payable 50,750
Accrued other expenses 152,383
Deferred Income - Advance royalties 483,804
-------------
Total current liabilities 1,302,206
Redeemable common stock 484,643
Commitments and contingencies --
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized:
19,223,635 shares outstanding 19,224
Additional paid-in capital 19,290,053
Stock subscription receivable (2,758,646)
Accumulated deficit (14,808,990)
-------------
Total stockholders' equity 1,741,641
-------------
$ 3,528,490
=============
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
SEPTEMBER 30,
2003 2002
------------- -------------
REVENUES
Net revenues $ 616,646 $ 799,894
------------- -------------
COSTS AND EXPENSES
Cost of revenues 417,693 374,219
Sales and marketing 277,963 177,029
Product development 162,532 111,912
General and administrative 520,379 547,472
------------- -------------
Total costs and expenses 1,378,567 1,210,632
------------- -------------
Loss from operations (761,921) (410,738)
Interest income 784 38,677
Other income 93 --
Interest expense (7,414) (15,421)
------------- -------------
Loss before provision for income taxes (768,458) (387,482)
Provision for income taxes -- --
------------- -------------
Net loss $ (768,458) $ (387,482)
============= =============
Basic and diluted loss per common share:
Net loss per share $ (0.04) $ (0.03)
============= =============
Basic and diluted weighted average shares 18,625,061 15,340,752
============= =============
The accompanying notes are an integral part of these statements.
4
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------- -------------
REVENUES
Net revenues $ 1,634,027 $ 1,810,421
------------- -------------
COSTS AND EXPENSES
Cost of revenues 1,033,430 1,091,864
Sales and marketing 736,212 372,259
Product development 427,366 295,926
General and administrative 1,446,939 2,055,508
------------- -------------
Total costs and expenses 3,643,947 3,815,557
------------- -------------
Loss from operations (2,009,920) (2,005,136)
Interest income 2,753 105,205
Other income 10,479 --
Interest expense (22,985) (38,574)
------------- -------------
Loss before provision for income taxes (2,019,673) (1,938,505)
Provision for income taxes 800 800
------------- -------------
Net loss $ (2,020,473) $ (1,939,305)
============= =============
Basic and diluted loss per common share:
Net loss per share $ (0.12) $ (0.15)
============= =============
Basic and diluted weighted average shares 17,004,758 13,140,589
============= =============
The accompanying notes are an integral part of these statements.
5
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------ ------------
Cash flows from operating activities
Net loss $(2,020,473) $(1,939,305)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 224,274 145,837
Allowance for doubtful accounts and sales returns 93,280 (26,000)
Common stock issued for services 162,500 233,584
Stock options granted to non-employees for services 280,945 566,536
Stock issued for compensation 100,000 210,000
Stock issued for the remastering of movies on DVD 350,000 --
Interest expense on redeemable common stock 18,866 24,709
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (378,786) (853,395)
Inventories (321,683) (113,730)
Prepaid royalties (161,814) (97,497)
Prepaid expenses and deposits (520,729) (14,344)
Increase (decrease) in:
Accounts payable 337,575 (461,723)
Deferred income 77,965 308,540
Accrued payroll & related items 1,463 (54,388)
Accrued expenses 131,311 (150,165)
------------ ------------
Net cash used by operating activities (1,625,306) (2,221,341)
------------ ------------
Cash flows from investing activities
Patents and trademarks (1,029) (63,646)
Development of production masters (673,927) (279,346)
Purchase of property and equipment (19,477) (115,527)
------------ ------------
Net cash used in investing activities (694,433) (458,519)
------------ ------------
Cash flows from financing activities
Borrowings on notes payable -- 62,506
Proceeds from issuance of convertible debt -- 60,750
Proceeds from issuance of common stock 1,705,309 3,264,084
------------ ------------
Net cash provided by financing activities 1,705,309 3,387,340
------------ ------------
Net increase (decrease) in cash and equivalents (614,430) 707,480
Cash and equivalents at beginning of period 745,993 27,998
------------ ------------
Cash and equivalents at end of period $ 131,563 $ 735,478
============ ============
Non-cash investing and financing activities:
Payment of loans by issuance of common stock -- 62,506
Production master acquired through the issuance of common stock -- 73,600
Common stock subscribed -- 728,400
Exercise of options with notes receivable -- 1,778,000
Issuance of common stock for an option to acquire assets 100,000 --
Conversion of debenture to common stock 10,000 --
Income Taxes Paid 800 800
The accompanying notes are an integral part of these statements.
