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GNUS > SEC Filings for GNUS > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for GENIUS BRANDS INTERNATIONAL, INC.

Form 10-Q for GENIUS BRANDS INTERNATIONAL, INC.


13-Aug-2013

Quarterly Report


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

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 financial statements and related notes for the three and six month periods ended June 30, 2013 and 2012. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Forward Looking Statements

This report on Form 10-Q contains forward-looking statements which involve assumptions and describe our future plans, strategies and expectations. When used in this statement, 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

The 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 these 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

Genius Brands International, Inc. ("we", "us", "our" or the "Company"), f/k/a Pacific Entertainment Corporation, creates and distributes music-based products which we believe are entertaining, educational and beneficial to the well-being of infants and young children under our brands, including Baby Genius and Little Genius. We create, market and sell children's videos, music, books and other products in the United States by distribution at wholesale to retail stores, direct to consumers through various "deal for a day" sites and through digital platforms using intellectual property developed and owned by us. We license the use of our intellectual property, both domestically and internationally, to others to manufacture, market and sell products based on our characters and brand, whereby we receive advances and royalties. The Company also 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 have licensing agreements with other companies under which we produce music-based products using their characters and brands and for which we pay a royalty.

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. As previously described on the Company's Schedule 14C Information Statement, filed with the Securities and Exchange Commission on September 21, 2011, by filing the Articles of Merger, the Company
(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".

In addition to the distribution of our products, we have developed and will continue to develop multiple revenue streams which include worldwide licensing and merchandising opportunities for toys and other customer products that have been inspired by our brands or which we feel we can market and sell through our distribution channels. The Company is committed to providing the very best in children's education and developmental entertainment, as well as quality items based on our brand and licensed characters.

The Company believes that the distribution of products is changing from the traditional brick and mortar retail store to an increasing emphasis on digital delivery whereby the owners of content will be able to reach customers directly through a digital delivery platform. In 2013, we began creation of a digital streaming application that will be available at www.babygenius.com and the conversion of all our content to digital format. We anticipate the initial completion date in the fourth quarter of 2013.

Following is a summary of our revenues, assets and net losses for our two most recent fiscal periods ended June 30, 2013 and June 30, 2012:

Six Months Ended June 30,

                          2013              2012

Total Revenue         $   1,356,563     $  2,672,745

Net Loss              $  (1,489,114 )   $ (1,184,548 )

Total Assets          $   1,885,025     $  3,465,795

Total Liabilities     $   3,263,571     $  2,978,720

Accumulated Deficit   $ (11,697,138 )   $ (9,324,963 )

Products

Our products consist primarily of family and children's videos, music, books and other entertainment products. The products are manufactured and sold under brand names such as "Baby Genius", "Little Genius", "Kid Genius", "Wee Worship" and "123 Favorite Music". The Company has created eleven videos, five hundred songs and twelve books which are owned by us and we continue to add content to the library. Some Baby Genius products are bilingual in English and Spanish versions. Our Baby Genius brand products are designed primarily for ages from 0
- 5 years and our Little Genius products focus on children up to age 8 years.

We also license our Baby Genius brand and characters for various product lines including toys, sunglasses, games and puzzles, sippy cups, and early learning aids, as well as others, and receive advances and royalties based on sales of these products.

On January 11, 2011, the Company signed a five-year, world-wide license agreement with Tollytots(R) for a new toy line. The agreement included a broad range of exclusive categories including learning and developmental toys, most plush toys, and musical toys which Tollytots(R) had the sole right to manufacture, market and distribute on a world-wide basis. It also allowed Tollytots(R) a non-exclusive right to manufacture, market and distribute products in several non-exclusive categories, including board games, puzzles, electronic learning aids and amusement plush toys. The agreement was subject to early termination by the Company in specified territories in the event minimum sales requirements in those territories were not met in any contract year. On June 6, 2013, the Company and Tollytots(R) agreed to terminate the agreement in its entirety. The Company will receive no further payments for this license beyond June 30, 2013.

We will continue to explore the potential for derivative products under the Baby Genius brand to expand brand awareness and sales. For instance, we have created custom products using the Baby Genius brand for several book and music premiums, including Wendy's, Taco Bell and Gerber. For example, through an agreement with a third party licensee, we created small books based on our characters specifically for Wendy's which were inserted as a gift in Under 3 kids meals purchased at Wendy's locations throughout 2012.

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 2-5 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. In March 2012, the Company and Dr. 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.

The Company has developed the Ready!Play!Learn!(TM) program based partially on the intellectual property discussed above, which we anticipate will be available for distribution in the third quarter of 2013. The program includes a curriculum book and music aimed at parents and caregivers of preschool aged children to assist them in preparing their children for kindergarten.

