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Note 1: The Company and Significant Accounting Policies
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12 Months Ended |
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Dec. 31, 2011
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| Significant Accounting Policies [Text Block] |
Note
1: The Company and Significant Accounting
Policies
Organization
and Nature of Business
Genius
Brands International, Inc., f/k/a
Pacific Entertainment Corporation, (“we”,
“us”, “our” or the
“Company”) provides music-based products that are
entertaining, educational and beneficial to the well-being of
infants and young children. We create, market and
sell children’s DVDs, CD music, toy, and book products
in the United States by distribution at wholesale to retail
stores and outlets and directly to consumers on our website
and through “deal for a day” sites. We
license the use of our brands internationally to others to
manufacture, market and sell the products, whereby we receive
advances and royalties.
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., f/k/a
Pacific Entertainment Corporation, 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”). In November 2011, our trading symbol
changed from “PENT” to
“GNUS”.
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
(“Battat”), includes musical, activity, and
role-play toys that incorporate 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 final royalty
payment from this license was received for the three month
period ended March 31, 2011. The Company
experienced a reduction in royalty income during the
remainder of 2011 and estimates it will continue to
experience a reduction during the first and second quarters
of 2012 until the new licensed toy line is introduced at
retail.
On
January 11, 2011, the Company signed an agreement with Jakks
Pacific’s Tollytots®
(“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 of 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 and we anticipate the line will be introduced at
retail in the third quarter of 2012.
The
Company also obtains licenses for other select brands we feel
we can market and sell through our distribution
channels.
On
September 20, 2010, the Company entered into a joint venture
agreement between the Company and 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
commissioned research into the use of music-based curriculum
through San Diego State University over the past 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 classic movies and
television programs, “Pacific Entertainment
Presents”. Initially consisting of seven
titles, each focusing on a specific genre such as Horror,
Western, SciFi, 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. During 2011, the Company also signed
distribution agreements with five studios whereby we sell
their existing products through our channels of
distribution. The agreements range in length from
three to five years.
The
Company’s Financial Statements are prepared in
accordance with accounting principles generally accepted in
the United States of America. These require the
use of estimates and assumptions that affect the assets,
liabilities, revenues and expenses reported in the financial
statements, as well as amounts included in the notes thereto,
including discussion and disclosure of contingent
liabilities. Although the Company uses its best
estimates and judgments, actual results could differ from
these estimates as future confirming events occur.
Liquidity
Historically,
the Company has incurred net losses. As of
December 31, 2011, the Company had an accumulated deficit of
$8,135,049 and a total stockholders’ deficit of
$1,115,267. At December 31, 2011, the Company had
current assets of $1,935,648, including cash and cash
equivalents of $405,341, and current liabilities of
$1,629,712, resulting in a working capital excess of
$305,936. For the year ended December 31, 2011,
the Company reported a net loss of $1,366,893 and net cash
used by operating activities of
$326,603. Management believes that its increasing
sales, cash provided by operations, together with funds
available from short-term related party advances, 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 or
be forced to scale back its development plans or to
significantly reduce or terminate operations.
Use
of Estimates
The
preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting periods.
Cash
Equivalents
The
Company considers all highly liquid debt instruments with
initial maturities of three months or less to be cash
equivalents.
Reclassifications
Certain
amounts in the consolidated financial statements as of
December 31, 2010 have been reclassified to conform to the
presentation as of December 31, 2011.
Significant
Accounting Policies
Revenue
Recognition - The Company recognized revenue related
to product sales when (i) the seller’s price is
substantially fixed, (ii) shipment has occurred causing the
buyer to be obligated to pay for product, (iii) the buyer has
economic substance apart from the seller, and (iv) there is
no significant obligation for future performance to directly
bring about the resale of the product by the buyer as
required by Revenue Recognition Topic 605 of the FASB
Accounting Standards Codification.
Revenues
associated with the sale of branded CDs, DVDs and other
products, are recorded when shipped to customers pursuant to
approved customer purchase orders resulting in the transfer
of title and risk of loss. Cost of sales, rebates
and discounts are recorded at the time of revenue recognition
or at each financial reporting date.
The
Company’s licensing and royalty revenue represent
variable payments based on net sales from brand licensees for
content distribution rights. These license
agreements are held in conjunction with third parties that
are responsible for collecting fees due and remitting to the
Company its share after expenses. Revenue from licensed
products is recognized when realized or realizable based on
royalty reporting received from licensees.
Shipping and
Handling - The Company records shipping and handling
expenses in the period in which they are incurred and are
included in the Cost of Goods Sold.
Principles of
Consolidation - The consolidated financial statements
include the financial statements of the Company, and its 75%
owned subsidiary: Circle of Education LLC. All
inter-company balances and transactions have been eliminated
in consolidation.
Inventories
- Inventories are stated at the lower of cost
(average) or market and consist of finished goods such as
DVDs, CDs and other products. A reserve for
slow-moving and obsolete inventory is established for all
inventory deemed potentially non-saleable by management in
the period in which it is determined to be potentially
non-saleable. The current inventory is considered properly
valued and saleable. The Company concluded that
there was an appropriate reserve for slow moving and obsolete
inventory of $42,309 and $5,972 established as of December
31, 2011 and December 31, 2010, respectively.
