UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
--------------------
(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, 2005
[ ] 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.
(Exact name of small business issuer as specified in its charter)
DELAWARE 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 offices)
(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 40,084,437 shares outstanding of the issuer's Common Stock as of May
13, 2005.
Transitional small business disclosure format (check one): Yes [ ] No [X]
GENIUS PRODUCTS, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheet at March 31, 2005 (unaudited)
and December 31, 2004 (audited) 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flow for the Three Months
Ended March 31, 2005 and 2004 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
Item 4 Controls and Procedures 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits 17
SIGNATURES 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005 DECEMBER 31, 2004
-------------------------------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and equivalents $ 3,788,558 $ 1,223,881
Accounts receivable, net of allowance for doubtful accounts
and sales returns of $705,588 and $1,542,085 4,764,449 3,615,073
Inventories, net of obsolescence allowance $521,180 and $474,358 3,576,745 3,473,483
Prepaid royalties 1,649,930 1,042,120
Prepaid expenses 445,247 312,046
-------------------------------------
Total current assets 14,224,929 9,666,603
Property and equipment, net of accumulated depreciation of
$248,704 and $215,194 448,336 264,989
Production masters, net of accumulated amortization of
$1,226,675 and $805,891 17,895,804 2,825,426
Goodwill 11,375,612 --
Deposits and other 236,736 239,148
-------------------------------------
$ 44,181,417 $ 12,996,166
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,730,419 $ 7,329,218
Notes payable 4,000,000 --
Accrued payroll and related expenses 274,131 259,366
Debentures payable 50,750 50,750
Accrued expenses 1,137,947 229,800
Redeemable common stock 399,997 395,172
Payable on terminated contract 300,000 300,000
-------------------------------------
Total current liabilities 12,893,244 8,564,306
-------------------------------------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, $.0001 par value; 10,000,000 shares authorized;
0 shares outstanding -- --
Common stock, $.0001 and $.001 par value; 100,000,000 shares
authorized; 40,084,437 and 25,208,512 shares outstanding 3,953 25,209
Committed common stock 1,249,183
Additional paid-in capital 53,844,722 25,984,012
Accumulated deficit (23,809,685) (21,577,361)
-------------------------------------
Total stockholders' equity 31,288,173 4,431,860
-------------------------------------
$ 44,181,417 $ 12,996,166
=====================================
See accompanying notes to unaudited interim financial statements
3
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2005 2004
-------------------------------------
Revenues:
Audio $ 1,320,810 $ 778,603
DVD and VHS 1,419,262 2,497,044
Royalties, licensing and other 25,118 49,050
-------------------------------------
Gross revenues 2,765,190 3,324,697
Sales returns, discounts and allowances (209,304) (193,308)
-------------------------------------
Net revenues 2,555,886 3,131,389
Costs and expenses:
Cost of revenues:
Audio 790,800 342,724
DVD and VHS 1,632,163 1,601,410
Other 21,396 45,032
Amortization of Production Masters 172,670 88,549
Warehouse expenses 49,772 51,458
-------------------------------------
Total costs of revenues: 2,666,800 2,129,173
Operating expenses:
Product development 227,314 187,509
Sales and marketing 446,491 476,333
General and administrative 1,440,964 989,124
-------------------------------------
Total costs and expenses 4,781,569 3,782,139
Loss from operations (2,225,683) (650,750)
Interest expense (5,840) (147,002)
-------------------------------------
Loss before provision for income taxes (2,231,523) (797,752)
Provision for income taxes 800 800
-------------------------------------
Net loss $ (2,232,323) $ (798,552)
=====================================
Basic and diluted loss per common share:
Net loss per share $ (0.08) $ (0.04)
=====================================
Basic and diluted weighted average shares 28,000,009 20,697,233
=====================================
See accompanying notes to unaudited interim financial statements
4
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
2005 2004
-------------------------------
Cash flows from operating activities:
Net loss $ (2,232,323) $ (798,552)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 35,922 104,373
Change in allowance for doubtful accounts and provision for returns (837,217) 11,051
Common stock issued for services 58,579 33,000
Stock options granted to non-employees for services -- 157,383
Stock issued for the remastering of movies on DVD -- (350,000)
Interest expense on redeemable common stock 4,825 6,289
Amortization of discounts on notes payable -- 104,980
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 2,687,842 (1,019,166)
Inventories 646,738 (596,437)
Prepaid royalties (607,810) 10,666
Prepaid expenses and deposits 16,799 315,966
Development of production masters (270,379) (434,727)
Increase (decrease) in:
Accounts payable (4,723,799) 1,351,507
Accrued payroll & related items 14,765 15,938
Accrued expenses and other 123,147 16,989
-------------------------------
Net cash used in operating activities (5,082,911) (1,070,740)
Cash flows from investing activities
Net cash paid during Wellspring acquisition (188,886) --
Purchase of property and equipment (36,857) (78,520)
-------------------------------
Net cash used in investing activities (225,743) (78,520)
-------------------------------
Cash flows from financing activities:
Payments on notes payable -- (294,999)
Payments on short term debt (2,349,219) --
Payments of offering costs (718,589) --
Proceeds from exercise of options 83,580 --
Proceeds from exercise of warrants 557,560 --
Proceeds from issuance of common stock 10,300,000 6,425,468
-------------------------------
Net cash provided by financing activities 7,873,332 6,130,469
Net increase (decrease) in cash and equivalents 2,564,678 4,981,209
Cash at beginning of period 1,223,880 941,332
-------------------------------
Cash at end of period $ 3,788,558 $ 5,922,541
===============================
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
Warrants issued for offering costs $ 1,014,986 --
Issuance of common stock for offering costs $ 350,000 --
See accompanying notes to unaudited interim financial statements
5
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Genius
Products, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities Exchange Act of 1934. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The preparation of
financial statements requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual results are likely to differ from those estimates, but management does
not believe such differences will materially affect the financial position or
results of Genius Products, Inc.
