Genius Products 10Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from to

COMMISSION FILE NUMBER 000-27915

GENIUS PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	33-0852923
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2230 BROADWAY

SANTA MONICA, CA 90404

(Address of principal executive offices)

(310) 453-1222

(Registrant’s telephone number)

740 LOMAS SANTA FE DRIVE, SUITE 210

SOLANA BEACH, CA 92075

(Former name, former address and former fiscal year,

if changed since last report)

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ an accelerated filer ¨ or a non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

There were 61,002,626 shares outstanding of the issuer’s Common Stock as of June 30, 2006.

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

INDEX

		PAGE
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Balance Sheets at June 30, 2006 (unaudited) and December 31, 2005 (audited)	4

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2006 (unaudited)	5

	Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2005 and 2006 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4	Controls and Procedures	28

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	28

Item 1a	Risk Factors	29

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3	Defaults Upon Senior Securities	29

Item 4	Submission of Matters to a Vote of Security Holders	29

Item 5	Other Information	29

Item 6	Exhibits	29

SIGNATURES		30

FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, among other things, our goals, plans and projections regarding our financial position, results of operations, market position, product development and business strategy. These statements may be identified by the use of words such as “will,” “may,” “estimate,” “expect,” “intend,” “plan,” “believe,” “should”, “would”, “could” or the negative of these terms and other terms of similar meaning in connection with any discussion of future operating or financial performance. All forward-looking statements are based on our current views with respect to future events, are based on assumptions and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes and results to differ materially from current expectations.

These factors include, among other things, increased competitive pressures, including the rise of emerging distribution channels, the risk that The Weinstein Company could terminate Genius Products, LLC’s exclusive distribution rights, the anticipated timing and financial performance of new DVD releases including, Scary Movie 4, Lucky Number Slevin, Pulse and Clerks II and changes in the retail DVD and entertainment industries. Also, these forward-looking statements present our estimates and assumptions only as of the date of this report. For further details and a discussion of these and other risks and uncertainties, see “Forward-Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K. Unless otherwise required by law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2005			June 30, 2006
ASSETS				(unaudited)
Current assets:
Cash and cash equivalents	$	30,597,164		$	43,489,769
Accounts receivable, net of allowance for doubtful accounts of $942,361
(June 30, 2006 - $1,238,061) and sales returns of $5,966,428 (June 30, 2006 - $19,658,690)		2,406,658			48,457,391
Inventories, net		5,567,953			18,564,106
Prepaid expenses		703,875			446,718
Notes receivable, related party		750,000			-
Total current assets		40,025,650			110,957,984

Restricted cash		-			303,353
Property and equipment, net		396,358			736,434
Film library, net of accumulated amortization of $4,027,308 and $4,850,312		19,727,179			22,926,070
Notes receivable, related party		1,712,353			1,712,353
Goodwill		14,487,917			14,487,917
Deposits and other		15,545			206,583
Total assets	$	76,365,002		$	151,330,694

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,242,560		$	7,591,524
Notes payable		5,379,296			200,000
Remittance due to Licensor		-			61,674,457
Accrued expenses		3,307,893			20,346,505
Deferred revenue		-			10,549,480
Customer deposits		189,423			189,423
Debentures payable		50,750			-
Redeemable common stock		414,471			424,121
Total current liabilities		18,584,393			100,975,510

Deferred tax liability		1,380,338			1,380,338
Deferred gain, related party		1,212,353			1,148,907
Total liabilities		21,177,084			103,504,755

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized; no shares
outstanding		-			-
Common stock, $.0001 par value; 100,000,000 shares authorized;
60,438,154 and 61,002,626 shares outstanding		6,044			6,100
Additional paid-in capital		93,919,755			96,211,014
Accumulated deficit		(38,737,881	)		(48,391,175	)
Total stockholders’ equity		55,187,918			47,825,939
Total liabilities and stockholders' equity	$	76,365,002		$	151,330,694

See accompanying notes to unaudited interim financial statements

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	Restated 2005 (Note 2)			2006			Restated 2005 (Note 2)			2006

Revenues:
Video and DVD	$	3,797,130		$	101,925,551		$	5,216,392		$	138,132,136
Theatrical		467,469			138,291			467,469			208,726
Audio		494,707			244,501			1,815,517			1,021,055
Royalties, licensing and other		429,803			53,877			454,921			426,938

Gross revenues		5,189,109			102,362,220			7,954,299			139,788,855
Sales returns, discounts and allowances		(1,276,659	)		(27,349,625	)		(1,485,963	)		(36,192,933	)

Net revenues		3,912,450			75,012,595			6,468,336			103,595,922

Costs and expenses
Cost of revenues:
Video and DVD		2,751,420			59,518,611			4,383,583			81,563,243
Theatrical		1,155,663			-			1,155,663			103,705
Audio		699,600			181,123			1,490,400			776,044
Amortization of production masters and film library		1,036,801			428,623			1,209,471			739,712
Warehouse expense and other		-			78,844			71,168			205,003

Total cost of revenues		5,643,484			60,207,201			8,310,285			83,387,707

Gross profit (loss)		(1,731,034	)		14,805,394			(1,841,949	)		20,208,215

Operating expenses (income):
Product development		216,839			504,471			444,153			1,251,348
Sales and marketing		631,194			11,025,945			1,077,685			16,548,664
General and administrative		2,632,162			7,400,260			4,073,125			12,295,355
Gain on sale, related party		-			(23,179	)		-			(63,446	)

Total operating expenses		3,480,195			18,907,497			5,594,963			30,031,921

Loss from operations		(5,211,229	)		(4,102,103	)		(7,436,912	)		(9,823,706	)

Interest expense		(76,948	)		(8,315	)		(82,788	)		(163,976	)
Interest income and other		-			237,887			-			441,388

Loss before provision for income taxes		(5,288,177	)		(3,872,531	)		(7,519,700	)		(9,546,294	)

Provision for income taxes		8,175			107,000			8,975			107,000

Net loss	$	(5,296,352	)	$	(3,979,531	)	$	(7,528,675	)	$	(9,653,294	)

