UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 3 TO
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, 2004
[ ] 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.)
740 LOMAS SANTA FE, SUITE 210
SOLANA BEACH, CA 92075
(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 24,438,163 shares outstanding of the issuer's Common Stock as of May
14, 2004.
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 March 31, 2004 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flow for the Three
Months Ended March 31, 2004 and 2003 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Controls and Procedures 10
PART II Other Information
Item 1 Legal Proceedings 10
Item 2 Changes in Securities and Use of Proceeds 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 2004
-------------
ASSETS
Current assets
Cash and equivalents $ 6,030,401
Accounts receivable, net of allowance for doubtful accounts
and sales returns of $193,648 2,330,113
Inventories 1,426,721
Prepaid royalties 365,377
Prepaid expenses 158,443
-------------
Total current assets 10,311,055
Property and equipment, net of accumulated depreciation of $157,380 206,043
Production masters, net of accumulated amortization of $461,150 1,532,425
Patents and trademarks, net of accumulated amortization of $33,788 107,531
Deposits and other 168,186
-------------
$ 12,325,240
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, net of unamortized discount of $234,153 $ 620,848
Accounts payable 2,433,121
Accrued payroll and related expenses 81,710
Debentures payable 50,750
Accrued expenses 150,418
Payable on terminated contract 300,000
-------------
Total current liabilities 3,636,847
Redeemable common stock 497,221
Commitments and contingencies --
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
24,399,421 shares outstanding 24,399
Preferred stock, $.001 par value; 10,000,000 shares
authorized; 0 shares outstanding --
Additional paid-in capital 24,577,307
Accumulated deficit (16,410,534)
-------------
Total stockholders' equity 8,191,172
-------------
$ 12,325,240
=============
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,
-----------------------------
2004 2003
------------- -------------
Revenues:
Audio $ 778,603 $ 499,112
DVD and VHS 2,497,044 --
Royalties, licensing and other 49,050 123,390
------------- -------------
Gross revenues 3,324,697 622,502
Sales returns, discounts and allowances (193,308) (71,955)
------------- -------------
Net revenues 3,131,389 550,547
------------- -------------
Costs and expenses
Cost of revenues:
Audio 342,724 191,014
DVD and VHS 1,601,410 --
Other 45,032 58,211
Warehouse expenses 51,458 16,694
Sales and marketing 476,333 203,607
Product development 276,058 111,805
General and administrative 989,124 441,161
------------- -------------
Total costs and expenses 3,782,139 1,022,492
------------- -------------
Loss from operations (650,750) (471,945)
Other income (expense) -- 1,207
Interest expense (227,791) (8,047)
------------- -------------
Loss before provision for income taxes (878,541) (478,785)
Provision for income taxes 800 800
------------- -------------
Net loss $ (879,341) $ (479,585)
============= =============
Basic and diluted loss per common share:
Net loss per share $ (0.04) $ (0.03)
============= =============
Basic and diluted weighted average shares 20,697,233 15,890,544
============= =============
The accompanying notes are an integral part of these statements.
4
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
------------ ------------
Cash flows from operating activities
Net loss $ (879,341) $ (479,585)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 104,373 52,394
Change in allowance for doubtful accounts and provision for returns 11,051 17,270
Common stock issued for services 33,000 41,000
Stock options granted to non-employees for services 157,383 52,888
Return and cancellation of stock issued for the remastering of movies (350,000) --
Interest expense on redeemable common stock 6,289 6,289
Amortization of discount on notes payable 185,769 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,019,166) 20,849
Inventories (596,437) (61,027)
Prepaid royalties 10,666 9,038
Prepaid expenses and deposits 315,966 (144,091)
Increase (decrease) in:
Accounts payable 1,351,507 105,057
Accrued payroll & related items 15,938 2,086
Accrued expenses 16,989 4,905
Payable on terminated contract -- (50,000)
------------ ------------
Net cash used by operating activities (636,013) (422,927)
------------ ------------
Cash flows from investing activities
Patents and trademarks -- (1,029)
Development of production masters (434,727) (90,216)
Purchase of property and equipment (78,520) (1,829)
------------ ------------
Net cash used in investing activities (513,247) (93,074)
------------ ------------
Cash flows from financing activities
Payments on notes payable (294,999) --
Proceeds from exercise of options 107,860 4,000
Proceeds from issuance of common stock, net of offering costs 6,425,468 --
------------ ------------
Net cash provided by financing activities 6,238,329 4,000
------------ ------------
Net increase (decrease) in cash and equivalents 5,089,069 (512,001)
Cash at beginning of period 941,332 745,993
------------ ------------
Cash at end of period $ 6,030,401 $ 233,992
============ ============
Non-cash investing and financing activities:
Repayment of officer loans by return of common stock 25,751 --
Repayment of notes receivable by return of common stock 2,796,242 --
Interest on notes receivable 8,240 37,596
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, 2003. 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, 2004, we issued a total of
5,100,350 common shares. We issued (a) 5,000,000 unregistered shares at a price
of $1.40 per share for net proceeds of $6,425,468 in a private placement as
further detailed below, (b) 12,400 shares at prices of $2.30, $2.50 and $2.95
per share for services, (d) 87,950 shares for the exercise of options at prices
of $.80 and $1.53 per share. Of the shares issued for services, 2,400 shares
were registered on Form S-8 Statement No. 333-97769. Of the option issuances,
81,700 shares were registered on Form S-8 Registration Statement No. 333-37914.