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, 2004. 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. Interim results are
not necessarily indicative of future or annual results.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Genius Products, Inc., its wholly owned subsidiary (Sanuk
Corporation), which is inactive, and AVMC, which was acquired on March 21, 2005.
In regard to the AVMC subsidiary, the period from March 21, 2005 to March 31,
2005 is not material from an operations perspective, hence, the AVMC results for
this period are not included in the Statement of Operations for the three month
period ending March 31, 2005. The estimated, unaudited AVMC Balance sheet is
included in the consolidated Balance Sheet presented at March 31, 2005 (See Note
5). All significant inter-company transactions and accounts have been eliminated
in consolidation.
ACCOUNTS RECEIVABLE. The allowance for doubtful accounts and provision for sales
returns includes management's estimate of the amount expected to be lost or
returned on specific accounts and for losses or returns on other as yet
unidentified accounts included in accounts receivable. In estimating the
allowance component for unidentified losses and returns, management relies on
historical experience and takes into account current information obtained from
retailers including retail sell-through data and retail inventory data as
available. The amounts the Company will ultimately realize could differ
materially in the near term from the amounts assumed in arriving at the
allowance for doubtful accounts and provision for sales returns in the
accompanying financial statements.
CONCENTRATIONS OF CREDIT RISK. For the three month period ended March 31, 2005,
Sam's Club, Target Stores, 99 Cent Only Stores, and Anderson Merchandisers
accounted for 16%, 14%, 13% and 13% of net revenues respectively. For the three
month period ended March 31, 2004, Dollar Tree and Anderson Merchandisers
comprised 45% and 18%, respectively, of net revenues.
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and trade
receivables. The Company restricts investment of temporary cash investments to
financial institutions with investment grade credit ratings. The Company
provides credit in the normal course of business to customers located throughout
the United States. The Company performs ongoing credit evaluations of its
customers, generally does not require collateral and maintains allowances for
potential credit losses which, when realized, have been within the range of
management's expectations.
6
INVENTORIES. Inventories consist of raw materials and finished goods and are
valued at the lower of cost or market. Cost is determined on a
first-in-first-out method of valuation. The Company regularly monitors inventory
for excess or obsolete items and makes any valuation corrections when such
adjustments are needed. For the three month period ending March, 31, 2005, the
Company recorded an addition to inventory reserve of $46,822. Total inventory
reserve at March 31, 2005 is $521,180 across all product lines.
LONG-LIVED ASSETS. Property and Equipment purchases are recorded at cost and are
depreciated and amortized over the estimated useful lives of the assets (three
to seven years generally) using the straight-line method. Music production
masters are stated at cost net of accumulated amortization. Costs incurred for
music production masters, including licenses to use certain classical
compositions, royalties, and recording and design costs, are capitalized and
amortized over a three or seven year period using the straight line method from
the time a title is initially released, consistent with the estimated timing of
revenue for a title.