Basic and diluted net loss per share	$	(0.13	)	$	(0.07	)	$	(0.22	)	$	(0.16	)

Basic and diluted weighted average shares		41,754,657			60,797,241			34,915,329			60,636,798

See accompanying notes to unaudited interim financial statements

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June,
	2005 Restated (Note 2)			2006

Cash flows from operating activities:
Net loss	$	(7,528,675	)	$	(9,653,294	)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization		248,047			105,770
Amortization of production masters and film library		1,145,924			823,003
Change in allowance for doubtful accounts and provision for returns		(466,406	)		13,987,962
Change in provision for obsolete inventory		-			(680,774	)
Common stock issued for services		82,500			19,100
Amortization of warrants issued for services		149,295			-
Stock compensation expense		-			1,758,666
Debt discounts		-			120,704
Interest expense on redeemable common stock		9,650			9,650
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		2,374,880			(60,038,695	)
(Increase) decrease in inventories		(989,357	)		(12,315,379	)
(Increase) decrease in prepaid expenses, notes receivable and deposits		(462,276	)		816,119
(Increase) decrease in development film library		(2,420,745	)		(4,021,894	)
Increase (decrease) in accounts payable		(4,342,106	)		(1,651,036	)
Increase (decrease) in accrued expenses and other		19,914			17,038,612
Increase (decrease) in deferred revenue		-			10,549,480
Increase (decrease) in remittance to licensor		-			61,674,457
Increase (decrease) in debentures payable		-			(50,750	)
Increase (decrease) in deferred gain, related party		-			(63,446	)
Net cash provided by (used in) operating activities		(12,179,355	)		18,428,255

Cash flows from investing activities:
AVM cash, net of expenses paid in cash		(300,000	)		-
Restricted cash		-			(303,353	)
Purchase of property and equipment		(50,492	)		(445,847	)
Net cash used in investing activities		(350,492	)		(749,200	)

Cash flows from financing activities:
Payments on notes payable		-			(5,300,000	)
Payments on short-term debt		(2,349,219	)		-
Payments of offering costs		(834,391	)		-
Proceeds from exercise of options		91,140			355,250
Proceeds from exercise of warrants		707,560			158,300
Proceeds from issuance of common stock		15,313,423			-
Net cash provided by (used in) financing activities		12,928,513			(4,786,450	)

Net increase (decrease) in cash and equivalents		398,666			12,892,605
Cash at beginning of period		1,223,881			30,597,164

Cash at end of period	$	1,622,547		$	43,489,769

Supplemental disclosure of cash flow information
Warrants issued for offering costs	$	1,014,986		$	-
Issuance of common stock for offering costs	$	350,000		$	-
Interest paid	$	1,015		$	74,060
Taxes paid	$	800		$	-

See accompanying notes to unaudited interim financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. NATURE OF BUSINESS. Genius Products, Inc. (OTC BB:GNPI), ("we", "our", or the "Company") along with The Weinstein Company, jointly own Genius Products, LLC, a leading independent home-entertainment distribution company that produces, licenses, and distributes an expanding library of motion pictures, television programming, family, lifestyle and trend entertainment on DVD and other emerging platforms through its network of retailers throughout the U.S. Genius handles the distribution, marketing and sales for such brands as Asia Extreme(TM), Baby Genius®, Dimension Films, Dragon Dynasty(TM), ESPN®, IFC®, NBC News®, Sundance Channel Home Entertainment®, Wellspring(TM) and The Weinstein Company®.

THE WEINSTEIN COMPANY TRANSACTION. On July 21, 2006, we completed our pending strategic transaction with The Weinstein Company LLC (“TWC”) and formed a venture named Genius Products, LLC (the “Distributor”) to exploit the exclusive U.S. home video distribution rights to feature film and direct-to-video releases owned or controlled by TWC (the “Closing”). The transaction closed following a Special Meeting of Stockholders of the Company to approve the transaction and related matters. Under the terms of the transaction, Genius Products, Inc. contributed substantially all of its assets, employees and existing businesses to Genius Products, LLC, which holds the exclusive U.S. home video distribution rights for filmed entertainment and direct-to-video product of TWC. The new venture also operates the existing businesses of Genius Products, Inc., that involve the marketing, sales and distribution for other major branded entertainment content, including ESPN, NBC News, Sundance Home Entertainment, Asia Extreme, Dragon Dynasty and IFC. Genius Products, LLC is owned 70% by TWC and 30% by Genius Products, Inc. In addition, as part of the transaction with TWC, Genius Products, Inc. added to its Board of Directors two TWC executives, Larry Madden, Executive Vice President and Chief Financial Officer, and Irwin Reiter, Executive Vice President of Accounting and Financial Reporting.

The Company’s interest in the Distributor consists of Class G Units representing a 30% membership interest in the Distributor, and the interest of TWC or its owners consist of Class W Units representing a 70% membership interest in the Distributor. The 70% interest in the Distributor held by TWC or its owners is redeemable, at their option at any time from one year after the Closing, for up to 70% of the outstanding common stock of Genius Products, or with their approval, cash. As further discussed in Note 8, commencing on December 5, 2005, the date we entered into a Master Contribution Agreement (the “Agreement”) in connection with the formation of a new venture to exploit the exclusive U.S. home video distribution rights to feature film and direct-to-video releases owned or controlled by TWC, through the Closing, we operated under an interim distribution agreement with TWC and recorded the results from titles we first released for TWC in March 2006 in our financial statements. Refer to Note 14 for additional discussion regarding this transaction.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements as of and for the three and six months ended June 30, 2006 and 2005 have been prepared by the Company and are unaudited. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements include all adjustments of a normal recurring nature that are necessary for a fair presentation of the results of operations and cash flows for the interim periods presented. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2005. Amounts related to disclosures of December 31, 2005 balances within these interim statements were derived from the aforementioned Form 10-K. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year.