6
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2003
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 September 30, 2003, we issued a total of
1,346,736 common shares. We issued (a) 689,179 unregistered shares at a price of
$.70 per share for net proceeds of $429,360 in private placements, (b) 142,860
unregistered shares at a price of $.70 per share to five officers as
compensation in lieu of salary, (c) 10,775 registered shares for services at a
price per share of $1.08 for 3,718 shares, $1.12 for 3,557 shares and $1.14 for
3,500 shares, (d) 83,000 registered shares for the exercise of options at a
price per share of $.63 for 61,000 shares and $.80 for 22,000 shares, (e)
350,000 unregistered shares at a price of $1.00 per share as an advance against
the cost of remastering movies on DVD per a contract with Falcon Picture Group,
a company that licenses radio and television programs and movies to us, and (f)
70,922 unregistered shares at a price $1.41 per share for an option to acquire
certain assets of Falcon Picture Group. The shares issued for services were
registered on Form S-8 Registration Statement No. 333-97769. The shares issued
for the exercise of options were registered on Form S-8 Registration Statement
No. 333-37914. The 1,252,961 unregistered shares were issued under Rule 506 of
Regulation D of the Securities Act. Each private placement purchase included a
five-year warrant to purchase one share at an exercise price of $1.40 for each
share purchased.
NOTE C: OFFICER'S COMPENSATION
On June 2, 2003, five officers agreed to accept an aggregate of 140,865
unregistered shares at a price of $.70 per share as payment of $100,000 of 2003
salary to be paid pro rata over the remainder of 2003. Each officer was also
issued one five-year warrant to purchase 28,173 shares at an exercise price of
$1.40. The pricing of shares and warrants issued in lieu of salary was based
upon the pricing of common stock and warrants issued to third parties in our
most recent private placement. The shares were issued in July 2003. The shares
and warrants will vest as the salary is earned over the remainder of 2003.
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.
7
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D: STOCK-BASED COMPENSATION (continued)
Pro forma adjustments to our consolidated net loss and loss per share
are as follows:
For the Quarter Ended
-----------------------------
September 30,
2003 2002
------------ ------------
Net Loss as reported $ (768,458) $ (387,482)
Basic and diluted net loss per common share as reported $ (.04) $ (.03)
============ ============
Less: Total stock-based compensation expense determined under
the fair value based method for all awards (84,953) (349,384)
------------ ------------
Pro forma net loss $ (853,411) $ (736,866)
============ ============
Pro forma basic and diluted net loss per common share $ (.05) $ (.05)
============ ============
For the Nine Months Ended
-----------------------------
September 30,
2003 2002
------------ ------------
Net Loss as reported $(2,020,473) $(1,939,305)
Basic and diluted net loss per common share as reported $ (.12) $ (.15)
============ ============
Less: Total stock-based compensation expense determined under
the fair value based method for all awards (113,082) (965,384)
------------ ------------
Pro forma net loss $(2,133,555) $(2,904,689)
============ ============
Pro forma basic and diluted net loss per common share $ (.13) $ (.22)
============ ============
NOTE E: FALCON PICTURE GROUP
On September 8, 2003, we entered into a license agreement with Falcon
Picture Group, LLC ("Falcon"), for the exclusive rights to distribute a majority
of its audio and video products, including AMC(TM) branded DVD movie and
television collections, in the U.S. and Canada. Carl Amari is the Chief
Executive Officer, Manager and 75% owner of Falcon and was appointed to our
Board of Directors on October 20, 2003. Our agreement with Falcon expires on
July 1, 2006, with an automatic renewal for an additional three years if both
parties are fulfilling their obligations under the agreement, and calls for a
royalty to be paid quarterly on net receipts of the licensed products. We have
committed to pay a minimum annual royalty of $240,000 and to have Falcon
digitally remaster for DVD distribution a minimum of 100 hours of classic movies
and television programs per year at a cost of $350,000 for the first 150 hours
of programming (payable in cash or stock). Additional hours of remastered
programming will cost $2,500 per hour. 350,000 shares of common stock at a price
of $1.00 per share were issued as an advance against the remastering costs.
