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 June 30, 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 24,497,096 shares outstanding of the issuer's Common Stock as of
August 12, 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 June 30, 2004 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three Months
Ended June 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Operations for the Six Months
Ended June 30, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flow for the Six Months
Ended June 30, 2004 and 2003 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis or Plan of Operation 11
Item 3 Controls and Procedures 14
PART II Other Information
Item 1 Legal Proceedings 15
Item 2 Changes in Securities 15
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 and Reports on Form 8-K 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, 2004
-------------
ASSETS
Current assets
Cash and equivalents $ 3,953,225
Accounts receivable, net of allowance for doubtful accounts and
sales returns of $148,106 1,758,453
Inventories 1,429,806
Prepaid royalties 295,577
Prepaid expenses 837,928
-------------
Total current assets 8,274,989
Property and equipment, net of accumulated depreciation of $174,462 240,903
Production masters, net of accumulated amortization of $573,579 1,731,948
Patents and trademarks, net of accumulated amortization of $36,190 108,134
Deposits and other 865,107
-------------
$ 11,221,081
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, net of unamortized discount of $156,102 $ 698,899
Accounts payable 1,499,003
Accrued payroll and related expenses 105,878
Debentures payable 50,750
Accrued expenses 156,326
Payable on terminated contract 300,000
-------------
Total current liabilities 2,810,856
Redeemable common stock 428,936
Commitments and contingencies --
Stockholders' equity
Preferred stock, $.001 par value; 10,000,000 shares authorized;
0 shares outstanding --
Common stock, $.001 par value; 50,000,000 shares authorized;
24,985,763 shares outstanding 24,986
Additional paid-in capital 25,613,524
Accumulated deficit (17,657,221)
-------------
Total stockholders' equity 7,981,289
-------------
$ 11,221,081
=============
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
JUNE 30,
----------------------------------
2004 2003
--------------- --------------
Revenues:
Audio $ 275,934 $ 300,502
DVD and VHS 2,004,043 --
Royalties, licensing and other 26,240 215,605
--------------- --------------
Gross revenues 2,306,217 516,107
Sales returns, discounts and allowances (248,660) (49,273)
--------------- --------------
Net revenues 2,057,557 466,834
--------------- --------------
Costs and expenses
Cost of revenues:
Audio 135,325 164,159
DVD and VHS 1,337,410 --
Other 21,352 164,993
Warehouse expenses 52,287 20,666
Sales and marketing 472,402 254,642
Product development 315,782 153,029
General and administrative 867,410 485,399
--------------- --------------
Total costs and expenses 3,201,968 1,242,888
--------------- --------------
Loss from operations (1,144,411) (776,054)
Other income (expense) 9,460 11,154
Interest expense (111,736) (7,523)
--------------- --------------
Loss before provision for income taxes (1,246,687) (772,423)
Provision for income taxes -- --
--------------- --------------
Net loss $ (1,246,687) $ (772,423)
=============== ==============
Basic and diluted loss per common share:
Net loss per share $ (0.05) $ (0.05)
=============== ==============
Basic and diluted weighted average shares 24,442,271 16,474,524
=============== ==============
The accompanying notes are an integral part of these statements.
4
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE SIX
MONTHS ENDED
JUNE 30,
----------------------------------
2004 2003
--------------- --------------
Revenues:
Audio $ 1,054,537 $ 799,613
DVD and VHS 4,501,088 --
Royalties, licensing and other 75,291 338,994
--------------- --------------
Gross revenues 5,630,916 1,138,607
Sales returns, discounts and allowances (441,969) (121,226)
--------------- --------------
Net revenues 5,188,947 1,017,381
--------------- --------------
Costs and expenses
Cost of revenues:
Audio 480,389 369,748
DVD and VHS 2,936,480 --
Other 66,385 208,629
Warehouse expenses 103,745 37,360
Sales and marketing 948,735 458,249
Product development 591,840 264,834
General and administrative 1,856,534 926,560
--------------- --------------
Total costs and expenses 6,984,108 2,265,380
--------------- --------------
Loss from operations (1,795,161) (1,247,999)
Other income (expense) 9,439 12,361
Interest expense (339,506) (15,571)
--------------- --------------
Loss before provision for income taxes (2,125,228) (1,251,209)
Provision for income taxes 800 800
--------------- --------------
Net loss $ (2,126,028) $(1,252,009)
=============== ================
Basic and diluted loss per common share:
Net loss per share $ (0.09) $ (0.08)
=============== ================
Basic and diluted weighted average shares 22,579,860 16,182,542
=============== ================
The accompanying notes are an integral part of these statements.