We capitalize the costs of production and acquisition of film libraries. Costs
of production include costs of film and tape conversion to DLT master format,
menu design, authoring and compression. These costs are amortized to direct
operating expenses in accordance with Statement of Position ("SOP") 00-2,
"Accounting by Producers or Distributors of Films", using the individual film
forecast method over a period of ten years. Costs are stated at the lower of
unamortized film costs or estimated fair value. Films classified as part of a
library have an initial release date of more than three years prior to
acquisition. For acquired film libraries, ultimate revenue includes estimates
over a period not to exceed ten years. Management regularly reviews and revises
when necessary its ultimate revenue and cost estimates, which may result in a
change in the rate of amortization of film costs and/or a write-down of all or a
portion of the unamortized costs of the library to its estimated fair value. No
assurances can be given that unfavorable changes to revenue and cost estimates
will not occur, which may result in significant write-downs affecting our
results of operations and financial condition. The unamortized library costs at
March 31, 2005 was $17,895,804. The Company estimates the total amortization
expense for 2005 to be $932,391.
Patents and trademarks covering a number of the Company's products are being
amortized on a straight-line basis over 5 to 17 years.
Long-lived assets are reviewed annually for impairment and whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Impairment is necessary when the undiscounted cash flows
estimated to be generated by the asset are less than the carrying amount of the
asset.
STOCK-BASED COMPENSATION. The Company has elected to adopt only the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") 123,
"Accounting for Stock-based Compensation" as amended by SFAS No. 148,
"Accounting for Stock Based Compensation Transition and Disclosure - an
amendment of FASB Statement No. 123", and continues to measure compensation cost
related to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), Accounting for Stock Issued to Employees, and related
interpretations.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant dates for awards under this plan consistent with
the method of SFAS 123, as amended by SFAS No. 148, the Company's net loss and
loss per common share would have been increased to the pro forma amounts
indicated below:
For the quarter ended March 31,
2005 2004
---------------------------------
Net Loss as Reported $ (2,232,323) $ (798,552)
Compensation cost at fair value (176,520) (241,943)
---------------------------------
Pro forma Net Loss $ (2,408,843) $ (1,040,495)
=================================
Basic loss per share:
As reported $ (0.08) $ (0.04)
Pro forma $ (0.09) $ (0.05)
=================================
7
The pro forma compensation cost was recognized for the fair value of the stock
options granted, which was estimated using the Black-Scholes model with the
following weighted-average assumptions for the quarter ended March 31, 2005 and
2004: expected volatility of 60% and between 20% and 50%, respectively,
risk-free interest of 3.7% and between 2.6% and 4%, respectively, expected life
of 1 to 10 years and no expected dividends for both years. The weighted-average
exercise price of outstanding stock options at March 31, 2005 and 2004 was $1.43
and $1.25 respectively. The weighted average remaining contractual life of
outstanding options at March 31, 2005 and 2004 was 8.2 years and 10 years
respectively.
LOSS PER SHARE. Basic EPS is calculated using income available to common
stockholders divided by the weighted average of common shares outstanding during
the year. Diluted EPS is similar to Basic EPS except that the weighted average
of common shares outstanding is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares, such as options, had been issued. The treasury stock method is used to
calculate dilutive shares which reduces the gross number of dilutive shares by
the number of shares purchasable from the proceeds of the options assumed to be
exercised. All potential common shares were anti-dilutive, and excluded from
loss per share calculations
REVENUE RECOGNITION. Revenues are recorded upon the shipment of goods. Costs of
sales and an allowance for returns are also recorded at the time of shipment.
The allowance for returns calculation is based upon an analysis of historical
customer and product returns performance as well as current customer inventory
data as available. Updates to the returns calculation is performed quarterly.
Sales made under consignment or guaranteed sales arrangements are not recognized
as net revenue until such time that cash is received for the sale and release of
return liability is confirmed by the customer.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In March 2005, the FASB issued FASB
Interpretation ("FIN") No. 47, "Accounting for Conditional Asset Retirement
Obligations". FIN No. 47 clarifies that the term conditional asset retirement
obligation as used in FASB Statement No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Uncertainty
about the timing and/or method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability when
sufficient information exists. This interpretation also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. FIN No. 47 is effective no later than the end of
fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year
companies). Retrospective application of interim financial information is
permitted but is not required. Management does not expect adoption of FIN No. 47
to have a material impact on the Company's financial statements.
NOTE 2: INVENTORY
March 31, December 31,
2005 2004
------------------------------------
Raw Materials $ 368,910 $ 349,231
Finished Goods 3,729,015 3,598,610
------------------------------------
$ 4,097,925 $ 3,947,841
Allowance for Obsolescence (521,180) (474,358)
------------------------------------
$ 3,576,745 $ 3,473,483
====================================
8
NOTE 3: PROPERTY AND EQUIPMENT
March 31, December 31,
2005 2004 USEFUL LIVES
---------------------------------
Computers and equipment $ 595,929 $ 424,071 3 - 5 years
Furniture and fixtures 78,746 33,746 3 - 7 years
Leasehold improvements 22,365 22,365 Lesser of lease term
--------------------------------- or useful life.
