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GNUS > SEC Filings for GNUS > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for GENIUS BRANDS INTERNATIONAL, INC.

Form 10-Q for GENIUS BRANDS INTERNATIONAL, INC.


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our unaudited consolidated financial statements and related notes for the three and nine months ended September 30, 2012 and 2011. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.

When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company's future plans of operations, business strategy, operating results, and financial position. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished.

Persons reviewing this report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward looking statements as a result of various factors. Such factors include, among other things, uncertainties relating to our success in judging consumer preferences, financing our operations, entering into strategic partnerships, engaging management, seasonal and period-to-period fluctuations in sales, failure to increase market share or sales, inability to service outstanding debt obligations, dependence on a limited number of customers, increased production costs or delays in production of new products, intense competition within the industry, inability to protect intellectual property in the international market for our products, changes in market condition and other matters disclosed by us in our public filings from time to time. Forward-looking statements speak only as to the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Overview

This MD&A is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Our Business

The Company commenced operations in January 2006, assuming all of the rights and obligations of its Chief Executive Officer, Klaus Moeller, under an Asset Purchase Agreement between the Company and Genius Products, Inc., in which we obtained all rights, copyrights, and trademarks to the brands "Baby Genius", "Little Genius", "Kid Genius", "123 Favorite Music" and "Wee Worship" and all then existing productions under those titles. On October 17, 2011 and October 18, 2011, Genius Brands International, Inc., filed Articles of Merger with the Secretary of State of the State of Nevada and with the Secretary of State of the State of California, respectively, which (i) changed its domicile to Nevada from California, and (ii) changed its name to Genius Brands International, Inc. from Pacific Entertainment Corporation (the "Reincorporation"). Pursuant to the Articles of Merger, Pacific Entertainment Corporation, a California corporation, merged into Genius Brands International, Inc., a Nevada corporation that, prior to the Reincorporation, was the wholly owned subsidiary of Pacific Entertainment Corporation. Genius Brands International, the Nevada corporation, is the surviving corporation. In connection with the Reincorporation, on October 12, 2011, the Company filed an Issuer Company-Related Action Notification Form with the Financial Industry Regulatory Authority ("FINRA") and on November 29, 2011 our trading symbol changed from "PENT" to "GNUS".


Our products include video, music and books based on our characters and content distributed at wholesale to retail stores and outlets, direct to consumers through various "deal for a day" sites and through digital platforms. The Company obtains rights to the content of other studios for distribution through our warehouse facility to our customers, for which we either pay royalty fees or earn distribution fees. We also license the use of our brands and characters, both domestically and internationally, to others to manufacture, market and sell products based on our characters and brand, from which we receive advances and royalties.

In August 2009, the Company launched a line of Baby Genius pre-school toys. The line of 24 Baby Genius toys, manufactured by toy manufacturer Battat Incorporated, included musical, activity, and role-play toys that incorporated the Baby Genius principle of music as a core learning tool to engage and encourage children to communicate, connect, discover, and use their imagination. The Company cancelled the agreement in December 2010 according to the terms of the contract, permitting Battat to continue selling the current line of toys until late spring 2011. The Company received no royalty revenue from Battat subsequent to the three month period ended March 31, 2011 and anticipates no further royalty income from this license.

On January 11, 2011, the Company signed a world-wide license agreement with Jakks Pacific's Tollytots® division for a new toy line. As a result of the five-year agreement, Tollytots® immediately began development on a comprehensive line of musical and early learning toys, incorporating the music, characters and themes from the Baby Genius series of videos and music CDs. The new toy line will cover a broad range of exclusive categories, including learning and developmental toys, most plush toys, and musical toys, as well as several other non-exclusive categories. As part of the development of the new products, the Company has engaged in the creation of several new characters as well as updating the existing characters. The toys are available at retail.