Property and
Equipment - Property and equipment are recorded at
cost. Depreciation on property and equipment is computed
using the straight-line method over the estimated useful
lives of the assets, which range from 5 to 39 years.
Maintenance, repairs, and renewals, which neither materially
add to the value of the assets nor appreciably prolong their
lives, are charged to expense as incurred. Gains and losses
from dispositions of property and equipment are reflected in
the statement of operations.
Intangible
Assets –Intangible Assets acquired, either
individually or with a group of other assets, are initially
recognized and measured based on fair value. In
the acquisition of the assets from Genius Products, fair
value was calculated using a discounted cash flow analysis of
the revenue streams for the estimated life of the
assets.
The
Company develops new music and video products, in addition to
adding content, improved animation and songs/features to
their existing productions. The costs of new
product development and significant improvement to existing
products are capitalized while routine and periodic
alterations to existing products are expensed as
incurred. The Company begins amortization of new
products when it is available for general
release. Annual amortization cost of intangible
assets are computed based on the straight-line method over
the remaining economic life of the product, generally such
deferred costs are amortized over five years.
The
Company reviews all intangible assets periodically to
determine if the value has been impaired by recent financial
transactions using the discounted cash flow analysis of
revenue stream for the estimated life of the assets.
Stock Based
Compensation - As required by the Stock Compensation
Topic 718 of the FASB Accounting Standards Codification, the
Company recognizes an expense related to the fair value of
our stock-compensation awards, including stock options, using
the Black-Scholes calculation as of the date of grant.
Income
Taxes- Deferred income tax assets and liabilities are
recognized based on differences between the financial
statement and tax basis of assets and liabilities using
presently enacted tax rates. At each balance sheet
date, the Company evaluates the available evidence about
future taxable income and other possible sources of
realization of deferred tax assets, and records a valuation
allowance that reduces the deferred tax assets to an amount
that represents management’s best estimate of the
amount of such deferred tax assets that more likely than not
will be realized.
Advertising
Costs- The Company’s marketing and sales costs
are primarily related to advertising, trade shows, public
relation fees and production and distribution of collateral
materials. In accordance with the FASB Topic
720-35 regarding Advertising Costs, the Company expenses
advertising costs in the period in which the expense is
incurred. Marketing and Sales costs incurred by
licensees are borne fully by the licensee and are not the
responsibility of the Company. Advertising expense
for the year ended December 31, 2011 and December 31, 2010
was $116,079 and $139,060, respectively.
Allowance for
Sales Returns - An Allowance for Sales Returns is
estimated based on average sales during the previous
year. Based on experience, sales growth, and our
customer base, the Company concluded that the allowance for
sales returns at December 31, 2011 and December 31. 2010
should be $84,000 and $76,000, respectively.
Concentration of
Risk - The Company’s cash and cash equivalents
are maintained at one financial institution and from time to
time the balances for this account exceed the Federal Deposit
Insurance Corporation’s (“FDIC’s”)
insured amount. Balances on interest bearing
deposits at banks in the United States are insured by the
FDIC up to $250,000 per institution. The
Dodd-Frank Deposit Insurance Provision provides that all
funds in noninterest-bearing transaction accounts held at
FDIC-insured depository institutions (“IDIs”)
will be fully insured from December 31, 2010 through December
31, 2012. As of December 31, 2011 and 2010, there
were no uninsured balances.
For
fiscal year 2011, the revenue from one customer comprised
28.5% of the Company’s total revenue. This
account made up 1.1% of the total accounts receivable balance
at December 31, 2011. For fiscal year 2010, the
revenue from three major customers comprised 27.6%, 16.3% and
14.1% of the Company’s total revenue. Those
three major customers made up 39.1%, 0%, and 0% of the total
accounts receivable balance at December 31, 2010,
respectively. The major customer for the year
ending December 31, 2011 is not necessarily the same as one
of the major customers at December 31, 2010. There
is significant financial risk associated with a dependence
upon a small number of customers. The Company
periodically assesses the financial strength of these
customers and establishes allowances for any anticipated bad
debt. At December 31, 2011 and 2010, no allowance
for bad debt has been established for the major
customers as these amounts are believed to be fully
collectible.
Earnings Per
Share - Basic earnings (loss) per common share
(“EPS”) is calculated by dividing net loss by the
weighted average number of common shares outstanding for the
period. Diluted EPS is calculated by dividing net loss by the
weighted average number of common shares outstanding, plus
the assumed exercise of all dilutive securities using the
treasury stock or “as converted” method, as
appropriate. During periods of net loss, all common stock
equivalents are excluded from the diluted EPS calculation
because they are antidilutive. The Company had stock options
outstanding to purchase 14,995,000 shares of common stock as
of December 31, 2011.
Fair value of
financial instruments - The carrying amounts of cash,
receivables and accrued liabilities approximate fair value
due to the short-term maturity of the instruments.
Litigation
We
are not a party to any legal or administrative proceedings,
other than routine legal activities incidental to our
business that we do not believe, individually or in the
aggregate, would be likely to have a material adverse effect
on our financial condition or results of operations.
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