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GNUS > SEC Filings for GNUS > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for GENIUS BRANDS INTERNATIONAL, INC.

Form 10-Q for GENIUS BRANDS INTERNATIONAL, INC.


14-Aug-2014

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 months ended June 30, 2014 and 2013. 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

We create and distribute products which we believe are entertaining, educational and beneficial to the well-being of infants and young children under our brands. We create market and sell children's videos, music, books and other products. 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. We own, control, distribute and seek to build animated content and brands aimed at kids, and then license the brands and characters onto various products, including toys, publishing video games, music, apparel and soft goods. In most cases, we create our own original content. In other cases, we partner with existing rights holders to develop an idea or an existing brand.

On November 15, 2013, we entered into an Agreement and Plan of Reorganization (the "Merger Agreement") with A Squared Entertainment LLC, a Delaware limited liability company ("A Squared"), A Squared Holdings LLC, a California limited liability company and sole member of A Squared (the "Member") and A2E Acquisition LLC, our newly formed, wholly-owned Delaware subsidiary ("Acquisition Sub"). Upon closing of the transactions contemplated under the Merger Agreement (the "Merger"), which occurred concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of A Squared. A Squared is a children's entertainment production company that produces original content for children and families and provides entertaining and educational media experiences. A Squared also creates comprehensive consumer product programs in the forms of toys, books and electronics. A Squared works with broadcasters, digital and online distributors and retailers worldwide as well as major toy companies, video game companies and top licensees in the kids and family arena.

On April 2, 2014, we filed a certificate of amendment to our Articles of Incorporation to affect a reverse split of our issued and outstanding common stock on a one-for-one hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory Authority) on April 7, 2014. All common stock share and per share information in this Quarterly Report, including the accompanying consolidated financial statements and notes thereto, has been adjusted to reflect retrospective application of the reverse split, unless otherwise indicated.

Recent Updates

During the second quarter of 2014, the Company began a strategic initiative to restructure its product sales business by phasing out the direct sale of physical products including DVDs and CDs and shifting to a licensing model. On July 14, 2014, the Company employed Stone Newman in the newly created position of President - Worldwide Consumer Products wherein he will manage all consumer products, licensing and merchandising sales and rights for the Company's brands and programming.

On May 12, 2014, the Board of Directors authorized the designation of a class of preferred stock called the Series A Convertible Preferred Stock. On May 14, 2014, the Company filed the Certificate of Designation, Preferences and Rights of the 0% Series A Convertible Preferred Stock with the Secretary of State of the State of Nevada.

On May 14, 2014, we entered into securities purchase agreements with certain accredited investors pursuant to which the Company sold an aggregate of 6,000 shares of its newly designated Series A Convertible Preferred Stock at a price of $1,000 per share for gross proceeds to the Company of $6,000,000. The closing of the transaction was subject to certain customary closing conditions and closed on May 15, 2014.

Results of Operations

Comparison of Results of Operations for the three months ended June 30, 2014 and 2013

Our summary results for the three months ended June 30, 2014 and 2013 are below:

                                6/30/2014        6/30/2013         Change          % Change
Revenues                       $    217,196     $    622,324     $  (405,128 )        -65%
Costs and Operating Expenses     (1,046,389 )     (1,067,912 )        21,523           -2%
Depreciation and
Amortization                        (29,088 )        (39,003 )         9,915          -25%
Loss from Operations               (858,282 )       (484,591 )      (373,691 )        -77%

Other Income                          7,156               16           7,140         44625%
Interest Expense                        (21 )       (155,483 )       155,462          -100%
Interest Expense - Related
Parties                              (6,207 )         (6,810 )           603           -9%
Gain (loss) on distribution
contracts                           (50,000 )              -         (50,000 )         N/A
Gain (loss) on
extinguishment of debt               12,593                -          12,593           N/A
Gain (loss) on disposition
of assets                           (70,905 )              -         (70,905 )         N/A
Gain (loss) on inventory           (174,963 )              -        (174,963 )         N/A
Gain (loss) on derivative
valuation                                 -          103,619        (103,619 )        -100%
Net Other Income (Expense)         (282,347 )        (58,658 )      (223,689 )        381%

Income tax provision                      -                -               -           N/A

Net Loss                       $ (1,140,629 )   $   (543,249 )   $  (597,380 )        -110%

Net Loss per common share      $      (0.18 )   $      (0.75 )

Weighted average shares
outstanding                       6,221,947          722,911

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

                        6/30/2014      6/30/2013        Change        % Change
Product Sales           $  118,495     $  394,772     $ (276,277 )       -70%
Content Distribution        36,814              -         36,814          N/A
Licensing & Royalties       61,887        227,552       (165,665 )       -73%
Total Revenue           $  217,196     $  622,324     $ (405,128 )       -65%

Product sales represent physical products in which the Company holds intellectual property rights such as trademarks and copyrights, whether registered or unregistered, to the characters and which are manufactured and sold by the Company either directly at wholesale to retail stores or direct to consumers through daily deal sites and our website. During the three months ended June 30, 2014, product sales decreased by $276,277 due in part to a general decline in market demand for CDs and DVDs as well as the Company's shift in emphasis away from physical goods distribution.