Due to a gap between the termination of the Battat license and subsequent end of the extended sell off period and the introduction of the Jakks Pacific toy line 2012, we experienced a reduction in royalty revenue during first nine months of 2012. As we cannot state with any certainty what the revenue would have been from the Battat toy line nor predict the sales for the new line of Jakks Pacific toys, we are unable to state the amount of the overall reduction for our licensed revenue category.

On September 20, 2010, the Company entered into a joint venture agreement with Dr. Shulamit Ritblatt to form Circle of Education, LLC ("COE"), a California limited liability company, for the purpose of creation and distribution of a curriculum to promote school readiness for children ages 0-5 years. The Company actively participated in a research study into the use of music-based curriculum through a major university for three years based on certain unregistered copyrights and trademarks, confidential information, designs, ideas, discoveries, inventions, processes, research results and work product it had developed. Dr. Ritblatt, who holds a Doctorate of Philosophy in Child Development and Family Relations has conducted research into child development and has experience developing early learning curriculum for children. In March 2012, the Company and Dr. Shulamit Ritblatt agreed to terminate the joint venture agreement. COE transferred equal right of ownership in the intellectual property developed as of the date of termination ("IP") to each of the Company and Dr. Ritblatt, and in exchange for the rights to the IP, Dr. Ritblatt transferred her units of COE to the Company. Each party will have the right to continue development of the IP and products based on the IP with no further obligation to the other party. Subject to certain limitations for specific channels of distribution reserved for each party for a period of twelve months from the execution of the agreements, both parties have non-exclusive and non-restrictive rights to the use, sublicense or sale of the IP and products created based on the IP.


During 2010, the Company launched a line of DVDs including classic movies and television programs under the brand "Pacific Entertainment Presents". Initially consisting of seven titles, each focusing on a specific genre such as Horror, Western, Sci-Fi, Action, Mystery, War, and Gangster, an additional six titles were added in late 2010 expanding the line with the Super Hero's collection as well as Family Favorites. In 2011, we obtained the rights to distribute other studios' films on DVD, Blu-Ray, digital and broadcast formats under our brand were included in our product catalog starting in the third quarter of 2011. The term of the agreements vary from three to five years.

In 2012, the Company signed agreements with Nokia and Microsoft to develop applications based on our content, characters and kindergarten readiness program. The initial two applications in development, games based on our characters, are anticipated to be available through Microsoft Marketplace in the fourth quarter of 2012. Additional applications featuring a variety of tools, including lesson plans, curriculum and songs, are currently in development and planned for launch in the first quarter of 2013. These applications are designed to assist parents teach academic subjects and socialization skills to their children ages 2-5 years in preparation for attending kindergarten.

Results of Operations

Three and Nine Month Periods Ended September 30, 2012 Compared to September 30,
2011

Our summary results of operations are presented below:

                                   Three Months Ended                 Nine Months Ended
                                      September 30,                     September 30,
                                  2012             2011             2012             2011
Revenues                      $  1,632,078     $  1,682,005     $  4,304,823     $  3,824,917
Costs and Operating
Expenses                        (2,189,286 )     (1,913,464 )     (6,004,162 )     (4,846,179 )
Depreciation and
Amortization                       (34,889 )        (53,991 )       (110,578 )       (163,085 )
Loss from Operations              (592,097 )       (285,450 )     (1,809,917 )     (1,184,347 )

Other Income                           189            3,720              361           24,777
Interest Expense                  (128,519 )        (31,486 )       (171,699 )        (96,224 )
Gain on settlement of debt               -                -           76,280                -
Total Other Income                (128,330 )        (27,766 )        (95,058 )        (71,447 )

Net Loss                          (720,427 )       (313,216 )     (1,904,975 )     (1,255,794 )
Acquisition of
Noncontrolling Interest                  -                -           (5,366 )              -
Net Loss attributable to
Noncontrolling Interest                  -              742                -            5,163
Net Loss attributable to
Genius Brands
International, Inc.           $   (720,427 )   $   (312,474 )   $ (1,910,341 )   $ (1,250,631 )

Net Loss per common share     $      (0.01 )   $      (0.01 )   $      (0.03 )   $      (0.02 )