697,040 480,182
Accumulated depreciation and amortization (248,704) (215,193)
---------------------------------
$ 448,336 $ 264,989
=================================
Depreciation expense for the periods ended March 31, 2005 and 2004 were
$33,510 and $13,439 respectively.
NOTE 4: STOCKHOLDERS' EQUITY
COMMON STOCK
- ------------
During the three months ended March 31, 2005, we issued a total of
14,875,925 common shares and returned no common shares to treasury. 6,518,987
shares were issued for proceeds of $10.3 million in conjunction with a private
placement offering and 7,000,000 shares were issued in conjunction with the
acquisition of American Vantage Media Corporation. We issued 712,338 shares at
$2.16 to $2.27 per share for services rendered in connection with the private
placement offering , 562,000 shares for the exercise of warrants at $.63 to
$1.00 per share and 82,600 shares for the exercise of options at $.80 to $1.50
per share.
During the three months ended March 31, 2005, we issued a total of
3,549,076 warrants to purchase common stock at $1.58 to $2.78 per share.
2,086,076 were issued in conjunction with the private placement offering.
1,463,000 were issued in conjunction with the transaction to acquire American
Vantage Media Corporation, of which, 63,000 warrants were issued as offering
costs.
STOCK OPTIONS AND WARRANTS
- --------------------------
A summary of stock option and warrant activity follows:
Weighted
Options and Average
Warrants Exercise
Outstanding Price
--------------------------------
December 31, 2004 22,711,748 $1.86
Granted 3,569,076 $2.46
Exercised (644,600) $0.99
Canceled (189,976) $1.90
---------------
March 31, 2005 25,446,248 $1.96
===============
Options and warrants exerciseable, March 31, 2005 20,637,946 $1.84
===============
9
PRIVATE PLACEMENT
- -----------------
On March 2, 2005, the Company entered into a Securities Purchase Agreement with
certain institutional investors related to the private placement of 6,518,987
shares of our common stock, par value $0.0001 per share, and five-year warrants
to purchase 1,303,797 shares of Common Stock, half at an exercise price of $2.56
per share and half at an exercise price of $2.78 per share. The fair value of
these warrants was estimated as $1,392,231 using the Black-Scholes model with
the following weighted average assumptions: expected volatility of 60%, risk
free interest of 4%, an expected life of five years and no expected dividends.
The transaction closed on March 3, 2005 and the Company realized gross proceeds
of $10.3 million from the financing before deducting commissions and other
expenses. Offering costs related to the transaction totaled $2,086,971 comprised
of $718,589 cash payments for legal and investment services, $350,000 for
162,037 shares of stock valued at $2.16 per share issued for investment services
and 782,279 warrants, half at an exercise price of $2.56 and half at an exercise
price of $2.78, valued at $1,014,986. The value of the warrants was estimated
using the Black-Scholes model with the following weighted average assumptions:
expected volatility of 60%, risk free interest of 4%, an expected life of five
years and no dividends. The Company agreed to register for resale the shares of
Common Stock issued in the private placement and shares issuable upon exercise
of warrants. Such registration statement became effective on May 11, 2005.
NOTE 5: ACQUISITION OF AVMC
On March 21, 2005, we completed our acquisition of American Vantage Media
Corporation ("AVMC"), a subsidiary of American Vantage Companies ("AVC"). The
acquisition was completed through an Agreement and Plan of Merger ("Merger
Agreement") which provided for the issuance to AVC of (i) 7,000,000 shares of
our common stock valued at $2.27 per share and (ii) warrants to purchase
1,400,000 shares of our common stock, half at an exercise price of $2.56 per
share and half at an exercise price of $2.78 per share, plus our assumption of
approximately $6.3 million in debt of AVMC. The fair value of these warrants was
estimated as $1,596,482 using the Black-Scholes model with the following
weighted average assumptions: expected volatility of 60%, risk free interest of
4.2%, an expected life of five years and no expected dividends. The purchase
price is approximated by using the average closing market price of the Company's
common stock over the two-day period before and after the sale was announced.
$1,559,911 in direct costs incurred for the acquisition include $238,886 for
legal and professional services related to the valuation of the Wellspring
library, as well as a transaction fee of $1,249,183 paid in the form of 550,301
shares issued at a value of $2.27 per share, and 63,000 warrants, half at an
exercise price of $2.56 and half at an exercise price of $2.78, for $71,842. The
value of the warrants was estimated using the Black-Scholes model with the
following weighted average assumptions: expected volatility of 60%, risk free
interest of 4.2%, an expected life of five years and no dividends.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition. The estimated fair values of
assets purchased and liabilities assumed, used herein, were estimated based on
available information and is subject to refinement based upon the outcome of
valuations and other fair value studies, which have not yet been completed.