On January 22, 2004, the officers' notes receivable held by Genius Products as
subscription receivable were paid off by tendering shares of Genius Products
common stock pursuant to the terms of the notes. Klaus Moeller and Michael
Meader each tendered 168,052 shares to retire their loans. Larry Balaban and
Howard Balaban tendered 170,405 shares and 174,883 shares, respectively,
tendering additional shares to retire advances previously made to them.
As further described in Note D below, 350,000 shares previously issued
to Falcon Picture Group, LLC were cancelled.
As indicated above, on March 19, 2004, we completed a private placement
offering of $7 million pursuant to the exemption from registration under Rule
506 of Regulation D of the Securities Act. Proceeds to us net of commissions
totaled approximately $6.4 million. We intend to use the proceeds for working
capital purposes. Sands Brothers International Limited served as the selected
dealer for the transaction. The private placement was priced at $70,000 per
unit. Each unit consists of 50,000 shares of common stock and warrants to
purchase 10,000 shares of common stock. The warrants have an exercise price of
$3.00 per share and a five-year term. Pursuant to the sales of the units we
issued 5,000,000 new unregistered shares of common stock and warrants to
purchase up to 1,650,000 shares of common stock (including those warrants issued
as compensation to the selected dealer). In accordance with the terms of the
Registration Rights Agreement we entered into with the investors and the
selected dealer in connection with this financing, we have agreed to file a
resale registration statement for the resale of the common stock and the common
stock underlying the warrants by May 18, 2004.
Upon the request of certain of the $1,150,000 secured promissory note
holders, we repaid $294,999 of the notes prior to the maturity date. Those
noteholders then purchased units in the private placement. Amortization of the
discount on the repaid notes totaled $80,789.
6
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C: 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,
---------------------------
2004 2003
------------ ------------
Net Loss as reported $ (879,341) $ (479,585)
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 (241,943) (1,648)
------------ ------------
Pro forma net loss $(1,121,284) $ (481,233)
============ ============
Pro forma basic and diluted net loss per common share $ (.05) $ (.03)
============ ============
NOTE D: FALCON PICTURE GROUP
In September 2003, we reached an agreement with Falcon Picture Group,
LLC ("Falcon") to allow us to manufacture and distribute the radio programs,
television programs, and movies that Falcon has the rights to license. The
agreement required us to issue 350,000 shares of common stock at a price of
$1.00 per share as prepayment against the development of remastered DVDs. The
shares were not registered for sale, and we paid cash for the remastering costs
instead. As a result of mutual agreement, these shares were returned to us and
cancelled in February 2004.
NOTE E: BONUSES
In March 2004, the Board of Directors approved and the Company paid
bonuses totaling $382,446, including applicable employer taxes, to executive
management and staff in recognition of their efforts in assisting the Company to
obtain revenue in excess of $3,000,000 for the first quarter of 2004.
NOTE F: BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
For the Quarter Ended
March 31,
--------------------------------
2004 2003
------------- -------------
Numerator
Net loss $ (879,341) $ (479,585)
============= =============
Denominator
Basic and diluted weighted average number of common
shares outstanding during the period 20,697,233 15,890,544
============= =============
Basic and diluted net loss per share $ (0.04) $ (0.03)
============= =============
The effect of the potentially dilutive securities listed below were not included in the
computation of diluted loss per share, since to do so would have been anti-dilutive.