CONCENTRATIONS OF CREDIT RISK. For the three month period ended June 30, 2006, Wal-Mart accounted for 44.0% of net revenues. At June 30, 2006 this customer comprised 23.7% of the accounts receivable before allowances. For the three month period ended June 30, 2005, Dollar Tree accounted for 11% of net revenues. For the three month period ended June 30, 2006, this customer accounted for less than 1% of net revenues. At June 30, 2005, this customer comprised 11.6% of the accounts receivable before allowances.

For the six month period ended June 30, 2006, Wal-Mart and Blockbuster accounted for 39.2% and 10.2%, respectively, of net revenues. For the six month period ended June 30, 2005, Anderson Merchandisers accounted for 13% of net revenues. For the six month period ended June 30, 2006, this customer accounted for less than 1% of net revenues.

Financial instruments that potentially subject us to concentration of credit risk consist primarily of temporary cash investments and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with investment grade credit ratings. We provide credit in the normal course of business to customers located throughout the United States. We perform ongoing credit evaluations of our customers, generally do not require collateral and maintain allowances for potential credit losses which, when realized, have been within the range of management’s expectations.

STOCK-BASED COMPENSATION. In December 2004, the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards No. 123 (FAS 123R), “Share-Based Payment,” which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. The accounting provisions of FAS 123R became effective for the Company beginning on January 1, 2006.

Under FAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. The Company adopted the provisions of FAS 123R using a modified prospective application. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Share-based compensation expense recognized under SFAS 123R includes share-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R as well as share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123. In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the share-based compensation impact of FAS 123R.

INCOME TAXES. For the three and six months ended June 30, 2006, Company recognized a tax benefit of approximately $0.9 million and $3.7 million, respectively, which was fully offset by a valuation allowance. Except for $107,000 of alternative minimum taxes, the Company did not record any tax expense after considering the full year expected results and the likelihood of recoverability of deferred tax assets. Management will continue to monitor the future recoverability of the tax assets which have a full valuation allowance as of June 30, 2006.

RECLASSIFICATIONS. Certain prior period amounts have been reclassified to conform to current period presentation.

REVENUE RECOGNITION. Revenue from the sale or licensing of films is recognized upon meeting all recognition requirements of SOP 00-2. Revenues are recorded upon the receipt of goods by the customer for titles that do not have a “street date” (when it is available for sale by the customer). If a title has a street date, we recognize the initial shipment as revenue on that date and all subsequent shipments after street date are recognized as revenue upon the receipt of goods by the customer. Under revenue sharing arrangements, rental revenue is recognized on or after the street date and when we are entitled to receipts and such receipts are determinable. Costs of sales and an allowance for returns are recorded at the time of revenue recognition. The allowance for returns calculation is based upon an analysis of historical customer and product returns performance as well as current customer inventory data as available. Updates to the returns calculation are performed quarterly. Revenues from royalties are recognized when received. Revenues from licensing are recognized when the title is available to the licensee. Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met. Long-term, non-interest bearing receivables are discounted to present value.

ACCOUNTING CHANGES. In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), an amendment to Accounting Principles Bulletin Opinion No. 20, “Accounting Changes” (“APB No. 20”), and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. Though SFAS No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors, SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. We implemented SFAS No. 154 in our fiscal year beginning January 1, 2006. The adoption of SFAS No. 154 did not have a material impact on our financial position of results of operations for the quarter ended June 30, 2006.

HYBRID FINANCIAL INSTRUMENTS. In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. We are currently evaluating the impact of this new standard but believe that it will not have a material impact on our financial position, results of operations, or cash flows. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.

UNCERTAINTY IN INCOME TAXES. In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the application of FIN 48 will have on its results of operations and financial condition.

NOTE 2: RESTATEMENT OF QUARTER ENDED JUNE 30, 2005

The Company determined that it was necessary to restate our unaudited consolidated financial statements and other financial information at and for the quarter ended, June 30, 2005. The restatement relates to the following correction of errors:

1. The Company revised royalty revenue to increase the amount recognized during the three months ended June 30, 2005. The total adjustment required to increase revenue to its proper amount was $90,000 for the three months ended June 30, 2005. On May 2, 2005 the Company completed a sale of a title in its film library to a third-party licensee. At the time of the sale the rights to this title were not available and, therefore, the Company recorded the sale as unearned revenue. When the rights to these titles became available during the three months ended June 30, 2005, the Company did not recognize the revenue from the sale. The correct accounting treatment is to recognize the revenue when the rights become available.

2. The Company revised royalty expense to increase the amount recognized during the three month period ended June 30. The total adjustments required to increase royalty expense to its proper amount was $416,148 for the three month period ended June 30, 2005. This adjustment was necessary because the Company had recorded this amount as an asset as of June 30, 2005. The correct accounting treatment is to record this amount as royalties expense during the three month period ended June 30, 2005.

3. The Company revised production cost amortization expense to increase the amount recognized during the three month period ended June 30, 2005. The total adjustment required to increase production costs amortization expense to its proper amount was $63,547 for the three month period ended June 30, 2005. This adjustment was necessary because the Company had recorded this amount as an asset as of June 30, 2005 when the amount should have been expensed under SOP 00-2. The correct accounting treatment is to record this amount as expense during the three month period ended June 30, 2005.