In 2013, the Company signed agreements to develop an application based on our content and characters. The initial application includes digital video and music delivery, with games and puzzles based on our characters, which is scheduled to be available in the second quarter of 2013. Future enhancements include a variety of tools, including lesson plans, curriculum and songs designed to assist parents teach academic subjects and socialization skills to their children ages 2-5 years in preparation for attending kindergarten.

We created a set of early learning cards "Numbers and Alphabet" using our characters which were made available in 2012 and are currently developing additional products for addition to our catalog in 2013.

We have third party licensing agreements under which we developed musical products under other brands. Through an exclusive licensing agreement with the San Diego Zoological Society, we created a series of Baby Genius DVD's featuring footage from the San Diego Zoo and San Diego Wild Animal Park. We will continue to investigate partnerships which may lead to additions to our product lines.

Our business has reacted to seasonal influence, such as the holiday season. We generally anticipate increased sales in the third and fourth quarters principally due to sales from the holiday season. Due to the seasonality of our sales, we expect quarterly results to fluctuate. Our results of operations may also fluctuate significantly as a result of a variety of other factors, including changing consumer tastes and the marketing efforts of our distributors.

Results of Operations



Three and Six Month Periods Ended June 30, 2013 Compared to June 30, 2012



Our summary results of operations are presented below:



                                         Three Months Ended June 30,                                        Six Months Ended June 30,
                             2013             2012            Change        % Change          2013             2012            Change         % Change
Revenues                 $    622,324     $  1,641,798     $ (1,019,474 )      -62.1%     $  1,356,563     $  2,672,745     $ (1,316,182 )       -49.2%
Costs and Operating
Expenses                   (1,067,912 )     (2,254,472 )      1,186,560        -52.6%       (2,454,015 )     (3,814,875 )      1,360,860         -35.7%
Depreciation and
Amortization                  (39,003 )        (36,974 )         (2,029 )        5.5%          (78,175 )        (75,689 )         (2,486 )         3.3%
Loss from Operations         (484,591 )       (649,648 )        165,057        -25.4%       (1,175,627 )     (1,217,819 )         42,192          -3.5%

Other Income                       16               86              (70 )      -81.4%               32              171             (139 )       -81.3%
Interest Expense             (162,293 )         (9,965 )       (152,328 )     1528.6%         (324,276 )        (43,180 )       (281,096 )       651.0%
Gain on settlement of
debt                                -           76,280          (76,280 )     -100.0%                -           76,280          (76,280 )      -100.0%
Gain on derivative
valuation                     103,619                -          103,619        100.0%           10,757                -           10,757         100.0%

Net Other Income
(Expense)                     (58,658 )         66,401         (125,059 )     -188.3%         (313,487 )         33,271         (346,758 )     -1042.2%

Net Loss                     (543,249 )       (583,247 )         39,998         -6.9%       (1,489,114 )     (1,184,548 )       (304,566 )        25.7%
Acquisition of
Noncontrolling
Interest                            -                -                -          0.0%                -           (5,366 )          5,366        -100.0%
Net Loss attributable
to Genius Brands
International, Inc.      $   (543,249 )   $   (583,247 )   $     39,998         -6.9%     $ (1,489,114 )   $ (1,189,914 )   $   (299,200 )        25.1%

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

Weighted average
shares outstanding         72,291,089       63,312,162                                      72,490,289       63,277,002

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

                                      Three Months Ended June 30,                                     Six Months Ended June 30,
                         2013           2012            Change         % Change         2013            2012            Change         % Change
Genius Brands
Product Sales          $ 335,833     $   480,957     $   (145,124 )       -30.2%     $   552,356     $ 1,002,980     $   (450,624 )       -44.9%
Licensed and
Distributed Products      58,939       1,120,255       (1,061,316 )       -94.7%         545,229       1,599,483       (1,054,254 )       -65.9%
Royalty Revenue          227,552          40,586          186,966         460.7%         258,978          70,282          188,696         268.5%
Total Revenue          $ 622,324     $ 1,641,798     $ (1,019,474 )       -62.1%     $ 1,356,563     $ 2,672,745     $ (1,316,182 )       -49.2%

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. For the three month period ended June 30, 2013 compared to the same period in 2012, this category decreased $145,124 (30.2%) due to decreased wholesale to retail store sales and returned product. The decrease of $450,624 (44.9%) for the six months ended June 30, 2013 compared to the six months ended June 30, 2012, was due to a decrease in sales at wholesale to retail customers, returns from distributors and a reduction in sales directly to consumers. Management believes that the Company is on target to increase direct product sales volumes over 2012, 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 retail and distribution customers; 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 felt would do well within our distribution channels, product acquired from other studios through distribution agreements, and overstock inventory from other studios which we sell. Sales in this category decreased $1,061,316 (94.7%) for the three month period ended June 30, 2013 compared to the same period in 2012. For the six months ended June 30, 2013, the category decreased by $1,054,254 (65.9%) over the same period in 2012. The decreases for both time periods are a result of a decrease in outside overstock studio product acquired and sold. The timing of the sales of overstock product was intermittent and unpredictable as it is determined by the availability of excess inventory from outside studios and the product margin is minimal. As a result, the Company has discontinued the sales of overstock product from other studios effective at the end of the first quarter of 2013. We intend to focus all our resources on our core product categories of family and children's entertainment and education products and will phase out unrelated products over the next six months.