Stock options and warrants 21,040,364 5,840,257
Convertible debentures -- 121,500
7
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. FOR ADDITIONAL INFORMATION CONCERNING THESE FACTORS,
SEE THE INFORMATION UNDER THE CAPTION "RISK FACTORS" IN OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003.
Prior to the third quarter of 2003, our revenues were comprised
primarily of:
o Baby Genius(TM) and Kid Genius(TM) music product sales directly to
mass retailers, distributors and independent retailers (70% of
revenues for first half of 2003);
o sales of jewelry to retailers (12% of revenues for first half of
2003);
o licensing revenue related to licensing the Baby Genius trademark
for use on various products distributed by third parties (5% of
revenues for first half of 2003); and
o royalties related to the distribution of our line of VHS and DVDs
through our agreement with Warner Home Video (13% of revenues for
first half of 2003).
In an effort to expand the sales of our product line through our
distribution network, we entered into agreements in 2003 to manufacture and sell
music products under license from various children's books ("licensed music")
and classic radio programs, branded (AMC(TM) and TV Guide(TM)) and non-branded
classic movies and television shows which have been remastered for sale on DVD,
and classic radio programs. Our current business model includes revenues from
four major sources:
1. Sales of our branded proprietary and licensed DVDs and VHS;
2. Sales of our branded proprietary and licensed music audio CDs
and cassettes;
3. Sales of non-branded DVDs; and
4. Sales of Zoo Babies and gift sets.
We began shipping the first two releases of movies on DVD, titled AMC
Monsterfest and AMC Movies, in the fourth quarter of 2003. These new DVDs and
some of our licensed music products, along with our existing Baby Genius and Kid
Genius music products, provided most of our revenue in the fourth quarter of
2003 and the first quarter of 2004, and we expect that they will do so in the
remainder of 2004. Sales of non-branded DVDs of classic movies and television
shows also began in the first quarter of 2004. We do not expect royalties,
licensing and other revenue to be significant in 2004, primarily due to our
agreement with Warner Home Video to terminate the distribution agreement, and
due to only occasional orders for jewelry. We intend to self-distribute our Baby
Genius line of videos and DVDs.
For the first quarter of 2004, revenues were as follows:
1. Sales of our DVDs and VHS (75.1% of revenues for the first
quarter of 2004);
2. Sales of our audio CDs and cassettes (23.4% of revenues for
the first quarter of 2004); and
3. Sales from royalties, licensing and other (1.5% of revenues
for the first quarter of 2004).
We are continuing to seek agreements for licensed music, and in the
first quarter of 2004, signed agreements to develop and market music for My
Little Pony(TM), The Little Tikes(TM) and Tonka(TM). We are also developing
additional music lines and gift sets (audio CDs with gifts) for our existing
retail clients. We began selling religious music for children entitled Wee
Worship(TM) in the first quarter of 2004 as well as our new Tranquility CDs
(music marketed to adults), and we are continuing to develop additional
proprietary musical products to enhance our existing offerings. We intend to
commence sales of Zoo Babies pillows and gift sets in the fall of 2004.
Royalties related to the distribution of our videos by Warner Home
Video declined in 2003, as the sales of Baby Genius VHS and DVDs by Warner Home
Video failed to reach the levels we anticipated. In the first quarter of 2004,
we reached an agreement to terminate the agreement with Warner Home Video that
will allow us to self-distribute the Baby Genius VHS and DVDs directly to our
customers. As a result of this agreement, there will be no further royalties
received. As part of the agreement, we will pay a settlement amount of $300,000
by paying a royalty on the future sales of our Baby Genius videos and DVDs. The
$300,000 represents the amount of advance royalties received from Warner that we
are required to repay. The amount of advance royalties was previously classified
as deferred income - advance royalties. This amount will be our maximum
obligation under the settlement agreement and must be repaid by March 5, 2005.
We also purchased the remaining inventory of our VHS and DVDs from Warner Home
Video for approximately $192,000.
We do not report our different products as segments because we do not
allocate our resources among products and measure performance by product, and we
do not maintain discrete financial information concerning each of them. 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 related to all products. In
addition, we do not report our retail operations, representing sales over the
Internet, as a separate segment because they are immaterial, representing less
than 1% of revenues. Our Internet presence is maintained primarily for
advertising and brand recognition purposes.