Therefore, the allocation of the purchase price and resulting goodwill is
subject to change.
10
AVMC-STANDALONE (UNAUDITED)
Cash $ 50,000
Accounts Receivable 3,000,000
Inventory 750,000
Other current Assets 150,000
Total Current Assets $ 3,950,000
Wellspring Library 14,800,000
Fixed Assets 180,000
Goodwill 11,375,612
Total Assets $ 30,305,612
Accounts Payable $ 4,125,000
Accrued Expenses 785,000
Short Term Debt 2,349,219
Long Term Debt 4,000,000
Total Liabilities $ 11,259,219
THREE MONTHS ENDED
PRO-FORMA 31-MAR 31-MAR
COMBINED COMPANY 2004 2005
Net Revenues $ 5,924,389 *
Net Loss $ (1,204,552) *
Net loss per common share $ 0.06 *
(basic and diluted)
The unaudited pro-forma information above represents the results of operations
of the Company as if AVMC had been a part of the Company as of January 1, 2004.
(*) The pro-forma March 31, 2005 estimate cannot be provided at the time of this
filing as American Vantage Companies filed their 10-KSB late, on May 10, 2005
and has not completed the accounting for the period ending March 31, 2005.
The unaudited pro-forma information may not be indicative of the results that
would actually have been achieved had the acquisition occurred as of the date of
the periods indicated or that may be obtained in the future.
11
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 NOTES
THERETO CONTAINED IN THIS REPORT. THE DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT RELATE TO FUTURE EVENTS OR THE COMPANY'S FUTURE FINANCIAL
PERFORMANCE THAT 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 THOSE EXPRESSED OR
IMPLIED BY THE FORWARD-LOOKING STATEMENTS. FOR ADDITIONAL INFORMATION CONCERNING
THESE FACTORS, SEE THE INFORMATION UNDER THE CAPTION "RISK FACTORS" IN OUR
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004.
OVERVIEW
We are an entertainment company that produces, publishes and
distributes films, videos and music on digital video discs ("DVDs"), videos
("VHS") and compact discs ("CDs"), and the new Universal Media Disc (UMD) under
a variety of branded and, non-branded names. Our products are sold at retail
outlets nationwide, and, to a lesser extent, internationally, either through
distributors or through retailers that we sell to directly. We also sell our
products through various websites on the Internet, including our own,
www.geniusproducts.com. Our current business includes revenues from three major
sources, as follows:
o Sales of branded proprietary and licensed DVDs and VHS (30.3%
of gross revenues for the first three months of 2005);
o Sales of branded proprietary and licensed music audio CDs and
cassettes (38.0% of gross revenues for the first three months
of 2005); and
o Sales of non-branded DVDs and music CDs (31.7% of gross
revenues for the first three months of 2005).
Revenues from royalties, licensing and other revenue were not
significant in the first three months of 2005 as we have terminated our
distribution agreement with Warner Home Video and discontinued our sales of
jewelry in fourth quarter 2004.
Consistent with other retail product distributors, we experience some
degree of sales seasonality. Our second quarter (period ending June 30) is
typically the lowest sales period and our fourth quarter the highest. However we
have grown significantly over the past few quarters, and therefore our changes
in revenues may not track industry seasonality norms. In addition, we will be
placing a higher focus on our branded and proprietary business and less of a
focus on value priced products. This transition may affect future quarterly
results.
We do not report our different products as segments because we do not
allocate our resources among products nor do we measure performance by product.
Finally, we do not maintain discrete financial information regarding product
lines. Our chief operating decision maker receives financial information taken
as a whole. Due to our size and limited resources, our sales, marketing and
product development efforts are performed by the same personnel who support all
products. Our warehousing costs also reflect support of all products and cannot
be distinguished among product lines. In addition, we do not report our retail
operations, representing sales over the Internet, as a separate segment as they
are immaterial, representing less than 1% of revenues. Our Internet presence is
maintained primarily for advertising and brand recognition purposes.
On March 2, 2005, the Company entered into a Securities Purchase
Agreement with certain institutional investors related to the private placement
of 6,518,987 shares of its common stock, par value $0.0001 per share, and
five-year warrants to purchase 1,303,797 shares of Common Stock, half at an
exercise price of $2.56 per share and half at an exercise price of $2.78 per
share. The transaction closed on March 3, 2005 and the Company realized gross
proceeds of $10.3 million from the financing, before deducting commissions and
other expenses. The Company agreed to register for resale the shares of Common
Stock issued in the private placement and shares issuable upon exercise of
warrants. Such registration statement became effective on May 11, 2005.
