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GNXE.OB > SEC Filings for GNXE.OB > Form 10KSB on 13-Feb-2007All Recent SEC Filings

Show all filings for GENER8XION ENTERTAINMENT, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10KSB for GENER8XION ENTERTAINMENT, INC.


13-Feb-2007

Annual Report


Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This discussion, with the exception of historical financial information, may consist of forward looking statements that involve risks and uncertainties, including whether and when Registrant will have ongoing business operations. Consequently, actual results may vary from management's expectations.

Results of operations for the year ended October 31, 2006 as compared to the year ended October 31, 2005 .

Rental income amounted to $51,576 for 2006 and $55,576 for 2005. Related depreciation expense was $28,571 in each of those years.

Other income-related party of $100,000 for the year ended October 31, 2006 resulted from fees earned by the Company for facilitating an investment for a company owned by an officer of the Company. No fee was earned in 2005.

Production revenue amounted to $4,710,595 for the year ended October 31, 2006 compared to $320,000 for the year ended October 31, 2005. Revenue earned on the domestic theatrical release of the Company's first motion picture, "One Night with the King" amounted to $4,352,929. The related cost of production was $5,663,472 in 2006, which primarily related to print and advertising expense for the movie of $5,777,474. The Company received a production cost refund from a related party of $390,000 in 2006. There was no related cost of production revenue in 2005.


Revenue from sale of lighting equipment amounted to $846,159 for 2006 and $75,182 for 2005. This was earned by the Company's new division, Cinemills, which was purchased September 30, 2005. The related cost of sales amounted to $439,367 in 2006 and $38,729 in 2005. Of the sales and related cost of sales in 2006, $141,890 and $84,777, respectively, represent sales to related party.

General and administrative expenses amounted to $5,057,991 for the year ended October 31, 2006, compared to $1,590,322 for the year ended October 31, 2005. The major reasons for the increase were:
Accounting fees of $125,842 for the year ended October 31, 2006, compared to $33,301 for the year ended October 31, 2005 Legal fees of $90,980 for the year October 31, 2006, compared to $60,843 for the year ended October 31, 2005
Other professional services and contract labor of $335,626 for the year ended October 31, 2006, compared to $0 for the year ended October 31, 2005. Stock option expense amounted to $2,676,758 for the year ended October 31, 2006, compared to $78,905 for the year ended October 31, 2005.

Interest expense-net includes interest income of $7,373 and interest expense of $288,123 for the year ended October 31, 2006, compared to $399 of interest income and $3,556 of interest expense for the year ended October 31, 2005. Interest expense relates mainly to borrowings for the print and advertising for the movie, "One Night with the King."

State income taxes were $6,611 for the year ended October 31, 2006 and $3,190 for the year ended October 31, 2005.

The Company incurred a net loss of $5,768,433 in fiscal 2006, compared to $1,213,213 for fiscal 2005. The increased loss was principally the result of the increased stock compensation expenses discussed above, and print and advertising expense discussed above.

Results of operations for the year ended October 31, 2005 as compared to the year ended October 31, 2004.

Rental income amounted to $55,576 for 2005 and $51,576 for 2004. Related depreciation expense was approximately $29,000 in each of those years.

Other income of $320,000 for the year ended 31, 2005 resulted from production and distribution services rendered by the Company to a joint venture in which the Company's Chief Executive Officer has a minority interest. This was the first revenue the Company earned from these services.

Revenue from sale of lighting equipment amounted to $75,182 for the year ended October 31, 2005. This was earned by the Company's new division, Cinemills, which was purchased September 30, 2005. The related cost of sales amounted to $38,729.

General and administrative expenses amounted to $1,590,322 for the year ended October 31, 2005, compared to $92,019 for the year ended October 31, 2004. The major reasons for the increase were:
Compensation expenses of $1,004,096 for the year ended October 31, 2005, compared to $49,300 for the year ended October 31, 2004.
Rent expense of $148,400 for the year ended October 31, 2005, compared to $2,500 for the year ended October 31, 2004.


Interest expense amounted to $3,158 for the year ended October 31, 2005, compared to $5,908 for the year ended October 31, 2004. Interest expense relates to notes payable to affiliates for borrowings.

State income taxes were $3,190 for the year ended October 31, 2005 and $1,450 for the year ended October 31, 2004.

The Company incurred a net loss of $1,213,213 in fiscal 2005, compared to $77,381 for fiscal 2004. The increased loss was principally the result of the increased compensation expenses discussed above, offset by the increase in production income and lighting products sales.

Liquidity and Capital Resources

The Company's current activities and operating expenses will require raising additional capital. During the year ended October 31, 2005, the Company raised gross proceeds of $2,525,000 from the sale of Units (consisting of common stock and warrants) in a private placement. During the year ended October 31, 2006, the Company raised additional proceeds of $160,000 from the sale of Units (consisting of common stock and warrants) and $686,000 from the sale of common stocks with no warrants attached.

The Company's primary source of liquidity has been funds earned from its television production projects, funds earned from its Cinemills division and funds raised from private placements. The Company used $7,297,145 cash in operating activities in fiscal 2006 and $970,813 in fiscal 2005. The Company used $88,223 in fiscal 2006 and $717,898 in fiscal 2005 in investing activities for the purchase of lighting and production equipment. In fiscal 2006 financing activities consisted principally of loan proceeds of $6,000,000 for print and advertising expenditures of the newly released feature film, "One Night with the King," and sale of common stock in the amount of $846,000. In fiscal 2005 financing activities consisted principally of the sale of common stock totaling $2,418,480.