Like many retail product distributors, we experience some seasonality
during the summer months when the purchasing staff of our customers may be on
vacation, thereby decreasing sales in such periods. In the fourth quarter, we
typically have a general increase in sales as retail inventory levels are raised
in anticipation of the Christmas season.
On March 19, 2004, we completed a private placement offering of 100
units aggregating $7 million pursuant to the exemption from registration under
Rule 506 of Regulation D of the Securities Act. Proceeds to us net of
commissions totaled approximately $6.4 million. We intend to use the proceeds
for working capital purposes. Sands Brothers International Limited served as the
selected dealer for the transaction. The private placement was priced at $70,000
per unit. Each unit consists of 50,000 shares of common stock and warrants to
purchase 10,000 shares of common stock. The warrants have an exercise price of
$3.00 per share and a five-year term. Pursuant to the sales of the units we
issued 5,000,000 new unregistered shares of common stock and warrants to
purchase up to 1,650,000 shares of common stock (including those warrants issued
as compensation to the selected dealer). In accordance with the terms of the
Registration Rights Agreement we entered into with the investors and the
selected dealer in connection with this financing, we have agreed to file a
resale registration statement for the resale of the common stock and the common
stock underlying the warrants by May 18, 2004.
THE THREE MONTHS ENDED MARCH 31, 2004.
Audio revenues for the first quarter of 2004 are composed of Baby
Genius, Kid Genius and licensed music CDs that are typically sold as three packs
(packages of three CDs in vinyl or chipboard sleeve packaging), although single
CDs and five packs are also sold. Audio revenues increased $279,491 or 56% in
the first quarter of 2004 to $778,603, as compared to $499,112 in the first
quarter of 2003. This increase was the result of the sales of the new licensed
music products, which more than offset a decline in Baby Genius music CDs.
DVD and VHS revenues for the first quarter of 2004 are composed of the
sales of AMC branded classic movies and television shows on DVD, non-branded
classic movies and television shows on DVD and BOZO the Clown(TM) DVD and VHS
units. DVD and VHS revenues were $2,497,044 during the first three months of
2004. There were no comparable revenues in the first three months of 2003 as
8
Baby Genius videos were sold under our agreement with Warner Home Video, and we
did not begin selling the new products until the third quarter of 2003. One
customer, Dollar Tree Stores, Inc., who ordered non-branded classic movie and
television show DVDs, accounted for $1,447,999 of the total of DVD and VHS
revenues. Additionally, $1,258,130 of this amount is included in accounts
receivable at March 31, 2004.
Royalties, licensing and other revenues are composed of royalties from
our prior agreement with Warner Home Video, licensing fees from the license of
our Baby Genius brand name and sales of jewelry. Royalties, licensing and other
revenues declined to $49,050 in the first quarter of 2004 from $123,390 in the
first quarter of 2003, a decrease of $74,340, or 60%, due to reductions in all
three categories, as expected.
Gross revenues increased $2,702,195, or 434% during the quarter ended
March 31, 2004, to $3,324,697, as compared to $622,502 in the same prior year
period, primarily as the result of sales of new DVD and VHS products, aided by
the sales of licensed music products.
Sales returns, discounts and allowances increased $121,353, or 6% of
gross revenues, in the first quarter of 2004 to $193,308, as compared to
$71,955, or 12% of gross revenues in the first quarter of 2003. This reduction
as a percentage of gross revenues occurred as the result of the majority of DVD
and VHS revenues in the first quarter being sold without any right of return,
and therefore no provision for returns was required for those sales. A provision
for returns was accrued on the balance of DVD and VHS revenues, as well as on
the audio revenues, using historical reserve rates.
Net revenues increased by $2,580,842 or 469% to $3,131,389 for the
three months ended March 31, 2004, from $550,547 for the three months ended
March 31, 2003, due to sales of our new DVD and licensed music products.
Cost of sales consists primarily of the cost of products sold to
customers, packaging and shipping costs, and royalties paid on sales of licensed
products. Audio cost of sales in the first quarter of 2004 was 44% of audio
revenues, as compared to 38% during the same period in 2003, primarily due to
the royalties payable on licensed music products. DVD and VHS cost of sales in
the first quarter of 2004 was 64% of DVD and VHS revenues. Sales of single DVDs
with no right of return at lower margins, royalties payable on licensed DVD
products, and distribution pricing in order to get our products placed with a
major retailer all contributed to a lower margin on DVD and VHS revenues.