These shares may be sold by Falcon in order to fund these costs at the time the
SB-2 Registration Statement in which the shares are being registered becomes
effective. At September 30, the $350,000 is included in prepaid expenses.
In addition, the agreement called for the issuance of $100,000 worth of
shares for an option to acquire certain assets of Falcon for $3,600,000 (payable
in cash or stock or a combination of cash and stock) during the first three
years of the agreement. As a result, 70,922 shares were issued in September 2003
at a price of $1.41 per share, and the $100,000 option to acquire is included in
deposits and other at September 30, 2003. The market value of the shares issued
was based upon the average of the closing market price of the common stock as of
September 8, 2003, the execution date of the agreement, and July 1, 2003, the
effective date of the agreement, as per the terms of the agreement. We also
license BOZO the Clown(TM) television shows for distribution on video and DVD
from Falcon under the terms of a separate licensing agreement.
8
NOTE F: SUBSEQUENT EVENT
In October and November 2003, we received a total of $925,000 from
private lenders from the issuance of secured notes payable. The notes are due on
December 31, 2004, carry interest at 10.5%, and include a warrant to purchase
one share of our common stock at an exercise price of $1.00 and one share of our
common stock at an exercise price of $3.00 for each $1.00 loaned. The notes are
secured by our interest in twelve of our digitally remastered classic movie
masters.
At the October 13, 2003, meeting of our Board of the Directors, the
resignations from the Board of David Anderson and Richard Bermingham were
accepted. On October 20, 2003, Carl Amari was appointed to the Board of
Directors. Carl Amari is the Chief Executive Officer, Manager and 75% owner of
Falcon Picture Group with whom we executed the licensing agreements described
in Note E above.
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.
Prior to the third quarter of 2003, net revenues were comprised of Baby
Genius(TM) and Kid Genius(TM) music product sales directly to mass retailers,
distributors and independent retailers, sales of jewelry to retailers, licensing
revenue related to licensing the Baby Genius trademark and royalties related to
the distribution of our line of videos through our agreement with Warner Home
Video. In an effort to expand the sales of our product line through our
distribution network, we have entered into agreements in 2003 to manufacture and
sell music products under license from various children's books ("licensed
music"), BOZO the Clown television shows on video and DVD, and AMC classic
movies and television shows which have been remastered for sale on DVD, and
classic radio programs.
We expect these new DVD and licensed music products, along with our
existing Baby Genius and Kid Genius music products, to provide most of our
revenues in the fourth quarter of 2003 and in 2004. Jewelry revenues have
declined in 2003 (7% of net revenues for the current quarter and 11% for the
nine month period) as our main jewelry customer has only ordered infrequently,
and although we may continue to sell jewelry in the future, we expect to focus
our efforts on selling other products and anticipate that jewelry will not be a
significant contributor to our net revenues. Licensing revenues have been less
than 10% of net revenues in 2003, and are also not expected to be a significant
contributor to net revenues in the future. Royalties related to the distribution
of our videos by Warner Home Video have been less than anticipated, as the sales
of Baby Genius videos and DVDs by Warner Home Video have not reached the levels
that were forecasted. We do not expect these royalties to be a significant
contributor to net revenues in the future.
We experienced delays in the signing of agreements for our new
products, and in getting timely design approvals in order to start
manufacturing. We also experienced delays in our internal product development
and some difficulties in manufacturing the products. As a result of these
delays, we only began receiving orders and shipping the new products in
September 2003. The licensed music that was shipped in the third quarter was
Guess How Much I Love You(TM) and Rainbow Fish(TM). We also shipped BOZO the
Clown television shows on video and DVD, and the first DVD sets of movies under
the title AMC Monsterfest(TM). Three additional titles of licensed music were
also ordered in the third quarter and began shipping in October 2003. These
licensed music products are Curious George(TM), Paddington Bear(TM) and Raggedy
9
Ann and Andy(TM). The second set of six 2-DVD movie collections entitled AMC
Movie Classics(TM) were also ordered by one of our primary distributors in the
third quarter of 2003 and began shipping in November 2003.