On March 21, 2005, we completed our acquisition of American Vantage
Media Corporation ("AVMC"), a subsidiary of American Vantage Companies ("AVC").
The acquisition was completed through an Agreement and Plan of Merger ("Merger
Agreement") which provided for the issuance to AVC of (i) 7,000,000 shares of
our common stock valued at $2.27 per share and (ii) warrants to purchase
1,400,000 shares of our common stock, half at an exercise price of $2.56 per
share and half at an exercise price of $2.78 per share, plus our assumption of
approximately $6.3 million in debt of AVMC.
12
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in the critical accounting
policies disclosed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in our most recent Annual Report
on Form 10-KSB. The preparation of our financial statements requires management
to make estimates and assumptions that affect the amounts reported. The
significant areas requiring the use of management's estimates relate to
provisions for lower of cost or market inventory writedowns, doubtful accounts
receivables, unrecouped royalty fee advances, and sales returns and allowances.
Although these estimates are based on management's knowledge of current events
and actions management may undertake in the future, actual results may
ultimately differ materially from those estimates.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Audio revenues for the first quarter of 2005 were composed of Baby
Genius, Kid Genius, licensed music CDs, Interactive music programs and a Value
music product sold at an entry level price point at retail. Audio revenues
increased $542,207 or, 70% in the first quarter of 2005 to $1,320,810, as
compared to $778,603 in the first quarter of 2004. The increase is attributed to
higher sales of the Baby Genius and licensed music product and continued sales
of the Value music product and Lifestyles Music Program that was introduced in
the fourth quarter of 2004.
DVD and VHS revenues for the first quarter of 2005 were composed of
sales of branded products including AMC, TV GUIDE and Hollywood Classic and
branded classic movies and television shows on DVD as well as non-branded
classic movies and television shows on DVD. DVD and VHS revenues were $1,419,262
during the first quarter of 2005, as compared to $2,497,044 in the first quarter
of 2004. The $1,077,782 decrease, or approximately 43%, was primarily due to a
$1,204,713 decrease in sales of value priced, non-branded classic movie and
television show DVDs, and reduced sales of the AMC product, partially offset by
the sales of the branded Classic Animated products launched this quarter.
Branded DVD sales represented approximately 64% of DVD sales for the first
quarter of 2005 compared to approximately 47% of DVD sales for first quarter
2004.
Royalties, licensing and other revenues were composed of royalties from
our prior agreement with Warner Home Video, licensing fees from the license of
our Baby Genius brand name, sales of gift sets and plush toys. Royalties,
licensing and other revenues decreased to $25,118 in the first quarter of 2005
from $49,050 in the first quarter of 2004, a decrease of $23,932, or 49%.
Current quarter sales were comprised of plush toys only.
Total gross revenues decreased $559,507, or 17%, during the quarter
ended March 31, 2005, to $2,765,190, as compared to $3,324,697 in the same
period last year due primarily to decreased sales of DVD products as discussed
above. During the first quarter of 2005, four customers accounted for 10% or
more of gross revenues. Sam's Club, Target Stores, 99 Cent Only Stores, and
Anderson Merchandisers accounted for 16%, 14%, 13% and 13% of revenues
respectively. For the three month period ended March 31, 2004, Dollar Tree and
Anderson Merchandisers comprised 45% and 18%, respectively, of revenues.
Sales returns, discounts and allowances increased $15,996, or 8%, to
$209,304 or 7.6% of gross revenues in the first quarter of 2005, as compared to
$193,308 or 5.8% of gross revenues in the first quarter of 2004. The provision
for sales returns and allowances is calculated in accordance with historical
averages, but will vary based on customer and product mix.
Net revenues decreased by $575,503, or 18%, to $2,555,886 for the three
months ended March 31, 2005, from $3,131,389 for the three months ended March
31, 2004, due to the decrease in sales of DVD products as discussed above.
Cost of sales consists primarily of the cost of products sold to
customers, packaging and shipping costs, amortization of production masters, and
royalties paid on sales of licensed products. For analytical purposes we review
amortization of production masters as a stand-alone cost element and discuss the
aggregate cost of producing, packaging, and shipping of the audio, DVD, and
royalty, licensing and other products.
Audio cost of sales in the first quarter of 2005 was 60% of audio
revenues, as compared to 44% for the same period in 2004. The increase in costs
as a percentage of revenues was due to a sales mix which included sales of the
value audio product in first quarter of 2005 which is sold at lower margins than
the branded audio product. Audio sales for first quarter of 2004 was of branded
audio only.