The effects of the restatement on net revenues, cost of revenues, gross profit, net loss, basic and diluted loss per common share, production masters, film library, accrued expenses, and stockholders’ equity as of and for the three and six months ended June 30, 2005 are as follows:

	Three months ended June 30, 2005									Six months ended June 30, 2005
	As Originally Reported			Restatement Adjustments			As Restated			As Originally Reported			Restatement Adjustments			As Restated

Net revenues	$	3,822,450		$	90,000		$	3,912,450		$	6,378,336		$	90,000		$	6,468,336
Cost of revenues		5,163,789			479,695			5,643,484			7,830,590			479,695			8,310,285
Gross profit		(1,341,339	)		(389,695	)		(1,731,034	)		(1,452,254	)		(389,695	)		(1,841,949	)
Net loss	$	(4,906,657	)	$	(389,695	)	$	(5,296,352	)	$	(7,138,980	)	$	(389,695	)	$	(7,528,675	)

Loss per common share:
Basic and diluted	$	(0.12	)	$	(0.01	)	$	(0.13	)	$	(0.17	)	$	(0.01	)	$	(0.18	)

Production masters	$	3,456,267		$	(63,547	)	$	3,392,720		$	3,456,267		$	(63,547	)	$	3,392,720
Film library		16,095,700			(416,148	)		15,679,552			16,095,700			(416,148	)		15,679,552
Total assets		46,981,069			(479,695	)		46,501,374			46,981,069			(479,695	)		46,501,374
Accrued expenses		1,595,815			(90,000	)		1,505,815			1,595,815			(90,000	)		1,505,815
Total current liabilities		15,255,350			(90,000	)		15,165,350			15,255,350			(90,000	)		15,165,350
Stockholders' equity	$	31,725,719		$	(389,695	)	$	31,336,024		$	31,725,719		$	(389,695	)	$	31,336,024

NOTE 3. RESTRICTED CASH

Restricted cash of $0.3 million at June 30, 2006 represents cash invested in certificates of deposit to collateralize a letter of credit issued to a landlord for an office lease.

NOTE 4. INVENTORY

Inventories consist of raw materials and finished goods and are valued at the lower of cost or market.

	December 31, 2005			June 30, 2006

Raw materials	$	71,085		$	106,670
Finished goods		7,798,303			20,078,097

		7,869,388			20,184,767
Allowance for obsolescence		(2,301,435	)		(1,620,661	)

Inventories, net	$	5,567,953		$	18,564,106

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment purchases are recorded at cost and are depreciated and amortized over the estimated useful lives of the assets (three to seven years generally) using the straight-line method.

	December 31, 2005			June 30, 2006			Useful lives

Computers and equipment	$	711,646		$	1,095,827			3-5 years
Furniture and fixtures		35,445			37,900			3-7 years
Leasehold improvements		22,365			22,365			Lesser of lease term or useful life
Tools and dies		-			54,141			3 years

		769,456			1,210,233
Accumulated depreciation and amortization		(373,098	)		(473,799	)

Property and equipment, net	$	396,358		$	736,434

Depreciation expense for the six months ended June 30, 2006 and June 30, 2005 was $105,770 and $80,776, respectively.

NOTE 6. INVESTMENT IN FILMS AND VIDEO

Following are the components of our Production Masters and Film Library balances:

	December 31, 2005		June 30, 2006

Titles released, net of accumulated amortization	$	4,573,191	$	7,784,063
Acquired library, net of accumulated amortization		14,551,096		13,203,004
Titles acquired and not released		602,892		1,939,003
	$	19,727,179	$	22,926,070

We expect approximately 49.9% of titles released, net of accumulated amortization and excluding acquired library, will be amortized during the three year period ended December 31, 2008. The Company expects approximately 80% of titles released, net of accumulated amortization and excluding acquired library, will be amortized during the seven year period ended December 31, 2012 as the library is comprised primarily of mature titles which provide a longer, steadier stream of revenue. The film library, including titles acquired and not released of $15.1 million, net of accumulated amortization at June 30, 2006 is composed of the Wellspring library that was acquired as part of the acquisition of American Vantage Media (“AVMC”) , a subsidiary of American Vantage Companies (“AVC”) and Wellspring Media, Inc. on March 21, 2005 and additional titles licensed since the acquisition. The film library is amortized over its expected revenue stream for a period of ten years from the acquisition date. The amortization period on the library which includes titles acquired and not released as of June 30, 2006 is approximately nine years on unamortized costs of $15.1 million. We estimate total amortization expense for our film library for the remainder of 2006 to be $3.4 million which is based upon revenue estimates for our film library for the remainder of the year.

We expect that we will pay accrued participation liabilities of $5.4 million during the twelve month period ending December 31, 2006.

NOTE 7. NOTES PAYABLE AND CONVERTIBLE DEBENTURES

On March 21, 2005, we completed our acquisition of American Vantage Media (“AVMC”), a subsidiary of American Vantage Companies (“AVC”). As part of this acquisition, we assumed notes payable to certain individuals and entities with a total principal balance of $4.0 million, bearing interest at 7%, payable quarterly, and a maturity date of February 3, 2006. We repaid $3.8 million of these notes on February 7, 2006 and withheld payment on the balance as part of our contractual right to reserve for certain potential liabilities associated with the acquisition.

On October 4, 2005, we entered into a Note and Warrant Purchase agreement with a group of investors (collectively, the “Investors”). Under the Purchase Agreement, the Investors loaned a total of $4.0 million to us in exchange for (i) promissory notes in favor of the Investors (the “Notes”) with a total principal balance of $4.0 million and (ii) five-year warrants to purchase a total of 280,000 shares of our common stock, par value $0.0001 per share, with an exercise price per share equal to $1.88 (the last reported sales price of our common stock, as reported by the Over the Counter Bulletin Board, on the initial closing date of October 5, 2005). The discount allocated to the warrants was $0.3 million, calculated using the Black-Scholes Model, with the following weighted average assumptions: expected volatility 60%; risk-free interest rate of 4.2%; expected life of five years and no dividends payable. The fair value of the warrants were classified as equity in 2005 in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The discount is amortized over the life of the Note. As of December 31, 2005 the amortized discount was $0.2 million. On December 5, 2005, we repaid $2.5 million of the October 4, 2005 Notes with proceeds from our December 2005 private equity financing, and on March 6, 2006 we repaid the remaining $1.5 million.

In 2001, we issued a convertible debenture for $50,750 to a shareholder in place of redeemable common stock. The debenture bears interest at 8%, was due March 31, 2002, and was convertible into common shares at $.50 per share; however, the conversion feature of this debenture has expired. Interest on the debenture was accrued through December 31, 2005. There was no beneficial conversion interest related to this debenture. We repaid the balance of the debenture in February 2006.