5
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------------
2004 2003
------------- ------------
Cash flows from operating activities
Net loss $ (2,126,028) $(1,252,009)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 236,286 99,257
Change in allowance for doubtful accounts and provision for returns (34,491) (28,189)
Common stock issued for services 58,800 143,000
Amortization of warrants issued for services 29,072 --
Stock options granted to non-employees for services 249,732 134,884
Return and cancellation of stock issued for the remastering
of movies (350,000) --
Stock issued for compensation -- 7,500
Interest expense on redeemable common stock 11,952 12,577
Amortization of discount on notes payable 263,821 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (401,964) 70,626
Inventories (599,522) (91,023)
Prepaid royalties 80,466 (76,142)
Prepaid expenses and deposits (217,358) (183,758)
Increase (decrease) in:
Accounts payable 417,389 118,303
Accrued payroll & related items 40,106 14,147
Accrued expenses and other 22,897 46,905
------------- ------------
Net cash used by operating activities (2,318,842) (983,922)
------------- ------------
Cash flows from investing activities
Patents and trademarks (3,005) (1,029)
Development of production masters (746,679) (280,939)
Purchase of property and equipment (130,462) (16,636)
------------- ------------
Net cash used in investing activities (880,146) (298,604)
------------- ------------
Cash flows from financing activities
Payments on notes payable (294,999) --
Purchase of redeemable common stock (73,948) --
Proceeds from exercise of options 159,860 --
Proceeds from issuance of common stock, net of offering costs 6,419,968 1,219,920
------------- ------------
Net cash provided by financing activities 6,210,881 1,219,920
------------- ------------
Net increase (decrease) in cash and equivalents 3,011,893 (62,606)
Cash at beginning of period 941,332 745,993
------------- ------------
Cash at end of period $ 3,953,225 $ 683,387
============= ============
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 services 872,154 --
Conversion of debenture to common stock -- 10,000
The accompanying notes are an integral part of these statements.
6
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. Interim results are
not necessarily indicative of future or annual results.
CRITICAL ACCOUNTING POLICIES
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. 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.
Inventories
Inventories consist of 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.
Long-lived assets
Depreciation and amortization of property and equipment are provided
over the estimated useful lives of the assets using the straight-line
method. Production masters are stated at cost net of accumulated
amortization. Costs incurred for production masters, including licenses
to use certain classical compositions, royalties, recording and design
costs, are capitalized and amortized over a three or seven year period
from the time a title is initially released, consistent with the
estimated timing of revenue for a title. 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 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.
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.
7
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B: COMMON STOCK
During the three months ended June 30, 2004, we issued a total of
586,487 common shares and returned 125 common shares to treasury. We issued (a)
478,716 shares for the exercise of warrants at $1.40 per share; (b) 42,751
shares at prices ranging from $1.40 to $2.75 per share for services; and (c)
65,000 shares for the exercise of options at $.80 per share. We returned 125
common shares to treasury after our repurchase of the stock pursuant to a
rescission offer.