13
DVD and VHS cost of sales in the first quarter of 2005 was 115% of DVD
and VHS revenues, as compared to 64% for the first quarter of 2004. During the
first quarter of 2005, the Company sold certain DVD products at a significant
discount in order to generate cash in anticipation of closing a private equity
placement and an acquisition. The loss on the sales of discounted DVD product
was approximately $383,000. In addition, the Company had other one-time DVD cost
of sales expenses which included a $104,000 charge to settle expediting fees
with a supplier.
Costs of other revenues were 85% of royalty, licensing and other
revenues in first quarter of 2005 as compared to 92% in the first quarter of
2004. The slight decrease in costs as a percentage of revenue is due to product
mix.
Amortization of production masters increased $84,121, or 95%, to
$172,670 for first quarter 2005 as compared to $88,549 for first quarter 2004.
We currently anticipate that product development amortization expenses will
continue to increase compared to similar periods in 2004 as we continue to
invest in product content and product packaging development.
The Company took a $46,822 charge to cost of sales in first quarter of
2005 as a general inventory reserve for obsolete product. The total inventory
reserve at March 31, 2005 is $521,180.
Warehouse expenses decreased by $1,686, or 3%, in the first quarter of
2005 as decreased sales resulted in lower warehouse operations costs.
Product development expenses increased by $39,805, or 21%, in the first
quarter of 2005, as compared to the same quarter in 2004. The increase is
attributed to increased personnel and consulting costs.
Sales and marketing expenses decreased by $29,842, or 6%, in the first
quarter of 2005 as compared to the same quarter in 2004. This decrease is due to
decreased commissions partially offset by the increased costs of our direct
sales force.
General and administrative expenses increased by $451,840, or 46%, in
the first quarter of 2005, as compared to the same quarter in 2004. The increase
is primarily due to costs associated with the private equity placement and
acquisition including increased audit and legal fees. In addition, the Company
accrued a $150,000 charge for severances during the first quarter of 2005.
Interest expense decreased to $5,840 for the three months ended March
31, 2005, compared to $147,002 for the same quarter in 2004, due to the payoff
of Notes Payable in the fourth quarter of 2004.
The net loss for the first quarter of 2005 of $2,232,323 was $1,433,771
greater than the net loss of $798,552 for the same quarter in 2004 as the result
of decreased revenues, reduced margins due to discounted product pricing and
expenses associated with the private equity placement and acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three months ended March 31,
2005 was $5,082,911, primarily due to the net loss and decreases in accounts
payable, partially offset by decreases in accounts receivable. For the three
months ended March 31, 2004, net cash used in operations was $1,070,740, driven
primarily by the net loss and increases in accounts receivable, inventories and
development of production masters.
Net cash used in investing activities in the three months ended March
31, 2005, was $225,743, primarily attributed to obligations paid related to the
American Vantage acquisition. For the three months ended March 31, 2004, net
cash used in investing activities was $78,520, which was the result of
investment in computer equipment.
Cash provided from financing activities of $7,873,332 in the
three-month period ending March 31, 2005, were from the sale of our common stock
in a private equity placement in March, 2005 and cash received from the exercise
of stock options and warrants. Cash received was partially offset by payments on
short term debt and offering costs. In the first three months of 2004, cash
provided by financing activities accounted for $6,130,469, primarily driven by a
private equity placement of $6,425,468, and partially offset by payments of
$294,999 on notes payable.
14
At March 31, 2005, we had cash balances of $3,788,558 and net accounts
receivable of $4,764,449. We expect to raise additional equity capital in the
second quarter of 2005 to further fund working capital needs and future growth
opportunities. Although we believe that our expanded product line offers us the
opportunity for significantly improved operating results in future quarters, no
assurance can be given that we will operate on a profitable basis in 2005, or
ever, as such performance is subject to numerous variables and uncertainties,
many of which are out of our control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2005, our cash and equivalents were invested in financial
institutions with investment grade credit ratings. Due to the short duration of
our investment portfolio and the high quality of our investments, an immediate
10% change in interest rates would not have a material effect on the fair market
value of our portfolio. Therefore, we would not expect our operating results or
cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on our investment portfolio.
We do not enter into hedging or derivative instrument arrangements.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission ("SEC"), and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding the required
disclosures. In designing and evaluating the disclosure controls and procedures,
we recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that information required to be disclosed in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding the
required disclosures.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have disclosed in previous reports filed with the Securities and
Exchange Commission (i) a complaint filed against our new subsidiary American
Vantage Media Corporation and Wellspring Media, Inc. in U.S. Bankruptcy Court
for the District of Delaware by the Chapter 7 Trustee of the Winstar
Communications, Inc. Estate., and (ii) a possible rescission offer in Washington
State. There have been no material developments in these matters. For a complete
description of the facts and circumstances surrounding the Winstar litigation,
see the disclosures in our Annual Report on Form 10-KSB for the year ended
December 31, 2004 under "Item 3. Legal Proceedings", which are incorporated by
reference herein.