NOTE 8. REMITTANCE TO LICENSOR AND DEFERRED REVENUE

Under the interim agreement with TWC as discussed in Note 1, we record as net revenues the full amount we receive from sales of home video products (net of reserves and allowances), deduct our distribution fee, costs of goods sold (including manufacturing expenses) and certain marketing expenses, and remit the balance to TWC. The Remittance to licensor of $61.7 million at June 30, 2006 primarily related to amounts owed to TWC from sales of TWC’s titles, Wolf Creek, Hoodwinked, Doogal, Mrs. Henderson Presents, and Transamerica that we released on DVD during the quarter ended June 30, 2006.

The increase in deferred revenue to $11.3 million at June 30, 2006 primarily related to invoices for shipments of The Matador and The Libertine which were not available for retail sale until a date subsequent to June 30, 2006. In accordance with our revenue recognition policy, if a title has a “street date” (the date the product is available for retail sale), we recognize the initial shipment as revenue on that date. All subsequent shipments after street date are recognized as revenue upon the receipt of goods by the customer. Accordingly, revenue associated with these shipments were deferred until the “street date”.

NOTE 9. ACCRUED EXPENSES

The components of accrued expenses at December 31, 2005 and June 30, 2006 were:

	December 31, 2005		June 30, 2006
Accrued payroll and related items	$	483,697	$	629,858
Accrued commissions		373,510		122,528
Unearned revenue		262,742		38,400
Accrued severance		308,591		38,670
Tax payable		74,637		188,112
Other accrued expense ¹		1,804,716		19,328,937

Total accrued expenses	$	3,307,893	$	20,346,505

¹ Other accrued expense primarily relates to accrued purchases for inventory related to The Weinstein Company titles and other items as of June 30, 2006.

NOTE 10. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases certain facilities and computer equipment under non-cancelable operating leases. Rental expense for the three months ended June 30, 2006 and 2005 was $326,898 and $132,553, respectively. Rental expense for the six months ended June 30, 2006 and 2005 was $566,499 and $167,348, respectively.

As of June 30, 2006, the future minimum annual rental commitments required under existing non-cancelable operating leases are as follows:

	Remainder of 2006		2007		2008		2009		2010		Thereafter		Total

Lease obligations	$	536,310	$	1,092,459	$	976,302	$	728,507	$	734,880	$	185,068	$	4,253,526

Except as described below, we are not a party to any legal or administrative proceedings, other than routine litigation 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.

WELLSPRING MATTER

On March 21, 2005, we completed our acquisition of American Vantage Media Corporation (“AVMC”) and its subsidiary, Wellspring Media, Inc. (“Wellspring”). On or about March 14, 2005, a complaint was filed in U.S. Bankruptcy Court for the District of Delaware against Wellspring requesting a judgment in excess of $3,000,000. The complaint was filed by the Chapter 7 Trustee of the Winstar Communications, Inc. Estate (“Winstar”). The details of this matter are discussed below.

In September 2001 (prior to the acquisition of Wellspring by American Vantage Media), Winstar (or its predecessor) sold a subsidiary, Winstar TV & Video (“TV & Video”), to Wellspring in exchange for $2,000,000 in cash and a promissory note in the amount of $3,000,000. The merger agreement provided that in the event the working capital of TV & Video was determined to be less than $3,000,000 at the closing of the merger, the sole remedy of Wellspring was a reduction in the principal amount of the promissory note by the difference between $3,000,000 and the actual amount of the working capital. The accountants for Wellspring determined that at the time of the closing of the merger, TV & Video had a working capital deficit. Based upon this determination and the provisions of the merger agreement, Wellspring determined that the amount due under the promissory note should be reduced to zero, and as a result no payment was made. On November 30, 2001, Wellspring informed Winstar of its determination regarding the working capital deficit, and Winstar subsequently advised Wellspring that it disputed the determination. Since 2001, Wellspring and Winstar have engaged in discussions in an effort to settle the dispute over the working capital calculation, but no settlement has been reached.

We believe that, if an adverse judgment against Wellspring occurs or an adverse settlement is reached, our subsidiaries, Wellspring and American Vantage Media, will be entitled to full indemnification against any such losses by the initial owners of Wellspring (prior to AVMC), and we will be entitled to indemnification by American Vantage Companies (“AVC”), the prior owner of AVMC. However, if the outcome of this litigation is adverse to us, and we are required to pay significant monetary damages that are not indemnified by others, our financial condition and results of operations will likely be materially and adversely affected.

FALCON PICTURE GROUP MATTER

In October 2005, we commenced litigation against Falcon Picture Group, LLC (“Falcon”) in the Superior Court of San Diego County, Case No. GIN047884 seeking damages of $975,000 arising out of Falcon’s breach of the license agreement. In October 2005, Falcon commenced litigation against Genius in the Circuit Court of Cook County, Illinois, Case No. 05H16850 (the “Illinois Proceeding”), based upon allegations, among other things, that Genius breached the terms of a license agreement by refusing to pay certain royalties to which Falcon supposedly was entitled. Falcon seeks a damages award of approximately $83,332 subject to proof at trial. Falcon further alleges that as a result of Genius’ purported default under the license agreement, Falcon is entitled to judgment declaring the license agreement to have been lawfully terminated. Genius has dismissed its San Diego action against Falcon in favor of refiling the same action against Falcon and its owner, Carl Amari, as a counterclaim in the Illinois Action. The counterclaim was filed in the Illinois Action on July 12, 2006. Genius plans to vigorously defend against the allegations thereof and seek recovery of damages.

NOTE 11. STOCKHOLDERS’ EQUITY

COMMON STOCK

On March 2, 2005, we changed our state of incorporation from the state of Nevada to the state of Delaware and changed the par value of our common stock from $0.001 per share to $0.0001 per share. All transactions have been restated to reflect this change.

During the six months ended June 30, 2005, we issued a total of 18,037,925 common shares and returned no common shares to treasury. We issued 6,518,987 shares for proceeds of $10.3 million in conjunction with a private placement offering and issued 7.0 million shares in conjunction with the acquisition of American Vantage Media Corporation. We issued 712,338 shares at $2.16 to $2.27 per share for services rendered in connection with the private placement offering.