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 June 30,
-----------------------------------
2004 2003
---------------- ---------------
Net loss as reported $ (1,246,687) $ (772,423)
Basic and diluted net loss per common share as reported $ (.05) $ (.05)
================ ===============
Less: Total stock-based compensation expense determined under the fair
value based method for all awards (223,109) (20,483)
---------------- ---------------
Pro forma net loss $ (1,469,796) $ (792,906)
================ ===============
Pro forma basic and diluted net loss per common share $ (.06) $ (.05)
================ ===============
For the Six Months Ended Jun 30,
-----------------------------------
2004 2003
---------------- ---------------
Net loss as reported $ (2,126,028) $(1,252,009)
Basic and diluted net loss per common share as reported $ (.09) $ (.08)
================ ==============
Less: Total stock-based compensation expense determined under the fair
value based method for all awards (465,052) (22,131)
---------------- ---------------
Pro forma net loss $ (2,591,080) $(1,274,140)
================ ===============
Pro forma basic and diluted net loss per common share $ (.11) $ (.08)
================ ===============
8
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D: FALCON PICTURE GROUP
As part of our agreement with Falcon Picture Group, LLC ("Falcon"), we
pay Falcon for remastered classic movie and television programs that we then
sell on DVD. We also pay royalties on the net sales of certain licensed products
to Falcon. In May 2004, we paid $500,000 to Falcon as an advance against future
deliveries. We will offset future payments for programming and royalties against
this prepayment until it is recovered in full. At June 30, 2004, the balance of
this prepayment was $469,100.
NOTE E: WARRANTS ISSUED TO CONSULTANT
In May 2004, we entered into a five-year consulting agreement for
financial advising services with compensation through the issuance of 957,432
warrants at an exercise price of $1.40 with a cashless exercise provision,
pursuant to amended and restated warrant agreements. The $872,154 fair value of
the warrants was determined using the Black-Scholes model and has been recorded
as prepaid consulting expenses with an offset to additional paid in capital. The
prepaid expense will be amortized over the five-year life of the agreement. The
unamortized balance at June 30, 2004, is divided between current and non-current
assets and is shown as Prepaid Expenses ($145,354) and in Deposits and Other
($697,728).
NOTE F: BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
For the Quarter Ended June 30,
------------------------------------
2004 2003
---------------- --------------
Numerator
Net loss $ (1,246,687) $ (772,423)
---------------- --------------
Denominator
Basic and diluted weighted average number of
common shares outstanding during the period 24,442,271 16,474,524
================ ==============
Basic and diluted net loss per share $ (0.05) $ (0.05)
================ ==============
For the Six Months Ended June 30,
------------------------------------
2003 2004
---------------- --------------
Numerator
Net loss $ (2,126,028) $ (1,252,009)
---------------- --------------
Denominator
Basic and diluted weighted average number of
common shares outstanding during the period 22,579,860 16,182,542
================ ==============
Basic and diluted net loss per share (0.09) (0.08)
================ ==============
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 17,600,618 7,419,342
Convertible debentures -- 121,500
9
GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G: SUBSEQUENT EVENT
Under an agreement with Falcon Picture Group, we licensed the BOZO the
Clown(TM)television shows for sale on DVD and VHS. As the result of insufficient
sales being generated of these products, we terminated the agreement by written
notice on August 2, 2004. Our remaining liability for payment on this agreement
is the next annual minimum payment of $20,000 which is due August 15, 2004.
As the result of this termination, costs and expenses totaling $114,000
are included in the operating results of the second quarter of 2004. These costs
include the write-down of inventory to estimated net realizable value, the
write-off of production master costs, and the write-off of prepaid and
non-refundable royalty payments, including the $20,000 minimum payment noted
above. The cost of sales adjustment was $90,725 for inventory and prepaid
royalties, and $23,275 for production masters.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES
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-KSB FOR THE YEAR ENDED DECEMBER 31, 2003.
Prior to the third quarter of 2003, our revenues were comprised
primarily of:
o Baby Genius(R) and Kid Genius(R) 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(TM) and gift sets.
We began shipping the first two releases of movies on DVD, titled AMC
Monsterfest(TM) and AMC Movies(TM), 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 six months 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 six months of 2004, revenues were as follows:
1. Sales of our DVDs and VHS (79.9% of revenues for the first half of
2004);
2. Sales of our audio CDs and cassettes (18.7% of revenues for
the first half of 2004); and
3. Sales from royalties, licensing and other (1.4% of revenues for
the first half of 2004).