Television & Home Entertainment revenue totaled $36,814 during three months ended June 30, 2014 with no comparable amounts in 2013 due to the Merger. Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television in domestic and foreign markets and the sale of DVDs for home entertainment.

Licensing and royalty revenue includes items for which we license the rights from other companies to copyrights and trademarks of select brands we feel will do well within our distribution channels as well as for our brands licensed to others to manufacture and/or market, both internationally and domestically. During the three month period ended June 30, 2014 compared to June 30, 2013, this category had decreased from $227,552 to $61,887, or $165,665 (73%). This decrease is due to the shift in the Company's focus from third party off-brand product to more kid-oriented product that is more consistent with the Company's brand.

Costs. Costs and expenses, excluding depreciation and amortization, consisting primarily of cost of sales, marketing and sales expenses, and general and administrative costs, decreased $21,524 (2%) for the three month period ended June 30, 2014 compared to the three month period ended June 30, 2013.

                             6/30/2014        6/30/2013          Change          % Change
Cost of Sales               $    105,112     $    332,668     $   (227,556 )         -68%
General and
Administrative                   855,238          628,324          226,914           36%
Marketing and Sales               80,112          104,072          (23,960 )         -23%
Product Development                5,926            2,848            3,078           108%
Total Costs and Operating
Expenses                    $  1,046,388     $  1,067,912     $    (21,524 )         -2%

Cost of Sales decreased $227,556 (68%), during three months ended June 30, 2014 compared to the same period of 2013. The decrease was a result of the decrease in product sales discussed above.

General and Administrative expenses consist primarily of salaries, employee benefits, as well as other expenses associated with finance, legal, facilities, marketing, rent, and other professional services. General and administrative costs for the three months ended June 30, 2014 increased $226,914 (36%) as compared to the three months ended June 30, 2013. The aggregate increase for the category includes increases of professional fees of $186,621, other general and administration expenses of $162,173, and bad debt expense of $55,000 all offset by decreases of $108,165 in salaries and wages and $101,988 in stock based compensation expense.

Marketing and sales expenses decreased $23,960 (23%) for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to decreases in sales commission expenses and other advertising expenses.

Product development expenses are for routine and periodic alterations to existing products. For the three months ended June 30, 2014 compared to the three months ended June 30, 2013, these expenses increased by $3,078 (108%), primarily due to increased demand for alterations to our existing products.

Interest Expense. During the three months ended June 30, 2014, interest expense resulted from certain related party short-term debt and other operating interest expense. During the prior period, interest expense related to interest expense recognized in relation to certain related-party notes payable and other operating interest expense as well as interest expense related to certain debentures.

                                    6/30/2014      6/30/2013        Change        % Change
Interest Expense - Operating       $        21     $    2,222     $   (2,202 )       -99%
Interest Expense - Related Party         6,207          6,810           (603 )        -9%
Interest Expense - Debenture                 -        153,261       (153,261 )       -100%
Interest Expense                   $     6,228     $  162,293     $ (156,065 )       -96%

From 2007 through 2009, the Company borrowed funds from members of its previous management team, the proceeds of which were used to pay operating obligations of the Company. In association with the Merger, all remaining balances in association with these notes were converted into common stock. Interest expense was recorded in the three months ended June 30, 2014 and 2013 in the amounts of $0 and $3,722, respectively.

During 2011, four of the Company's former officers agreed to convert accrued but unpaid salaries through December 31, 2010 to subordinated long term notes payable. In association with the Merger, all remaining balances in association with these notes were converted into common stock. Interest expense was recorded in the three months ended June 30, 2014 and 2013 in the amounts of $0 and $3,088, respectively.

As part of the Merger, the Company acquired certain liabilities from A Squared. From time to time, A Squared required short-term advances to fund its operations and provide working capital from its founder, the Company's Chief Executive Officer, Andrew Heyward. As of June 30, 2014, these advances totaled $415,787. These advances are interest free and have no stated maturity. The Company has applied an imputed interest rate of 6%. During the quarter ended June 30, 2014, the Company recognized imputed interest expense of $6,207 with no comparable amount recognized in the prior period.