Royalties, licensing and other cost of sales during 2003 was 92% of revenues in
the first three months of 2004 as compared to 47% in the first three months of
2003. The 2004 margin is lower primarily due to no royalty income being recorded
in the 2004 period. Warehouse expenses increased by $34,764, or 208% in the
first quarter of 2004, mainly due to freight in costs on increased inventory
levels of multiple new products.
Sales and marketing expenses increased by $272,726, or 134% in the
three months ended March 31, 2004 as compared to the same quarter in 2003. This
increase is due to increased personnel costs due to an executive bonus and the
hiring of additional sales personnel, commissions payable to an outside sales
representative, and increased advertising expenses.
Product development expenses increased by $164,253, or 147% in the
first quarter of 2004, as compared to the quarter ended March 31, 2003. This
increase is due to increased amortization of production master costs incurred on
the new products, an executive bonus and increased consulting costs. We
currently anticipate that product development expenses will continue to increase
for the remainder of 2004 as we add new staff and make expenditures in the
continuing development of new DVD, VHS and audio products.
General and administrative expenses increased by $547,963, or 124% in
the three months ended March 31, 2004, as compared to the year earlier quarter.
This increase was primarily due to increased personnel costs due as a result of
executive and staff bonuses in the quarter and higher salaries, and higher costs
associated with the issuance of options and warrants to non-employees in the
current year quarter.
Interest expense increased to $227,791 for the three months ended March
31, 2004 compared to $8,047 for the same period of 2003, due to interest on
notes payable issued in the fourth quarter of 2003. Interest expense in the
first quarter of 2004 included the amortization of the discount on the notes
payable with an acceleration of the discount amortization on the portion of the
notes that were repaid in March 2004.
The net loss for the quarter ended March 31, 2004 of $879,341 was
greater than the net loss of $479,585 for the quarter ended March 31, 2003, as
the result of the increased operating expenses incurred in the current year
quarter.
9
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three months ended March 31,
2004 was $636,013, primarily due to the net loss and increases in accounts
receivable and inventories. This was partially offset by an increase in accounts
payable, and the reduction in prepaid expenses. In the three months ended March
31, 2003, net cash used in operations of $422,927 was primarily the result of
the net loss and increases in prepaid expenses, offset by an increase in
accounts payable, depreciation and amortization and stock options granted to
non-employees for services.
Net cash used in investing activities in the three months ended March
31, 2004 was $513,247, primarily as the result of the development of production
masters. In the three months ended March 31, 2003, net cash used in investing
activities was $93,074, also as the result of the development of production
masters.
Cash flows from financing activities of $6,238,329 in the three month
period ending March 31, 2004 were primarily from the sale of our common stock in
a private placement as noted above and the exercise of options. This was
partially offset by the repayment of part of the notes payable. In the first
quarter of 2003, the exercise of an option accounted for the cash flows from
financing activities.
At March 31, 2004, we had cash balances of $6,030,401. We believe that
this amount, when combined with our accounts receivable from shipments at March
31, 2004, will fund our operations through the remainder of 2004. Although we
believe that our expanded product line offers us an opportunity for
significantly improved operating results in 2004, no assurance can be made that
we will operate on a profitable basis in 2004, or ever, as such performance is
subject to numerous variables and uncertainties, many of which are out of our
control.
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 as of
the end of the period covered by this report, 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.
There were no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their most recent evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At March 31, 2004, a liability of $497,221 has been accrued
representing the amount of stock purchased and accrued interest for rescission
matters in Arizona, Pennsylvania and Washington related to approximately 70,000
shares of stock for which no registration filings were made under the securities
laws of those states and for which exemptions from registration appear to be
unavailable. In April 2004, we commenced offers to voluntarily repurchase the
stock purchased in Arizona and Pennsylvania, including an interest payment from
the date of purchase at an annual rate of 10% and 6%, respectively, on the stock
purchase price.
We are in discussions with the Securities Administrator of the State of
Washington regarding entering into an administrative order and although no terms
of an administrative order have yet been proposed by the Securities
Administrator, the purpose of entering such an order would be to resolve all
claims based on the allegations set forth in a Summary Order to Cease and Desist
filed against us with the State of Washington Department of Financial
Institutions Securities Division regarding the shares issued in that state. We
anticipate that any resolution of this matter with the Securities Administrator
would include our making an offer to repurchase these securities for the amount
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paid for them, plus interest thereon from the date of purchase at an annual rate
of 8%. Entering into an administrative order may affect our business or our
ability to raise capital in the State of Washington and those states where
having an outstanding administrative order may result in the loss of certain
available exemptions from registration of securities.