We are continuing to seek agreements for licensed music, and in the
second quarter of 2004 signed an agreement to develop and market music for Jay,
Jay the Jet Plane(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.
11
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.
THE THREE MONTHS ENDED JUNE 30, 2004.
Audio revenues for the second 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 are also sold. Audio revenues decreased $24,568 or 8% in the second quarter
of 2004 to $275,934, as compared to $300,502 in the second quarter of 2003. This
decrease was the result of a decline in Baby Genius music CDs, which was only
partially offset by sales of licensed music.
DVD and VHS revenues for the second quarter of 2004 are composed of the
sales of AMC branded classic movies and television shows on DVD and non-branded
classic movies and television shows on DVD. DVD and VHS revenues were $2,004,043
during the second quarter of 2004. There were no comparable revenues in the
first three months of 2003 as 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. Non-branded classic movie and television show DVDs
accounted for $1,049,046 of the total of DVD and VHS revenues.
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 $26,240 in the second quarter of 2004 from $215,605 in the
second quarter of 2003, a decrease of $189,365, or 88%, due to reductions in all
three categories, as expected.
Gross revenues increased $1,790,110, or 347%, during the quarter ended
June 30, 2004, to $2,306,217, as compared to $516,107 in the same prior year
period as the result of sales of the new DVD products.
Sales returns, discounts and allowances increased $199,387, or 405%, to
$248,660 or 10.8% of gross revenues in the second quarter of 2004, as compared
to $49,273 or 9.5% of gross revenues in the second quarter of 2003. The
provision for sales returns and allowances is calculated in accordance with
historical averages, but may vary depending on the amount of non-returnable
sales that are made, such as certain DVD sales or licensing revenues.
Net revenues increased by $1,590,793, or 341%, to $2,057,557 for the
three months ended June 30, 2004, from $466,834 for the three months ended June
30, 2003, due to sales of our new DVD 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 second quarter of 2004 was 49% of audio
revenues, as compared to 55% during the same period in 2003. This improvement is
the result of reductions in the purchased cost of the music products. DVD and
VHS cost of sales in the second quarter of 2004 was 67% 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 the lower margin on DVD and VHS
revenues. Royalties, licensing and other cost of sales was 81% of revenues in
the second quarter of 2004, similar to the 77% in the second quarter of 2003.
Warehouse expenses increased by $31,621, or 153%, in the second quarter of 2004,
mainly due to freight in costs on increased inventory levels of multiple new
products and increased personnel.
Sales and marketing expenses increased by $217,760, or 86%, in the
three months ended June 30, 2004, as compared to the same quarter in 2003. This
increase is due to increased personnel costs due to the hiring of additional
sales personnel, commissions payable to an outside sales representative, and
increased trade show expenses.
12
Product development expenses increased by $162,753, or 106%, in the
second quarter of 2004, as compared to the quarter ended June 30, 2003. This
increase is due to increased amortization of production master costs incurred on
the new products, the hiring of additional personnel 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 382,011, or 79%, in
the three months ended June 30, 2004, as compared to the year earlier quarter.
This increase was primarily due to the hiring of additional executive and
clerical personnel, and increases in professional fees and outside services in
the current year quarter.
Interest expense increased to $111,736 for the three months ended June
30, 2004, compared to $7,523 for the same period of 2003, due to interest and
amortization of the discount on the notes issued in the fourth quarter of 2003.
The net loss for the quarter ended June 30, 2004, of $1,246,687 was
greater than the net loss of $772,423 for the quarter ended June 30, 2003, as
the result of the increased operating expenses incurred in the current year
quarter which were only partially offset by the increase in sales.
THE SIX MONTHS ENDED JUNE 30, 2004.
Audio revenues increased $254,924, or 32%, in the first six months of
2004 to $1,054,537, as compared to $799,613 in the first six months of 2003.