Weighted average shares
outstanding                     60,743,380       60,448,815       67,965,997       58,394,312

Revenues. Revenues by product segment and for the Company as a whole were as follows:


                                          Three Months Ended September 30,              Nine Months Ended September 30,
                                            2012                    2011                  2012                   2011
Genius Brands Product Sales           $         551,842       $         462,338     $      1,554,822       $      1,538,815
Licensed and Distributed Products             1,040,842               1,148,436            2,640,325              1,756,818
Royalty Revenue                                  39,394                  71,231              109,676                529,284
Total Revenue                         $       1,632,078       $       1,682,005     $      4,304,823       $      3,824,917

Genius Brands product sales represent items in which the Company holds the copyrights and/or trademarks to the characters and content which are manufactured and sold by the Company directly, either at wholesale to retail stores and outlets or direct to consumers through daily deal sites and our website. The increase of $89,504 (19.4%) for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, was due to increases of both DVD and CD sales. The increase of $16,007 (1.0%) for the nine months ended September 30, 2012 compared to the nine month period ended September 30, 2011 is a result of a decrease in CD sales offset by an increase in DVD sales. Management believes that the Company is on target to slightly increase direct product sales volumes over 2011, although economic and retail conditions in the market could impact our future sales in a negative manner and we are unable to guarantee increased sales. We continue to explore additional sales opportunities with customers and new distribution channels; however, there is no guarantee that our products will be accepted by these new customers.

The licensed and distributed product sales category includes items for which we license rights from other companies to copyrights and trademarks of select brands we feel will do well within our distribution channels, product acquired from other studios through distribution agreements, and overstock inventory from other studios which we sell and from which we receive income. For the three months ended September 30, 2012, the category decreased by $107,594 (9.4%) compared to the same period in 2011 as a result of a decrease in outside overstock studio product acquired and sold and offset by an increase in other studios' distributed products. For the nine months ended September 30, 2012, the increase of $883,507 (50.3%) was the result of an increase in outside overstock studio product acquired and sold. The timing of the sales of overstock product is intermittent and unpredictable as it is determined by the availability of excess inventory from outside studios.

Royalty revenue is income for our characters and brands licensed to others to manufacture and/or market, both internationally and domestically, and our content distributed through licensed digital distribution providers. For the three months ended September 30, 2012 compared to the same period in 2011, there was a decrease of $31,837 (44.7%) as a result of international licensing reporting and collection. For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 there was a decrease of $419,608 (79.3%). The decrease was caused by the termination of the toy license with Battat and decreases in international royalties. There may be fluctuation in licensing revenue due to economic conditions in the sales territory. We believe this royalty revenue will increase in the fourth quarter of 2012 and in the subsequent years with the introduction of the new toy line currently in development with Jakks Pacific's Tollytots® division. We cannot guarantee that the new toy line will be accepted or that the royalty revenue will increase.

Our products compete in the pre-school music, books, DVDs, and toy categories. We believe we compare favorably in the quality of our products, as well as competitive price point. We continue to market direct to retailers and are exploring new domestic and international licensing opportunities. We are investigating additional relevant external brands to license, adding to the diversity of our product line, while maintaining the integrity of our core mission of educating and entertaining children.

The Company's business is subject to the effects of seasonality, causing revenues to fluctuate with consumer purchasing behavior, competition, and the timing of holiday periods.

The 2012 economic outlook remains challenging, however, we anticipate sales growth through our actions to improve our existing products, maintaining highly competitive price points, increasing our digital product revenue and adding content to our product catalog.

Costs. Costs and expenses, excluding depreciation and amortization, consisting of cost of sales, marketing and sales expenses, and general and administrative costs, increased $275,822 (14.4%) for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and increased $1,157,983 (23.9%) for the nine months ended September 30, 2012 compared to the same period of 2011.