During the six months ended June 30, 2005, we issued 724,000 shares for the exercise of warrants at $.63 to $1.00 per share and 82,600 shares for the exercise of options at $.80 to $1.50 per share.

During the six months ended June 30, 2005, we issued a total of 3,549,076 warrants to purchase common stock at $1.58 to $2.78 per share, of which 2,086,076 were issued in conjunction with the private placement offering, and 1,463,000 were issued in conjunction with the transaction to acquire American Vantage Media Corporation, of which, 63,000 warrants were issued as part of the offering costs.

During the six months ended June 30, 2005, we committed to issue shares totaling $82,500 related to recruiting expenses incurred during the six months ended June 30, 2005.

During the six months ended June 30, 2006, we issued 209,472 common shares related to the exercise of warrants for proceeds of $158,301. Additionally, during the six months ended June 30, 2006, we issued 345,000 common shares related to the exercise of options for proceeds of $355,251.

During the six months ended June 30, 2006, we issued 10,000 common shares for services rendered.

WARRANTS

A summary of warrant activity follows:

	Warrants Outstanding			Weighted Average Exercise Price

December 31, 2005		16,313,190		$	2.15
Granted		-		$	-
Exercised		(209,472	)	$	0.84
Canceled		-		$	-

Total		16,103,718		$	2.17

Warrants exercisable, June 30, 2006		15,823,718		$	2.17

The following table summarizes significant ranges of outstanding and exercisable warrants as of June 30, 2006

	Warrants outstanding		Average remaining life		Weighted average exercise price warrants outstanding		Warrants exercisable		Weighted average exercise price warrants exercisable

Under $1.50		3,518,868		1.5	$	1.17		3,518,868	$	1.17
$1.50 - $1.99		1,092,673		9.1		1.68		812,673		1.62
$2.00 - $2.99		9,842,177		4.4		2.44		9,842,177		2.44
$3.00 - $3.99		1,650,000		2.4		3.00		1,650,000		3.00

		16,103,718		2.9	$	2.17		15,823,718	$	2.17

PRIVATE PLACEMENTS

In May 2005, we entered into a securities purchase agreement with certain institutional investors related to the private placement of 3,000,000 shares of our common stock and five-year warrants to purchase 270,000 shares of our common stock at an exercise price of $2.56 per share. The transaction closed on May 20, 2005, and we realized gross proceeds of $5.25 million from the financing before deducting commissions and other expenses. The fair value of the warrants were classified as equity in 2005 in accordance with Emerging Issues Task Force No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”

On December 5, 2005, we entered into a securities purchase agreement with certain institutional investors related to the private placement of 16,000,000 shares of our common stock, par value $0.0001 per share, and five-year warrants to purchase 4,800,000 shares of common stock with an exercise price of $2.40 per share. The transaction closed on December 6, 2005 and we realized gross proceeds of $32 million from the financing, before deducting commissions and other expenses. The proceeds from the offering will provide working capital to fund new ventures as well as content acquisitions. The fair value of the warrants were classified as equity in 2005 in accordance with Emerging Issues Task Force No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”

NOTE 12. STOCK-BASED COMPENSATION

We use the Black-Scholes method of valuation for share-based option awards. In valuing the stock options, the Black-Scholes model incorporates assumptions about stock volatility, expected term of stock options, and risk free interest rates. The valuation is reduced by an estimate of stock option forfeitures.

We estimate the fair value of our stock option plans using the Black-Scholes option pricing model (the “Option Model”). The Option Model requires the use of subjective and complex assumptions, including the option’s expected term and the estimated future price volatility of the underlying stock, which estimates the fair value of the share-based awards. Our estimate of expected term in 2006 was determined based on the weighted average period of time that options granted are expected to be outstanding considering current vesting schedules. Beginning in 2006, the expected volatility assumption used in the Option Model changed from being based on historical volatility to implied volatility based on traded options on our stock in accordance with guidance provided in SFAS 123R and SAB 107. The risk-free interest rate used in the Option Model is based on the yield of U.S. Treasuries with a maturity closest to the expected term of our stock options.

Effective July 21, 2006, the stockholders voted to approve the amendment and restatement of our 2004 Stock Incentive Plan to (i) increase the number of shares of common stock available for issuance under the plan from 7,500,000 shares to 13,500,000 shares, provided that the proposed transaction with The Weinstein Company is consummated, and (ii) prohibit option repricings under the Plan without receipt of stockholder approval for such repricings.

We have adopted several stock option plans, all of which have been approved by our shareholders, that authorize the granting of options to purchase our common shares subject to certain conditions. At June 30, 2006, we had reserved 15.8 million of our common shares for issuance of share-based compensation awards under our stock option plans. At June 30, 2006, we have granted 6.9 million share-based compensation awards outside of our stock option plan. Options are granted at the fair value of the shares underlying the options at the date of the grant and generally become exercisable over periods ranging from three to five years and expire in ten years.

We issued 3,804,929 options during the first half of 2006. The amount of share-based compensation expense recognized in the three months ended June 30, 2006 and six months ended June 30, 2006 is based on options issued prior to January 1, 2006 and issued during the first six months of 2006, and ultimately expected to vest, and it has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Total share-based compensation expense recognized for the three months and six months ended June 30, 2006 was $0.7 million and $1.8 million, respectively. For the three and six months ended June 30, 2006, no income tax benefit was recognized in the statement of earnings (loss) for share-based compensation arrangements. Management assessed the likelihood that deferred tax assets realization relating to future tax deductions from share-based compensation will be recovered from future taxable income and determined that a 100% valuation allowance was required due to uncertainty as to the recoverability of these items.

During the six months ended June 30, 2006 and 2005, we received proceeds of $355,250 and $83,580, respectively, related to the exercise of options.

