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Note 1: The Company and Significant Accounting Policies
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6 Months Ended |
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Jun. 30, 2011
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| Significant Accounting Policies [Text Block] |
Note
1: The Company and Significant Accounting
Policies
Organization
and Nature of Business
Pacific
Entertainment Corporation (“we”,
“us”, “our” or the
“Company”) provides music-based products which we
believe are entertaining, educational and beneficial to the
well-being of infants and young children under our Baby
Genius brand. We create, market and sell
children’s DVDs, CD music and book products in the
United States by distribution at wholesale to retail stores
and outlets. We license the use of our brands,
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 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.
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,
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 granted an exclusive
license to Battat for the marketing and distribution of a
line of toys based on the Baby Genius brand and characters in
the United States and Canada, and non-exclusive rights of
distribution in other parts of the world. This
license was terminated according to the terms of the contract
in December 2010 although we granted Battat the right to
continue to distribute the existing line of toys through late
Spring 2011. We received no royalty reporting from
Battat during the three months ended June 30, 2011.
On
January 11, 2011, the Company signed an 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.
The
Company also obtains licenses for other select brands we feel
we can market and sell through our distribution channels and
are distributing content obtained from various independent
studios and producers.
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.
Interim
Consolidated Financial Statements
The accompanying
condensed consolidated financial statements of the Company
have been prepared without audit. Certain
information and disclosures required by accounting principles
generally accepted in the United States have been condensed
or omitted. These condensed consolidated financial
statements reflect all adjustments that, in the opinion of
management, are necessary to present fairly the results of
operations of the Company for the periods
presented. The results of operations for the three
and six month periods ended June 30, 2011, are not
necessarily indicative of the results that may be expected
for any future period or the fiscal year ending December 31,
2011.
These
consolidated financial statements should be read in
conjunction with the consolidated financial statements
included in the Company’s 2010 Annual Report filed with
the OTC Markets Group Inc. on March 11, 2011 and in the
Company’s registration statement on Form 10, as
amended, filed on July 26, 2011.
Significant
Accounting Policies
Revenue
Recognition – The Company recognizes 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. Revenue from licensed
products is recognized when realized or realizable based on
royalty reporting received from licensees.
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.
Other
Estimates – The Company estimates reserves for
future returns of product based on an analysis that considers
historical returns, changes in customer demand and current
economic trends. The Company regularly reviews the
outstanding Accounts Receivable balances for each account and
monitors delinquent accounts for
collectability. 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.
Liquidity
- Historically, the Company has incurred net
losses. As of June 30, 2011, the Company had a
consolidated accumulated deficit of $7,706,313 and total
stockholders’ deficit of $859,507. At June
30, 2011, the Company had consolidated current assets of
$1,743,134, including cash of $739,232, and consolidated
current liabilities of $1,246,200, resulting in working
capital of $496,934. For the six month period
ending June 30, 2011, the Company reported a consolidated net
loss of $938,157, including stock option expense of $306,367
which has no cash expenditure requirement. The
Company had net cash used by operating activities of
$82,736. Management believes that its increasing
revenue each year over the prior year and cash generated 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.
Reclassifications
– Certain amounts in the condensed consolidated
financial statements as of December 31, 2010 have been
reclassified to conform to the presentation as of June 30,
2011.
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