                                          Three Months Ended              Nine Months Ended
                                             September 30,                   September 30,
                                         2012            2011            2012            2011
Cost of Sales                         $ 1,389,564     $ 1,225,123     $ 3,414,440     $ 2,354,845
General and Administrative                695,645         570,259       2,048,222       1,859,161
Marketing and Sales                        91,635         114,108         520,756         620,780
Product Development                        12,442           3,974          20,744          11,393
Total Costs and Operating Expenses    $ 2,189,286     $ 1,913,464     $ 6,004,162     $ 4,846,179

Cost of sales increased $164,441 (13.4%) during the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and $1,059,595 (45.0%) for the nine months ended September 30, 2012 compared to the same nine month period of 2011, as a result of increased sales volumes, an increase in lower margin product mix and higher shipping costs.

Operating expenses predominately consists of salaries, employee benefits and stock based compensation as well as other expenses associated with executive management, finance, legal, facilities, marketing, rent, and other professional services. Costs associated with these categories are detailed as follows:

General and administrative costs increased $125,386 (22.0%) for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. This is the result of increases in salaries and related expenses of $90,190 and investor relations of $74,682, offset by decreased stock compensation expense of $10,100 and legal fees of $16,753. For the nine months ended September 30, 2012 compared to the same period in 2011, general and administrative costs increased $189,061 (10.2%) due to increases in salaries and related expenses of $303,290 and investor relations costs of $190,249 offset by decreases in stock compensation expense of $193,088, rent expense of $44,742 and legal fees of $50,777.

Marketing and sales expenses include trade shows, public relations firms, sales and royalty commissions and personal contact. Marketing expenses exhibit some fluctuation due to timing of trade shows attended. For the three months ended September 30, 2012 compared to the same period in the prior year the total expense decreased $22,473 (19.7%), due to decreases of commission expense for "deal for a day" revenue. The expense for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 decreased $100,024 (16.1%) due to decreased commissions paid for royalty revenue.

Product development expenses are for routine and periodic alterations to existing products. For the three months ended September 30, 2012 compared to the three months ended September 30, 2011, these expenses increased $8,468 (213.1%) and increased $9,351 (82.1%) for the nine months ended September 30, 2012 compared to the same period in the prior year. All costs for new product development and significant improvements to existing products are capitalized in accordance with FASB Accounting Standards Codification Topic 350, Intangible Assets and Topic 730, Research and Development.

Operating expenditures are not generally seasonal and require consistent cash outflows.

Interest Expense. Interest expense primarily resulted from related party loans.

The Company borrowed funds from four of the officers of the Company during the years 2007 to 2009 and issued promissory notes in favor of the officers. The proceeds from the notes were used to pay operating obligations of the Company. Interest expense for these loans was recorded in the three months ended September 30, 2012 and 2011 in the amounts of $3,559 and $2,992, respectively. For the nine months ended September 30, 2012 compared to the same period of 2011, interest expenses for these loans were recorded in amounts of $10,519 and $10,096, respectively.


On February 1, 2008, Isabel Moeller, sister of our Chief Executive Officer, Klaus Moeller, loaned $310,000 to the Company at an interest rate equal to 8% per annum. The funds were borrowed from Ms. Moeller in order to reduce outstanding obligations due to Genius Products, Inc. at that time. Subsequent agreements extended the maturity date to January 15, 2015 and reduced the stated interest rate to six (6%) percent per annum. Repayments on the principle balance were made in the aggregate of $24,000 during February and April 2011. On April 1, 2011, Ms. Moeller agreed to convert $200,000 of the outstanding balance to shares of common stock of the Company. On March 31 2012, Ms. Moeller agreed to convert the remaining balance of outstanding principal and interest, in the amount of $173,385, to shares of common stock of the Company. Interest expense for the three month period ended September 30, 2012 and September 30, 2011 was $0 and $2,165, respectively. The interest expense for the nine months ended September 30, 2012 and September 30, 2011 was $2,562 and $9,643, respectively. The note is paid in full.