In order to reduce expenses and conserve cash, effective March 1, 2006, the officers of the Company agreed to an aggregate annual reduction of their compensation of approximately $321,000. This includes officers whose compensation were the subject of formal written agreements.

On August 28, 2006, the Company entered into a Loan and Security Agreement with Windfall Financial, LLC, a Delaware limited liability company ("Windfall") whereby the Company and its co-borrower, One Night With The King, Inc., a California corporation, received a loan of $6,000,000 (with a commitment for an additional $2.5 million under certain circumstances) to finance the prints and advertising costs and expenses of the film "One Night With The King." The Company is the principal distributor of the film. The film had its nationwide release on October 13, 2006. Form 8K was filed on August 28, 2006.

As of January 31, 2007, the Company had earned an additional $1,300,000 in theatrical rental revenue, which will continue to draw down the outstanding secured loan. The Film was also released on DVD on January 30, 2007. During the first week of DVD release, 250,000 DVD's were sold.

Market Risk

The Company can give no assurance as to when, if ever, it will have sufficient revenues to cover its operating cash requirements and to fund maturing debt. Further, we can give no assurance that we will be able to continue to obtain funds from the sale equity securities or borrowings, or that the terms of such sales or borrowings will be as favorable as the terms of prior sales and borrowings. Our ability to obtain additional financing in the coming months will depend upon a number of factors, including market conditions, our results of operations, our success in the DVD release of the Film and investors' perception of our business and prospects. Sales of equity securities, or sales of convertible debt securities, could materially dilute our existing shareholders.


Critical Accounting Policies and Use of Estimates

The financial statements of the Company are presented on a consolidated basis for all periods presented. All significant inter-company accounts and transactions have been eliminated in preparation of the consolidated financial statements.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States which requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

In the first quarter of fiscal 2006, the Company adopted the fair value recognition provisions of SFAS 123R utilizing the modified-prospective transition method, as prescribed by SFAS 123R. Under that transition method, compensation cost recognized during the year ended October 31, 2006 includes:
(a) compensation cost for all share-based payments granted prior to, but not yet vested as of November 1, 2005, based on the grant date fair value estimated in accordance with SFAS 123, adjusted for an estimated future forfeiture rate, and
(b) compensation cost for all share-based payments granted subsequent to November 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Under the modified-prospective-transition method, results for the prior periods have not been restated. Stock options were granted March 01, 2006. (See Note 6)

The Company follows the guidance of SOP-00-2, which became effective for fiscal years beginning after December 15, 2000, to account for its film distribution and its television production and distribution revenue and costs. Under the guidance of SOP-00-2, paragraph 07, an entity should recognize revenue from a sale or licensing arrangement of a film when all of the following conditions are met.
a. Persuasive evidence of a sale or licensing arrangement with a customer exists.
b. The film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery.
c. The license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale.
d. The arrangement fee is fixed or determinable.
e. Collection of the arrangement fee is reasonably assured. If an entity does not meet any one of the preceding conditions, the entity should defer recognizing revenue until all of the conditions are met. If a licensing arrangement covering a single film provides that an entity will receive a flat fee, then the amount of that fee is considered fixed and determinable. In such instances, the entity should recognize the entire amount of the license fee as revenue when it has met all of the other conditions of paragraph .07. The company recognized film distribution revenue in 2006.

Recent Accounting Pronouncements

In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff's views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS
123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. The Company adopted the fair value recognition provisions of SFAS 123R in the first quarter of fiscal 2006.

In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. Management adopted FIN 47 the beginning of fiscal year 2006. The adoption did not have a material impact on its consolidated financial position or results of operations or cash flows.


In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections." This new standard replaces APB Opinion No. 20, "Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements," and represents another step in the FASB's goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard did not have a material impact on the Company's consolidated financial position or results of operations or cash flows.

In March 2006 the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets, an amendment of FASB Statements No. 140". Companies are required to apply SFAS No. 156 as of the first annual reporting period that begins after September 15, 2006. The Company does not believe adoption of SFAS No. 156 will have a material effect on its financial statements.

In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 provides a new single authoritative definition of fair value and provides enhanced guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for us as of January 28, 2008. We are currently assessing the impact, if any, of SFAS 157 on our financial position, results of operation, or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 are effective for reporting periods beginning after December 15, 2006. The Company is currently assessing the impact of the adoption of FIN 48 and its impact on our financial position, results of operations, or cash flows.

In September 2006, the SEC released Staff Accounting Bulletin No. 108 "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides interpretative guidance on how public companies quantify financial statement misstatements. There have been two common approaches used to quantify such errors. Under an income statement approach, the "roll-over" method, the error is quantified as the amount by which the current year income statement is misstated. Alternatively, under a balance sheet approach, the "iron curtain" method, the error is quantified as the cumulative amount by which the current year balance sheet is misstated. In SAB 108, the SEC established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company's financial statements and the related financial statement disclosures. This model is commonly referred to as a "dual approach" because it requires quantification of errors under both the roll-over and iron curtain methods. SAB 108 is effective for the us as of January 1, 2007. The adoption of SAB 108 is not expected to have a material impact on our financial position, results of operations, or cash flows.


In September 2006, the FAS issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires employers to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. The Company does not believe that the pronouncement will have a material affect on its financial statements as it does not participate in defined benefit pension plans.

In July 2006, the Emerging Issues Task Force Reached Consensus on Issue No. 06-03 "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)," that provides guidance on how sales tax collected from customers should be presented in the income statement. The Company will adopt this statement immediately, and will disclose the caption in which sales tax is recorded in accordance with the consensus reached in this issue when sales tax has been collected.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants ("AICPA") and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.


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