We estimated share-based compensation expense using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended	Six Months Ended
	June 30, 2006	June 30, 2006

Risk free interest rate	4.3%	4.4%
Expected dividend yield	-	-
Expected volatility	69%	70%
Expected life (in years)	3.1	3.0

A summary of the changes in our stock option plan during the three months ended June 30, 2006 is presented below:

	Shares			Weighted Average Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value

December 31, 2005		21,400,146		$	1.81
Granted		3,804,929		$	1.87
Exercised		(345,000	)	$	1.03
Canceled		(991,582	)	$	2.21

Outstanding at June 30, 2006		23,868,493		$	1.81		6.9	$	4,704,157

Vested and expected to vest at June 30, 2006		23,868,493		$	1.81		6.9	$	4,704,157

Options excerciseable, June 30, 2006		12,750,161		$	1.81		6.0	$	4,179,514

Pro Forma Information Under SFAS 123 for Periods Prior to Fiscal 2006

Prior to January 1, 2006, we accounted for stock options for our plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Prior to the implementation of FAS 123R, stock-based employee compensation expense was not generally reflected in net income, as all options granted under our plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS 123R to stock-based employee compensation for the three and six months ended June 30, 2005:

	(Restated) Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005

Net loss as reported	$	(5,296,352	)	$	(7,138,981	)
Compensation cost at fair value		(145,492	)		(322,012	)

Pro forma net loss	$	(5,441,844	)	$	(7,460,993	)

Basic and diluted net loss per share
As reported	$	(0.12	)	$	(0.20	)

Pro forma	$	(0.13	)	$	(0.22	)

The pro forma compensation cost recognized for the grant date fair value of the stock options granted during the three and six months ended June 30, 2005 was estimated using the Black-Scholes model with the following weighted-average assumptions:

	Three Months Ended	Six Months Ended
	June 30, 2005	June 30, 2005

Risk free interest rate	3.7%	3.7%
Expected dividend yield	-	-
Expected volatility	60%	60%
Expected life (in years)	1 to 10 years	1 to 10 years

NOTE 13. INCOME TAXES

For the three and six months ended June 30, 2006, Company recognized a tax benefit of approximately $0.9 million and $3.7 million, respectively, which was fully offset by a valuation allowance. Except for $107,000 of alternative minimum taxes, the Company did not record any tax expense after considering the full year expected results and the likelihood of recoverability of deferred tax assets. Management will continue to monitor the future recoverability of the tax assets which have a full valuation allowance as of June 30, 2006.

Significant components of the provision for income taxes for the six months ended June 30, 2006 are as follows:

Significant components of the provision for income taxes for the six months ended June 30, 2006 is as follows:

	June 30, 2006
Current Provision
Federal	$	80,000
California		27,000

Deferred Provision
Federal	$	0
California		0

Provision for Income Taxes	$	107,000

A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate to our effective income tax rate is as follows:

	June 30, 2006
Income tax computed at federal statutory tax rate		34.00%
State taxes, net of federal benefit		5.82%
Valuation allowance		-39.68%
Other		-0.14%

		0%

Significant components of our deferred tax assets (liabilities) at December 31, 2005 and June 30, 2006 consisted of the following:

	December 31, 2005			June 30, 2006
Net Operating Losses	$	13,886,000		$	11,928,000
Allowance accounts		404,000			722,000
State deferred		(401,000	)		(735,000	)
Other reserves		4,559,000			9,796,000
Accrued vacation		60,000			60,000
Deferred compensation cost		1,067,000			1,067,000
Depreciation		25,000			(2,500	)
Wellspring deferred tax liability		(1,380,000	)		(1,380,000	)
Stock Options		0			719,000

Net deferred tax assets	$	18,220,000		$	22,174,500
Less valuation allowance		(19,600,000	)		(23,554,500	)

Net deferred tax asset (liability)	$	(1,380,000	)	$	(1,380,000	)

As of June 30, 2006, we had total net operating loss carry-forwards for federal and state income tax purposes of $29,764,000 and $20,459,000 respectively which start expiring in 2012 through 2026. Included in our total net operating loss carryover, is approximately $12,900,000 of net operating losses we inherited as a result of the American Vantage Media (“AVMC”), a subsidiary of American Vantage Companies (“AVC”), and Wellspring Media, Inc. acquisition. The utilization of net operating loss carry-forwards may be limited due to the ownership change under the provisions of Internal Revenue Code Section 382 and similar state provisions.

The entire deferred income tax assets have been offset by a valuation allowance since management does not believe the recoverability of the deferred income tax assets during the next year is more likely than not. Accordingly, we have not recognized a deferred income tax benefit as of June 30, 2006 in these financial statements.

Pursuant to Internal Revenue Code Sec. 382 and 383, certain changes in the ownership structure (common stock issuances in the case of Genius Products, Inc.) may partially or fully limit future use of net operating losses and tax credits available to offset future taxable income and future tax liabilities, respectively. The Company’s net operating loss carryforwards are subject to substantial annual limitations due to a change in ownership structure occurring prior to June 30, 2006.

NOTE 14. LOSS PER SHARE

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if options and warrants were exercised or converted into common stock. Shares attributable to the exercise of outstanding options and warrants that are anti-dilutive are excluded from the calculation of diluted loss per share.

For the three and six months ended June 30, 2006, we excluded from the computation of diluted earnings per share stock options and warrants to purchase 39,972,211 and 39,644,864 shares, respectively. For the three and six months ended June 30, 2005, we excluded from the computation of diluted earnings per share stock options and warrants to purchase 25,489,454 and 25,446,248, respectively. All potential shares were antidilutive and excluded from loss per share calculations.

NOTE 15. SUBSEQUENT EVENTS

Distribution Agreement with ESPN

On July 7, 2006, we entered into an Output Distribution Agreement (the “Output Agreement”) with ESPN Enterprises, Inc. (“ESPN”) whereby ESPN granted to us, among other things and subject to the terms and conditions set forth in the Output Agreement, the rights to be the exclusive videogram distributor of all audiovisual productions released by ESPN during the term of the Output Agreement in the United States and Canada.