On March 31, 2011, four of the Company's officers agreed to convert accrued but unpaid salaries through December 31, 2010 to subordinated long term notes payable. In February 2011, as a result of an agreement by each of the four officers to retroactively decrease the amount of the annual salary for 2010 from $125,000 per annum per officer to $80,000, the amount of the notes were reduced to an aggregate of $1,620,137. In March 2102, the officers agreed to convert the aggregate sum of $1,572,161 to shares of common stock of the Company. The remaining note, with a principal balance of $159,753, has a maturity of January 15, 2015 and a stated interest rate of six percent (6%) per annum. For the three months ended September 30, 2012 and September 30, 2011, interest expense was recorded in the amount of $2,508 and $24,812, respectively. For the nine months periods ended September 30, 2012 and 2011, interest expense was recorded in the amounts $31,019 and $73,823, respectively.

On June 27, 2012, the Company entered into a Securities Purchase Agreement with Hillair Capital Investments L.P. whereby the Company issued and sold (i) a $1,000,000 16% senior secured convertible debenture due June 27, 2014. The Company recorded interest expense for the three months ended September 30, 2012 and September 30, 2011 in the amounts of $40,000 and $0, respectively. For the nine months ended September 30, 2012 and September 30, 2011, the Company recorded interest expense in the amounts of $41,333 and $0, respectively.

Liquidity and Capital Resources

Three and Nine months Ended September 30, 2012 Compared to September 30, 2011

To date, we have relied on a combination of revenue, loans from officers and private offerings of our securities to meet our cash requirements. Currently, our principal source of liquidity is cash in the bank. Management believes that its increasing revenues and cash generated by operations, together with funds available from short-term related party advances and the debenture issuance, will be sufficient to fund planned operations for the next twelve months. However, there can be no assurance that operations and operating cash flows will continue at the current levels or improve in the near future. If the Company is unable to obtain profitable operations and positive operating cash flows sufficient to meet scheduled debt obligations, it may need to seek additional funding through equity and related party loans or be forced to scale back its development plans or to significantly reduce or terminate operations.

Cash totaled $149,513 and $405,341 at September 30, 2012 and December 31, 2011, respectively. The change in cash is as follows:

                                                        Nine Months Ended September 30,
                                                       2012            2011          Change
Cash provided (used) by operations                 $ (1,218,910 )   $ (537,334 )   $ (681,576 )
Cash provided (used) in investing activities            (41,946 )     (169,897 )   $  127,951
Cash provided (used) in financing activities          1,005,028        738,230     $  266,798
Increase (decrease) in cash and cash equivalents   $   (255,828 )   $   30,999     $ (286,827 )

Our cash flow is very seasonal and a vast majority of our sales historically occur in the last two quarters of the year as retailers expand inventories for the holiday selling season. Cash used by operations in the nine months ended September 30, 2012, compared to 2011, increased by $681,576 due to increased prepaid and other accrued expenses, a decrease in the accounts payable balance and increases in accrued salaries and interest. Cash used in the same periods for investing activities decreased $127,951 and relates to investment in music, DVD, preschool readiness program and toy products. Cash provided by financing activities increased by $266,798 due to the sale of common stock for cash and proceeds from the debenture issuance.


Notes were issued in favor of four of our officers for loans to the Company at various times during the years 2007 through 2009. Interest expense was recorded in the nine months ended September 30, 2012 and 2011 in the amounts of $10,519 and $10,096, respectively.

On March 31, 2011, four of the officers agreed to convert accrued but unpaid salaries through March 31, 2011 to subordinated long term notes payable in an aggregate of $1,620,137. In March 2012, the Officers agreed to convert the sum of $1,572,161 to shares of common stock of the Company. The remaining note, with a principal balance of $159,753, has a maturity of January 15, 2015 and a stated interest rate of six percent (6%) per annum. For the nine months ended September 30, 2012 and September 30, 2011, interest expense was recorded in the amount of $31,019 and $73,823, respectively.

On June 27, 2012, the Company entered into a Securities Purchase Agreement with Hillair Capital Investments L.P. whereby the Company issued and sold (i) . . .

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