On June 27, 2012, the Company entered into a Securities Purchase Agreement whereby the Company issued and sold (i) a $1,000,000 16% senior secured convertible debenture due June 27, 2014 (the "Debenture"), and (ii) a common stock purchase warrant (the "Debenture Warrant") to purchase up to 50,000 shares of the Company's common stock. On August 29, 2013, pursuant to an agreement between the Company and certain holders, the original Debenture was assigned and exchanged for an aggregate of $1,163,333 in new notes with the same provisions (the "Reissued Debenture"). The interest rate and maturity date of the Reissued Debenture were not changed. In association with the Merger, the Company converted all remaining balances into shares of common stock. For the three months ended June 30, 2014 compared to the same period of 2013, interest expense for the Debenture and Reissued Debenture was recorded in amounts of $0 and $153,261, respectively.

Comparison of Results of Operations for the six months ended June 30, 2014 and 2013

Our summary results for the six months ended June 30, 2014 and 2013 are below:

                             6/30/2014        6/30/2013          Change          % Change
Revenues                    $    393,478     $  1,356,563     $   (963,085 )         -71%
Costs and Operating
Expenses                      (2,086,180 )     (2,454,015 )        367,835           -15%
Depreciation and
Amortization                     (53,629 )        (78,175 )         24,546           -31%
Loss from Operations          (1,746,331 )     (1,175,627 )       (570,704 )         -49%

Other Income                       7,789               32            7,757          24241%
Interest Expense                  (2,230 )       (310,742 )        308,512           -99%
Interest Expense -
Related Parties                  (13,370 )        (13,534 )            164           -1%
Gain (loss) on
distribution contracts           (47,229 )              -          (47,229 )         N/A
Gain (loss) on
extinguishment of debt            52,447                -           52,447           N/A
Gain (loss) on
disposition of assets            (70,905 )              -          (70,905 )         N/A
Gain (loss) on inventory        (174,963 )              -         (174,963 )         N/A
Gain (loss) on derivative
valuation                              -           10,757          (10,757 )        -100%
Net Other Income
(Expense)                       (248,461 )       (313,487 )         65,026           -21%

Income tax provision                   -                -                -           N/A

Net Loss                    $ (1,994,792 )   $ (1,489,114 )   $   (505,678 )         -34%

Net Loss per common share   $      (0.33 )   $      (2.05 )

Weighted average shares
outstanding                    6,126,292          724,903

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

                        6/30/2014       6/30/2013        Change        % Change
Product Sales           $  204,636     $ 1,097,585     $ (892,949 )       -81%
Content Distribution        87,275               -         87,275          N/A
Licensing & Royalties      101,567         258,978       (157,411 )       -61%
Total Revenue           $  393,478     $ 1,356,563     $ (963,085 )       -71%

Product sales represent physical products in which the Company holds intellectual property rights such as trademarks and copyrights, whether registered or unregistered, to the characters and which are manufactured and sold by the Company either directly at wholesale to retail stores or direct to consumers through daily deal sites and our website. During the six months ended June 30, 2014, product sales decreased by $892,949 due in part to a general decline in market demand for CDs and DVDs as well as the Company's shift in emphasis away from physical goods distribution.

Television & Home Entertainment revenue totaled $87,275 during six months ended June 30, 2014 with no comparable amounts in 2013 due to the Merger. Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television in domestic and foreign markets and the sale of DVDs for home entertainment.

Licensing and royalty revenue includes items for which we license the rights from other companies to copyrights and trademarks of select brands we feel will do well within our distribution channels as well as for our brands licensed to others to manufacture and/or market, both internationally and domestically. During the six month period ended June 30, 2014 compared to June 30, 2013, this category decreased from $258,978 to $101,567, or $157,411 (61%). This decrease is due to the shift in the Company's focus from third party off-brand product to more kid-oriented product that is more consistent with the Company's brand.

Costs. Costs and expenses, excluding depreciation and amortization, consisting primarily of cost of sales, marketing and sales expenses, and general and administrative costs, decreased $367,835 (15%) for the six month period ended June 30, 2014 compared to the six month period ended June 30, 2013.

                             6/30/2014        6/30/2013          Change          % Change
Cost of Sales               $    241,147     $    979,977     $   (738,830 )         -75%
General and
Administrative                 1,720,340        1,285,408          434,932           34%
Marketing and Sales              117,880          158,791          (40,911 )         -26%
Product Development                6,813           29,839          (23,026 )         -77%
Total Costs and Operating
Expenses                    $  2,086,180     $  2,454,015     $   (367,835 )         -15%

Cost of Sales decreased $738,830 (75%), during six months ended June 30, 2014 compared to the same period of 2013. The decrease was a result of the decrease in product sales discussed above.