We do not report our different products as segments because we do not
allocate our resources between products and measure performance by product, and
we do not maintain discrete financial information concerning each of them. Our
chief operating decision maker receives financial information taken as a whole.
Due to our size and limited resources, our sales and marketing and product
development efforts are performed by the same personnel working on all of the
different products and our warehousing costs also are for all products.
THE THREE MONTHS ENDED SEPTEMBER 30, 2003.
Net revenues decreased 23% ($183,248) to $616,646 for the three months
ended September 30, 2003, as compared to the same period in 2002. The current
quarter net revenues were affected by delays in the development, timely approval
of designs and shipment of new products as noted above. Additionally, orders
shipped to a major customer in the third quarter of 2002 that accounted for
approximately $340,000 in net sales were not repeated in the current quarter and
were only partly offset by the net revenues from new product shipments. The same
customer placed test orders for new products in the current quarter, but the
tests to determine possible future orders will not be completed until the end of
the fourth quarter of 2003.
The cost of revenues for the three months ended September 30, 2003 were
68% of net revenues as compared to 47% in the same quarter in 2002. The cost of
revenues in the current quarter reflects rework charges of $28,000 that occurred
due to manufacturing errors, and the lower margins on the AMC movies and
BOZO(TM) products due to the royalties we are required to pay on them. The cost
of revenues for the quarter ended September 30, 2002 also reflects the higher
margin we were able to obtain on the manufacturing of the order for the major
customer noted above.
Sales and marketing expenses increased by 57% ($100,934) in the three
months ended September 30, 2003 as compared to the same quarter in 2002. This
increase is due to the hiring of additional sales personnel, and increased
advertising expenses.
Product development expenses increased by 45% ($50,620) in the third
quarter of 2003, as compared to the quarter ended September 30, 2002. This
increase is due to higher personnel and consulting costs due to the increased
product development in 2003, and increased amortization of production master
costs as the new products began shipping. We anticipate that product development
expenses will be incurred at this higher level for the remainder of 2003 as we
continue to develop new audio products under license from others.
General and administrative expenses decreased by 5% ($27,093) in the
three months ended September 30, 2003, as compared to the year earlier quarter.
This decrease was primarily due to higher costs associated with the issuance of
options and warrants to non-employees in the prior year third quarter.
The net loss for the quarter ended September 30, 2003 of $768,458 was
greater than the net loss of $387,482 for the quarter ended September 30, 2002,
as the result of the lower net revenues and higher cost of sales and operating
expenses incurred in the current year quarter.
THE NINE MONTHS ENDED SEPTEMBER 30, 2003.
Net revenues decreased 10% ($176,394) to $1,634,027 for the nine months
ended September 30, 2003. Jewelry sales in the nine months ended September 30,
2003 were 11% ($176,000) of net revenues as compared to 24% ($428,000) in the
same period in 2002. This reduction in jewelry sales of approximately $250,000
was the primary reason for the decrease in net revenues between the periods.
The cost of revenues for the nine months ended September 30, 2003 were
63% of net revenues as compared to 60% in the same nine month period in 2002.
The rework charges and lower margins on certain new products, as well as the
higher margin on a large sale in the prior year, as noted above, all contributed
to the current year margin being lower. Both periods reflect the low level of
revenues in relation to fixed warehousing costs.
10
Sales and marketing expenses increased 98% ($363,953) for the nine
months ended September 30, 2003, as compared to the same period in 2002 as the
result of the hiring of additional personnel, and increased advertising and
consulting expenses. Sales activities for the first nine months of 2003 focused
on the further development of our distribution network with both distributors
and major retail customers on a direct basis. As a result of these efforts and
our new product offerings, we have significantly expanded our distribution
network.