This increase was the result of the sales of the new licensed music products,
which was only partially offset by a decline in the sales of Baby Genius
products.
DVD and VHS revenues were $4,501,088 during the first half of 2004.
There were no comparable revenues in the prior year period. Non-branded classic
movie and television show DVDs accounted for $2,762,255 of the total of DVD and
VHS revenues. One customer, Dollar Tree Stores, Inc., accounted for $1,791,482,
or 32%, of gross revenues.
Royalties, licensing and other revenues declined to $75,291 in the
first six months of 2004 from $338,964 in the same period of 2003, a decrease of
$263,703, or 78%, due to reductions in all three categories.
Gross revenues increased $4,492,309, or 395%, during the six months
ended June 30, 2004, to $5,630,916, as compared to $1,138,607 in the same prior
year period as the result of sales of the new DVD products.
Sales returns, discounts and allowances were $441,969 in the first six
months of 2004, or 7.8% of gross revenues, as compared to $121,226 or 10.6% of
gross revenues in the first six months of 2003. The provision for sales returns,
discounts and allowances in the 2004 period was affected by the significant
sales on a non-returnable basis of our new DVD products.
Net revenues increased by $4,171,566, or 410%, to $5,188,947 for the
six months ended June 30, 2004, from $1,017,381 for the six months ended June
30, 2003, due to sales of our new DVD products.
Audio cost of sales in the first half of 2004 was 46% of audio
revenues, the same as it was during the first half of 2003. The improvement in
the purchased cost of the three pack music products in the 2004 period was
offset by the sale of more single CDs having higher margins in the first six
months of 2003. DVD and VHS cost of sales for the first six months of 2004 was
65% 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 the lower margin on DVD and VHS revenues. Royalties, licensing
and other cost of sales was 88% of revenues in the first six months of 2004,
compared to 62% in the same period of 2003. The higher margin experienced in the
2003 period was due to royalty and licensing fees not in the current year
period. Warehouse expenses increased by $66,385, or 178%, in the first half of
2004, mainly due to freight in costs on increased inventory levels of multiple
new products and increased personnel.
Sales and marketing expenses increased by $490,486, or 107%, in the six
months ended June 30, 2004, as compared to the same six-month period in 2003.
This increase is due to increased personnel costs due to the hiring of
additional sales personnel, commissions payable to an outside sales
representative, and increased advertising and trade show expenses.
13
Product development expenses increased by $327,006, or 123%, in the six
months ending June 30, 2004, as compared to the same prior year period. This
increase is due to increased amortization of production master costs incurred on
the new products, the hiring of additional personnel and increased consulting
costs.
General and administrative expenses increased by 929,974, or 100%, in
the six months ended June 30, 2004, as compared to the year earlier period. This
increase was primarily due to bonuses issued to executives and staff in the
first quarter of 2004, the hiring of additional executive and clerical
personnel, higher costs associated with issuing options and warrants to
non-employees and professional fees in the current year six-month period.
Interest expense increased to $339,506 for the six months ended June
30, 2004, compared to $15,571 for the same period of 2003, due to interest and
amortization of the discount on the notes issued in the fourth quarter of 2003.
The net loss for the six months ended June 30, 2004, of $2,126,208 was
70% greater than the net loss of $1,252,009 for the six months ended June 30,
2003, as the result of increased operating expenses incurred in the current year
which were only partially offset by the increase in sales.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the six months ended June 30, 2004,
was $2,318,842, primarily due to the net loss and increase in inventories. This
was partially offset by an increase in accounts payable. In the six months ended
June 30, 2003, net cash used in operations of $983,922 was primarily the result
of the net loss and increases in prepaid expenses, offset by an increase in
accounts payable and stock options granted to non-employees for services.
Net cash used in investing activities in the three months ended June
30, 2004, was $880,146, primarily as the result of the development of production
masters. In the six months ended June 30, 2003, net cash used in investing
activities was $298,604, also as the result of the development of production
masters.