Royalty revenue is income for our characters and brands licensed to others to manufacture and/or market, both internationally and domestically. The increase of $186,966 (460.7%) during the three month period ended June 30, 2013 compared to 2012 was a result of the payment of a settlement amount for the termination of the toy license. For the six months ended June 30, 2013 compared to the same period in 2012, this category increased $188,696 (268.5%) for the same reason. This is the final payment for this license and we expect this category to decrease during the next six months while we investigate new license opportunities.

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 2013 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, decreased $1,186,560 (52.6%) for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 and $1,360,860 (35.7%) for the six month period ended June 30, 2013 and 2012.

                                        Three Months Ended June 30,                                      Six Months Ended June 30,
                           2013            2012            Change         % Change         2013            2012            Change         % Change
Cost of Sales           $   332,668     $ 1,290,745     $   (958,077 )       -74.2%     $   979,977     $ 2,024,876     $ (1,044,899 )       -51.6%
General and
Administrative              628,324         721,542          (93,218 )       -12.9%       1,285,408       1,352,577          (67,169 )        -5.0%
Marketing and Sales         104,072         239,563         (135,491 )       -56.6%         158,791         429,120         (270,329 )       -63.0%
Product Development           2,848           2,622              226           8.6%          29,839           8,302           21,537         259.4%
Total Costs and
Operating Expenses      $ 1,067,912     $ 2,254,472     $ (1,186,560 )       -52.6%     $ 2,454,015     $ 3,814,875     $ (1,360,860 )       -35.7%

Cost of sales decreased $958,077 (74.2%) during the three month period ended June 30, 2013 compared to 2012 and $1,044,899 (51.6%) during the six months ended June 30, 2013 compared to the six months ended June 30, 2012, as a result of decreased sales volumes, offset by product mix variations for overstock products discontinued and increased shipping costs due to the larger volume of direct to consumer shipments.

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 decreased $93,218 (12.9%) for the three month period ended June 30, 2013 compared to the same periods in 2012. This is the result of decreases in salaries and related expenses of $78,028 due to reduced head count and health insurance costs, investor relations of $133,476 and rent and utilities of $10,360, offset by increases in stock compensation expense of $40,569 and outside services of $84,495. For the six month period ended June 30, 2013 compared to 2012, these costs decreased $67,169 (5.0%) as a result of decreases in salaries and related expenses of $16,247, investor relations of $160,065 and rent and utilities of $15,133, offset by increases in stock compensation expense of $36,889 and outside services of $84,072.

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 month period ended June 30, 2013 compared to 2012, these costs decreased $135,491 (56.6%) and for the six months ended June 30, 2013 compared to the same period in the prior year the total expense decreased $270,329 (63.0%), due to reductions of commission expense for outside sales on direct to consumer products and trade show expenses.

Product development expenses are for routine and periodic alterations to existing products. For the three and six months ended June 30, 2013 compared to the same periods of 2012, these expenses increased $226 (8.6%) and $21,537 (259.4%), respectively. 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 the debenture and 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 to evidence the loans. The proceeds from the notes were used to pay operating obligations of the Company. For the three months ended June 30, 2013 compared to the same period of 2012, interest expenses for these loans were recorded in amounts of $3,722 and $3,506, respectively. For the six months ended June 30, 2013 and 2012, the interest expenses for these loans were $7,388 and $6,960, 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. There was no interest expense recorded for the three months ended June 30, 2013 or 2012. Interest expense six months ended June 30, 2013 and June 30, 2012 was $0 and $2,562, respectively. The note is paid in full.

On March 31, 2011, four of the 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 June 30, 2013 and 2012, the interest recorded for this notes was $3,088 and $2,472, respectively. For the six month periods ended June 30, 2013 and 2012, interest expense was recorded in the amounts $6,146 and $28,511, respectively. The decrease in expense was due to conversion of a majority of the outstanding balance to common stock on March 31, 2012.

Liquidity and Capital Resources

Three and Six Months Ended June 30, 2013 Compared to June 30, 2012

To date, we have relied on a combination of revenue, loans from officers, the debenture issued in June 2012 and private offerings of our stock 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 deferred officers' salaries and . . .

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