Product development expenses increased by 44% ($131,440) in the first
nine months of 2003, as compared to the first nine months of 2002 due to
increased personnel and consulting costs and related expenses incurred in the
development of new products. Expenditures for the development of production
masters in the nine months ending September 30, 2003 totaled $673,927.
General and administrative expenses decreased by 30% ($608,569) for
the nine months ended September 30, 2003, as compared to 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, as well as
higher consulting costs in the prior year nine month period.
Interest income in the nine months ended September 30, 2002 was higher
due to the interest earned on funds received from the private placement in 2002.
The net loss for the nine months ended September 30, 2003 of $2,020,473 was
greater than the net loss of $1,939,305 for the first nine months of 2002 due to
the lower net revenues in the current year period, which were partially offset
by the net reduction in operating expenses as compared to the prior year period,
and the higher interest income in the 2002 period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the nine months ended September 30,
2003 was $1,625,306, primarily due to the net loss and increases in prepaid
expenses, accounts receivable and inventories. This was partially offset by an
increase in accounts payable, stock issued for remastering costs, and stock
option costs for non-employee services. In the nine months ended September 30,
2002, net cash used in operations of $2,221,341 was primarily the result of the
net loss, and increases in accounts receivable and accounts payable. These were
offset by stock option costs for non-employee services, the increase in deferred
income and common stock issued for services and compensation.
Net cash used in investing activities in the nine months ended
September 30, 2003 was $694,433, primarily as the result of the development of
production masters. In the nine months ended September 30, 2002, net cash used
in investing activities was $458,519, as the result of the development of
production masters and expenditures for property and equipment.
Cash flows from financing activities of $1,705,309 and $3,387,340 in
the nine month periods ending September 30, 2003 and 2002, respectively, were
primarily from the sale of our common stock.
At September 30, 2003, we had cash balances of $131,563. In October and
November 2003, we received an additional $925,000 from private lenders for the
issuance of notes payable as described in Note F to these financial statements.
We believe that these amounts, when combined with our accounts receivable from
shipments in September through early November, will fund our operations through
the first quarter of 2004; however, no assurance can be made that we will be
timely paid or that other expenses will not create cash needs which are greater
than our ability to pay. Trade accounts receivable at November 14, 2003, were
approximately $900,000, and were due in the period November 2003 through early
February 2004. However, if we continue to incur net losses in the fourth quarter
of 2003 and the first quarter of 2004 as we have in the first nine months of
2003, it may be necessary to delay significant vendor payments or the
expenditures for our product development, 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 in order to fund our
operations through the end of the first quarter of 2004. Although we believe
that our expanded product line offers us an opportunity for significantly
improved operating results in the first quarter of 2004, no assurance can be
made that we will operate on a profitable basis in the first quarter of 2004, or
ever, as such performance is subject to numerous variables and uncertainties,
many of which are out of our control.
11
ITEM 3. CONTROLS AND PROCEDURES
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 as of September 30, 2003,
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.
In the third quarter of 2003, there were no significant changes in our
internal controls or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal controls subsequent to the
date of their most recent evaluation.
12
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2003, we issued a total of
1,346,736 common shares. We issued (a) 689,179 unregistered shares at a price of
$.70 per share for net proceeds of $429,360 in private placements, (b) 142,860
unregistered shares at a price of $.70 per share to five officers as
compensation in lieu of salary, (c) 10,775 registered shares for services at a
price per share of $1.08 for 3,718 shares, $1.12 for 3,557 shares and $1.14 for
3,500 shares, (d) 83,000 shares for the exercise of options at a price per share
of $.63 for 61,000 shares and $.80 for 22,000 shares, (e) 350,000 unregistered
shares at a price of $1.00 per share as an advance against the cost of
remastering movies on DVD per a contract with Falcon Picture Group, a company
that licenses radio and television programs and movies to us, and (f) 70,922
unregistered shares at a price $1.41 per share for an option to acquire certain
assets of Falcon Picture Group. The shares issued for services were registered
on Form S-8 Registration Statement No. 333-97769. The shares issued for the
exercise of options were registered on Form S-8 Registration Statement No.