General and Administrative expenses consist primarily of salaries, employee benefits, as well as other expenses associated with finance, legal, facilities, marketing, rent, and other professional services. General and administrative costs for the six months ended June 30, 2014 increased $434,932 (34%) as compared to the six months ended June 30, 2013. The aggregate increase for the category includes increases of professional fees of $441,984, other general and administration expenses of $306,689, and bad debt expense of $55,000 all offset by decreases of $270,616 in salaries and wages and $160,268 in stock based compensation expense.

Marketing and sales expenses decreased $40,911 (26%) for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to decreases in sales commission expenses and other advertising expenses.

Product development expenses are for routine and periodic alterations to existing products. For the six months ended June 30, 2014 compared to the six months ended June 30, 2013, these expenses decreased by $23,026 (77%), primarily due to decreased demand for alterations to our existing products.

Interest Expense. During the six months ended June 30, 2014, interest expense resulted from certain related party short-term debt and other operating interest expense. During the prior period, interest expense related to interest expense recognized in relation to certain related-party notes payable and other operating interest expense as well as interest expense related to certain debentures.

                                    6/30/2014      6/30/2013        Change        % Change
Interest Expense - Operating       $     2,230     $    4,220     $   (1,991 )       -47%
Interest Expense - Related Party        13,370         13,534           (164 )        -1%
Interest Expense - Debenture                 -        306,522       (306,522 )       -100%
Interest Expense                   $    15,600     $  324,276     $ (308,676 )       -95%

From 2007 through 2009, the Company borrowed funds from members of its previous management team, the proceeds of which were used to pay operating obligations of the Company. In association with the Merger, all remaining balances in association with these notes were converted into common stock. Interest expense was recorded in the six months ended June 30, 2014 and 2013 in the amounts of $0 and $7,388, respectively.

During 2011, four of the Company's former officers agreed to convert accrued but unpaid salaries through December 31, 2010 to subordinated long term notes payable. In association with the Merger, all remaining balances in association with these notes were converted into common stock. Interest expense was recorded in the six months ended June 30, 2014 and 2013 in the amounts of $0 and $6,146, respectively.

As part of the Merger, the Company acquired certain liabilities from A Squared. From time to time, A Squared required short-term advances to fund its operations and provide working capital from its founder, the Company's Chief Executive Officer, Andrew Heyward. As of June 30, 2014, these advances totaled $415,787. These advances are interest free and have no stated maturity. The Company has applied an imputed interest rate of 6%. During the six months ended June 30, 2014, the Company recognized imputed interest expense of $13,370 with no comparable amount recognized in the prior period.

On June 27, 2012, the Company entered into a Securities Purchase Agreement whereby the Company issued and sold (i) the $1,000,000 16% Debenture, and (ii) the Debenture Warrant to purchase up to 50,000 shares of the Company's common stock. On August 29, 2013, pursuant to an agreement between the Company and certain holders, the original Debenture was assigned and exchanged for an aggregate of $1,163,333 a Reissued Debenture. The interest rate and maturity date of the Reissued Debenture were not changed. In association with the Merger, the Company converted all remaining balances into shares of common stock. For the six months ended June 30, 2014 compared to the same period of 2013, interest expense for the Debenture and Reissued Debenture was recorded in amounts of $0 and $306,522, respectively.

Liquidity



Six Months Ended June 30, 2014 Compared to June 30, 2013



Cash totaled $5,576,206 and $253,390at June 30, 2014 and 2013, respectively. The
change in cash is as follows:



                                                6/30/2014        6/30/2013          Change
Cash provided (used) by operations             $ (1,234,446 )   $    (85,918 )   $ (1,148,528 )
Cash provided (used) in investing activities        (89,481 )       (172,518 )         83,037
Cash provided (used) in financing activities      6,373,023           64,278        6,308,745
Increase (decrease) in cash                    $  5,049,096     $   (194,158 )   $  5,243,254

During our periods ended June 30, 2014 and 2013, our primary sources of cash were financing activities. During 2014, our financing activities related primarily to the sale of shares of common stock and Series A Convertible Preferred Stock as well as the execution of a long-term, exclusive supply chain services agreement. During the comparable period in 2013, our financing activities related to the receipt of funds related to the issuance costs of certain debentures. During both periods, these funds were primarily used to fund operations as well as investments in intangible assets and capitalized product development.

Operating Activities

Cash used by operations in the six months ended June 30, 2014 was $1,234,446 as compared to a use of $85,918 during the same period of 2013, representing an increase in cash used in operations of $1,148,528 based on the operating results discussed above as well as increases in film and television costs related to the commencement of production of the second installment of the feature film Stan Lee and the Mighty 7 and episodes of the Thomas Edison: Secret Lab off-set by the receipt of $250,000 for a musical composition administration services with a third party.

Investing Activities

Cash used by investing activities for the six months ended June 30, 2014 was $89,481 as compared to a use of funds of $172,518 for the comparable period in . . .

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