Cash flows from financing activities of $6,210,881 in the six-month
period ending June 30, 2004, were primarily from the sale of our common stock in
a private placement in March, 2004, 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 sale of our common stock in a private placement accounted
for the $1,219,920 in cash flows from financing activities.
At June 30, 2004, we had cash balances of $3,953,225. We believe that
this amount, when combined with our accounts receivable from shipments at June
30, 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.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the period 1997 through 1999, we issued approximately 70,000
shares in Arizona, Pennsylvania and Washington, for which no share registration
filings were made under the securities laws of those states and for which
exemptions or preemptions from registration may be unavailable. We made
voluntary rescission offers 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 have paid a total of $64,487 to date to
investors accepting the rescission offer in those states.
On September 23, 1999, the Securities Administrator of the State of
Washington (the "Securities Administrator") filed a Summary Order to Cease and
Desist with the State of Washington Department of Financial Institutions
Securities Division against us, the Martin Consulting Group, Martin H. Engelman,
and their employees and agents. The relief sought is that the respondents cease
and desist from violations of RCW 21.20.140, 21.20.040, and 21.20.010 of the
Securities Act of Washington. The 1999 Summary Order to Cease and Desist
alleges, among other things, that Mr. Engelman and Genius Products offered to
sell shares of our common stock that were not registered in the state or
otherwise qualified for an exemption from registration. Mr. Engelman represented
us at the Third Annual Seattle Money Show and provided information to interested
parties about us and our products.
We are currently in discussions with the Securities Administrator to
resolve all claims based on the allegations set forth in the Summary Order to
Cease and Desist. This 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. If we are unable to
resolve this matter without vacating the current administrative order, we would
likely contest the Summary Order to Cease and Desist at a hearing. The potential
costs of a hearing and the uncertainty of the outcome may lead us to conclude,
however, that not contesting the 1999 Washington Summary Order to Cease and
Desist will likely be in our best interests.
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 paid for them, plus interest thereon from the date of purchase at
an annual rate of 8%. A total of approximately $264,000 of our shares of common
stock was sold in the State of Washington. We have accrued a liability of
$428,936 as of June 30, 2004, representing the amount of stock purchased and
accrued interest for Washington investors and for one investor in Pennsylvania
whose rescission offer is still pending. We believe that because the price of
our common stock is significantly lower than the original purchase price paid by
affected shareholders, they are likely to accept repurchase offers.
ITEM 2. CHANGES IN SECURITIES
Unregistered securities were issued in the second quarter of 2004 as
follows:
Sale No. of Class of
Date(s) Shares Net Proceeds Person Exemption Additional Information
- ------- ------ ------------ --------- --------- ----------------------
5/14/04 30,000 $42,000 in Accredited Rule 506 of Private placement issued as
services Investor Regulation D compensation to consultant at $1.40 per
provided share.
5/18/04 10,000 N/A Accredited Rule 506 of These shares are issuable upon exercise
Investor Regulation D of warrants issued for compensation of
a consultant.
5/18/04 957,432 N/A Accredited Rule 506 of These shares are issuable upon exercise
Investors Regulation D of warrants issued for compensation of
a consultant.
5/29/04 478,716 $670,202.40 Accredited Rule 506 of Private placement for exercise of
exercise price Investors Regulation D warrants at $1.40 per share.
On June 30, 2004, we repurchased 125 shares for $725 pursuant to a
rescission offer. These shares were returned to our treasury.
15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
10.1 Employment Agreement with Trevor Drinkwater dated July 16, 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.*
* Filed herewith.
(b) REPORTS ON FORM 8-K
We filed a Form 8-K on May 27, 2004, to disclose the issuance of three
press releases regarding the following: (i) a press release announcing the
acquisition of the Hollywood(TM) sign brand distribution rights; (ii) a press
release announcing our operating results for the first quarter of 2004 and a
shareholder conference call scheduled for May 19, 2004; and (iii) a press
release regarding the May 19, 2004, shareholder conference call.
16
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 16, 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
17