Recipients of our repurchase offer in Arizona and Pennsylvania have 30
days from the date of their receipt of our offer to accept or reject the offer.
We believe that because the price of our common stock is currently significantly
lower than the original purchase price paid by affected shareholders, they are
likely to accept repurchase offers. As of May 13, 2004, we have paid
approximately $62,000 to the shareholders who have accepted the repurchase
offers.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2004, we issued a total of
5,100,350 common shares. We issued (a) 5,000,000 unregistered shares at a price
of $1.40 per share for net proceeds of $6,425,468 in a private placement as
further detailed below, (b) 12,400 shares at prices of $2.30, $2.50 and $2.95
per share for services, (d) 87,950 shares for the exercise of options at prices
of $.80 and $1.53 per share. Of the shares issued for services, 10,000
unregistered shares were issued under Rule 506 of Regulation D of the Securities
Act, and the balance were registered on Form S-8 Statement No. 333-97769. The
stock issued for option exercises was registered on Form S-8 Registration
Statement No. 333-37914.
On January 22, 2004, the officers' notes receivable held by Genius
Products as subscription receivable were paid off by tendering shares of Genius
Products common stock pursuant to the terms of the notes. Klaus Moeller and
Michael Meader each tendered 168,052 shares to retire their loans. Larry Balaban
and Howard Balaban tendered 170,405 shares and 174,883 shares, respectively,
tendering additional shares to retire advances previously made to them.
In September 2003, we reached an agreement with Falcon Picture Group,
LLC ("Falcon") to allow us to manufacture and distribute the radio programs,
television programs, and movies that Falcon has the rights to license. The
agreement required us to issue 350,000 shares of common stock at a price of
$1.00 per share as prepayment against the development of remastered DVDs. The
shares were not registered for sale, and we paid cash for the remastering costs
instead. As a result of mutual agreement, these shares were returned to us and
cancelled in February 2004.
As indicated above, on March 19, 2004, we completed a private placement
offering of $7 million pursuant to the exemption from registration under Rule
506 of Regulation D of the Securities Act. Proceeds to us net of commissions
totaled approximately $6.5 million. We intend to use the proceeds for working
capital purposes. Sands Brothers International Limited served as the selected
dealer for the transaction. The private placement was priced at $70,000 per
unit. Each unit consists of 50,000 shares of common stock and warrants to
purchase 10,000 shares of common stock. The warrants have an exercise price of
$3.00 per share and a five-year term. Pursuant to the sales of the units we
issued 5,000,000 new unregistered shares of common stock and warrants to
purchase up to 1,650,000 shares of common stock (including those warrants issued
as compensation to the selected dealer). In accordance with the terms of the
Registration Rights Agreement we entered into with the investors and the
selected dealer in connection with this financing, we have agreed to file a
resale registration statement for the resale of the common stock and the common
stock underlying the warrants by May 18, 2004.
Upon the request of certain secured promissory note holders, our early
repayment of their notes in the aggregate amount of $294,999 was invested in the
private placement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
10.1 Homevideo Distribution Agreement with Warner Home Video dated
February 6, 2002 (filed with the Company's Form 10-QSB on May
17, 2004).*
10.2 Distribution and Manufacturing Agreement with Falcon Picture
Group, LLC dated November 12, 2002 (filed with the Company's
Form 10-QSB on May 17, 2004).*
10.3 License Agreement with Falcon Picture Group, LLC dated
September 8, 2003 (filed with the Company's Form 10-QSB on
May 17, 2004).*
10.4 First Amendment to License Agreement with Falcon Picture
Group, LLC dated December 22, 2003 (filed with the Company's
Form 10-QSB, Amendment #1, on July 13, 2004).*
10.5 Restated Termination, Release and Royalty Agreement with
Warner Home Video dated March 5, 2004 (filed with the
Company's Form 10-QSB, Amendment #1, on July 13, 2004).*
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.**
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
** Filed herewith.
(b) REPORTS ON FORM 8-K
We filed a Form 8-K on March 30, 2004 to disclose the issuance of three
press releases regarding the following: (i) a press release announcing our
financial results report to be released on March 30, 2004 and a shareholder
conference call scheduled for March 31, 2004; (ii) a press release announcing
our operating results for 2003, and (iii) a press release announcing a music
license with The Little Tikes.
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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.
August 12, 2004 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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