We and our subsidiaries are defendants in various other lawsuits most
of which relate to routine matters incidental to our business. We do not believe
that the outcome of this other pending litigation is likely to have a material
adverse effect on the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered securities were issued in the first quarter of 2005 as
follows:
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
NO. OF CLASS OF
SALE DATE(S) SHARES NET PROCEEDS PERSON EXEMPTION ADDITIONAL INFORMATION
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
2/17/05 12,000 $7,560 Accredited Rule 506 of Exercise of warrants at $0.63 per
Investor Regulation D share.
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
3/2/05 6,518,987 $9,273,902 Accredited Rule 506 of Private placement of stock, including
Investors Regulation D 5-year warrants to purchase 1,303,797
shares of common stock, half at an
exercise price of $2.56 per share and
half at $2.78 per share.
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
3/15/05 50,000 $50,000 Accredited Rule 506 of Exercise of warrants at $1.00 per
Investor Regulation D share.
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
3/15/05 50,000 $50,000 Accredited Rule 506 of Exercise of warrants at $1.00 per
Investor Regulation D share.
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
3/21/05 200,000 $200,000 Accredited Rule 506 of Exercise of warrants at $1.00 per
Investor Regulation D share.
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
3/21/05 7,000,000 Acquisition of Accredited Rule 506 of Issuance of 7,000,000 shares plus
American Investor Regulation D 5-year warrants to purchase 1,400,000
Vantage Media shares of common stock, half at an
Corporation exercise price of $2.56 per share and
half at $2.78 per share.
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
3/23/05 300,000 $300,000 Accredited Rule 506 of Exercise of warrants at $1.00 per
Investor Regulation D share.
- --------------- ------------ ---------------- -------------- ----------------- ---------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
16
ITEM 6. EXHIBITS
EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation (incorporated by reference from
Exhibit 3.1 to the Company's Form 10-KSB filed on March 31,
2005).
3.2 Bylaws (incorporated by reference from Exhibit 3.2 to the
Company's Form 10-KSB filed on March 31, 2005).
3.3 Amendment to Bylaws, dated March 18, 2005. *
10.39 Registration Rights Agreement dated March 2, 2005
(incorporated by reference from Exhibit 99.3 to the Company's
Form 8-K filed on March 9, 2005).
10.40 Form of Warrant dated March 2, 2005 (incorporated by reference
from Exhibit 99.3 to the Company's Form 8-K filed on March 9,
2005).
10.41 Agreement and Plan of Merger, dated as of March 21, 2005, by
and among the Company, Genius Acquisition Corp., American
Vantage Companies, and American Vantage Media Corporation
(incorporated by reference from Exhibit 2.1 to the Company's
Form 8-K filed on March 25, 2005).
10.42 Registration Rights Agreement, dated as of March 21, 2005, by
and between Genius Products and American Vantage Companies
(incorporated by reference from Exhibit 2.3 to the Company's
Form 8-K filed on March 25, 2005).
10.43 Form of Common Stock Purchase Warrant issued to American
Vantage Companies (incorporated by reference from Exhibit 2.7
to the Company's Form 8-K filed on March 25, 2005).
10.44 Resale and Voting Agreement, dated as of March 21, 2005, by
and between the Company and American Vantage Companies
(incorporated by reference from Exhibit 2.2 to the Company's
Form 8-K filed on March 25, 2005).
10.45 Assumption of Obligations and Pledge Agreement, dated as of
March 21, 2005, by and between the Company and American
Vantage Companies (incorporated by reference from Exhibit 2.5
to the Company's Form 8-K filed on March 25, 2005).
10.46 Assignment, Assumption and Pledge Agreement, dated as of March
21, 2005, by and between the Company and American Vantage
Companies (incorporated by reference from Exhibit 2.6 to the
Company's Form 8-K filed on March 25, 2005).
10.47 Escrow Agreement, dated as of March 21, 2005, by and among the
Company, American Vantage Companies and City National Bank,
National Association (incorporated by reference from Exhibit
2.4 to the Company's Form 8-K filed on March 25, 2005).
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.*
* Filed herewith.
17
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.
Dated: May 16, 2005 GENIUS PRODUCTS, INC.,
a Delaware Corporation
By: /s/ Trevor Drinkwater
--------------------------------------------
Trevor Drinkwater
Chief Executive Officer and
(Principal Executive Officer)
Dated: May 16, 2005 By: /s/ Andrew C. Schmidt
--------------------------------------------
Andrew C. Schmidt
Chief Financial Officer
(Principal Financial and Accounting Officer)
18