333-37914. The 1,252,961 unregistered shares were issued under Rule 506 of
Regulation D of the Securities Act. Each private placement purchase included a
five-year warrant to purchase one share at an exercise price of $1.40 for each
share purchased.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on July 7, 2003. Of the
16,305,497 shares eligible to vote, 11,406,638 appeared by proxy and established
a quorum for the meeting. The following items were approved by a majority of the
shareholders:
VOTES FOR VOTES AGAINST VOTES WITHHELD NOT VOTED
1. Election of Directors
Klaus Moeller 11,392,745 3,000 10,893 0
David Anderson 11,395,745 0 10,893 0
Margaret Loesch 11,395,745 0 10,893 0
Richard Bermingham 11,395,745 0 10,893 0
Nancy Evensen 11,395,745 0 10,893 0
Larry Balaban 11,392,745 3,000 10,893 0
2. Authorization of the 2003 Stock Option Plan
8,285,280 458,816 24,500 2,638,042
3. Ratification of Selection of Cacciamatta Accountancy Corporation to Serve as
Auditors for Fiscal Year Ending December 31, 2003
11,377,508 10,005 19,125 0
ITEM 5. OTHER INFORMATION
On September 8, 2003, we entered into a license agreement with Falcon
Picture Group, LLC ("Falcon"), for the exclusive rights to distribute a majority
of its audio and video products, including AMC(TM) branded DVD movie and
television collections, in the U.S. and Canada. Carl Amari is the Chief
Executive Officer, Manager and 75% owner of Falcon and was appointed to our
Board of Directors on October 20, 2003. Our agreement with Falcon expires on
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July 1, 2006, with an automatic renewal for an additional three years if both
parties are fulfilling their obligations under the agreement, and calls for a
royalty to be paid quarterly on net receipts of the licensed products. We have
committed to pay a minimum annual royalty of $240,000 and to have Falcon
digitally remaster for DVD distribution a minimum of 100 hours of classic movies
and television programs per year at a cost of $350,000 for the first 150 hours
of programming (payable in cash or stock). Additional hours of remastered
programming will cost $2,500 per hour. 350,000 shares of common stock at a price
of $1.00 per share were issued as an advance against the remastering costs.
These shares may be sold by Falcon in order to fund these costs at the time the
SB-2 Registration Statement in which the shares are being registered becomes
effective. At September 30, the $350,000 is included in prepaid expenses.
In addition, the agreement called for the issuance of $100,000 worth of
shares for an option to acquire certain assets of Falcon for $3,600,000 (payable
in cash or stock or a combination of cash and stock) during the first three
years of the agreement. As a result, 70,922 shares were issued in September 2003
at a price of $1.41 per share, and the $100,000 option to acquire is included in
deposits and other at September 30, 2003. The market value of the shares issued
was based upon the average of the closing market price of the common stock as of
September 8, 2003, the execution date of the agreement, and July 1, 2003, the
effective date of the agreement, as per the terms of the agreement. We also
license BOZO the Clown(TM) television shows for distribution on video and DVD
from Falcon under the terms of a separate licensing agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
31.1 Certification of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
(b) REPORTS ON FORM 8-K
We filed a Form 8-K on August 7, 2003 to disclose the issuance
of a press release announcing a music license for Curious
George.
We filed a Form 8-K on August 19, 2003 to disclose the
issuance of a press release announcing our financial results
for the second quarter ended June 30, 2003.
We filed a Form 8-K on August 19, 2003 to disclose the
issuance of a press release announcing a music license for
Raggedy Ann and Andy.
We filed a Form 8-K on September 29, 2003 to disclose the
issuance of a press release announcing our 2004 strategy and
forecast.
We filed a Form 8-K on October 28, 2003 to disclose the
issuance of two press releases. The first announced a change
in our Board of Directors upon the resignation of David
Anderson and Richard Bermingham and the appointment of Carl
Amari. The second announced a music license for Rainbow Fish.
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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.
November 19, 2003 GENIUS PRODUCTS, INC.,
a Nevada Corporation
By: /s/ Klaus Moeller
---------------------------------------
Klaus Moeller, Chief Executive Officer,
Chairman of the Board and Interim
Chief Financial Officer
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