The initial term of the Output Agreement commences on July 7, 2006 and continues, subject to the terms of the Output Agreement, through and including December 31, 2011 (the “Term”). Commencing immediately at the end of the Term, Genius shall have an additional six month period as a non-exclusive sell-off period for videograms, during which time Genius Products will have the right to continue to market, distribute and account for all videograms remaining in Genius Products’ inventory at the end of the Term. Subject to the terms of the Output Agreement, Genius Products shall pay ESPN a minimum guarantee of $4,500,000 in each of five Sales Periods (as defined in the Output Agreement) during the Term. Genius Products will receive a distribution fee which shall be computed in accordance with the terms of the Output Agreement.

Completion of Acquisition or Disposition of Assets

As previously disclosed on a Current Report on Form 8-K filed by the Company on December 9, 2005, the Company, The Weinstein Company LLC, a Delaware limited liability company (“TWC”), and The Weinstein Company Holdings LLC, a Delaware limited liability company (such company or another company designated by TWC pursuant to the Agreement, the “Distributor”), entered into a Master Contribution Agreement on December 5, 2005 (the “Agreement”) in connection with the formation of a new venture to exploit the exclusive U.S. home video distribution rights to feature film and direct-to-video releases owned or controlled by TWC (the “Transaction”).

The Company’s stockholders voted to approve the Transaction at a Special Meeting of Stockholders held on July 21, 2006 and the Transaction closed on such date. Under the terms of the Agreement, at the closing of the Transaction (“Closing”), the Company contributed to the Distributor substantially all of its assets, employees and existing businesses and certain liabilities, and the Distributor now holds a distribution agreement from TWC entitling it to distribute in the United States, and receive a distribution fee on, all filmed entertainment for which TWC owns or controls U.S. home video distribution rights. The Distributor is 70% owned by TWC or its owners and 30% owned by the Company. The Company’s interest in the Distributor consists of Class G Units representing a 30% membership interest in the Distributor, and the interest of TWC or its owners consists of Class W Units representing a 70% membership interest in the Distributor. The 70% interest in the Distributor held by TWC or its owners is redeemable, at their option at any time from one year after the Closing, for up to 70% of the outstanding common stock of Genius Products, or with their approval, cash. Beginning with our Form 10-Q for the third quarter of 2006, we will account for our investment in the Distributor on our financial statements using the equity method of accounting. Under the equity method of accounting, only our investment in and amounts due to and from the equity investee will be included in our consolidated balance sheet. As a result, we will record an asset on our balance sheet related to our investment interest in the Distributor. On our statement of operations, we will record our 30% share of the Distributor’s profit or loss as equity in net earnings (losses) from investee. We expect to record a gain upon consummation of the Transaction and that this gain will be based on the difference between the fair market value of assets contributed and the net book value, reduced for the portion of the gain associated with the retained economic interest in the Distributor. After the Closing, substantially all of our revenue and expenses as well as the results from releasing TWC product will be reflected in the financial statements of the Distributor. We will include separate quarterly and audited annual financial statements of the Distributor in a note to our financial statements. For additional information on the accounting for the Transaction and the pro forma information to be included beginning with our 10-Q for the period ended September 30, 2006, reference our Proxy Statement Schedule 14A as filed on June 29, 2006.

Amendment to Articles of Incorporation

Effective July 21, 2006, we amended our articles of incorporation to authorize and issue to TWC 100 shares of Series W Preferred Stock in us. The Series W Preferred Stock provides TWC or its permitted transferees with (a) the right to elect five of the seven directors on our Board of Directors, (b) majority voting power over other actions requiring approval of our stockholders, and (c) the right to approve certain specified actions by the Company. The Series W Preferred Stock has no rights to receive dividends and minimal liquidation value. On the Closing, we amended and restated our Certificate of Incorporation to, among other things, provide for the designation of the Series W Preferred Stock. We and TWC also entered into a Registration Rights Agreement pursuant to which we will register for resale our shares of Common Stock issuable upon redemption of TWC’s Class W Units in the Distributor. In addition we amended the articles of incorporation to authorize us to issue 300,000,000 common shares at a par value of $0.0001 per share.

Amendment and Restatement of 2004 Stock Incentive Plan

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto contained in this report. The discussion contains forward-looking statements that relate to future events or our future financial performance that involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. For additional information concerning these factors, see the information under the caption “Business Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2005.

OVERVIEW

On July 21, 2006, Genius Products, Inc. (“we”, “our” or the “Company”) completed a strategic transaction with The Weinstein Company LLC (“TWC”) and its parent company, The Weinstein Company Holdings, LLC, and formed a venture named Genius Products, LLC (the “Distributor”) to exploit the exclusive U.S. home video distribution rights to feature film and direct-to-video releases owned or controlled by TWC (the “Closing”). Please see the discussion below under “Recent Strategic Transactions”. At the Closing we contributed to the Distributor all of our operating business, including substantially all of our assets, except for $1 million cash and certain liabilities, and received a 30% equity interest in the Distributor. The discussions in this section reflect our operations prior to the Closing. Beginning with our Form 10-Q for the third quarter of 2006, we will account for our investment in the Distributor on our financial statements using the equity method of accounting. Under the equity method of accounting, only our investment in and amounts due to and from the equity investee will be included in our consolidated balance sheet. As a result, we will record an asset on our balance sheet related to our investment interest in the Distributor. On our statement of operations, we will record our 30% share of the Distributor’s profit or loss as equity in net earnings (losses) from investee. We expect to record a gain upon consummation of the Transaction and that this gain will be based on the difference between the fair market value of assets contributed and the net book value, reduced for the portion of the gain associated with the retained economic interest in the Distributor. After the Closing, substantially all of our revenue and expenses as well as the results from releasing TWC product will be reflected in the financial statements of the Distributor. We will include separate quarterly and audited annual financial statements of the Distributor in a note to our financial statements.

We are a leading independent home-entertainment distribution company that produces, licenses and distributes an expanding library of motion pictures, television programming, family, lifestyle and trend entertainment on DVD and other emerging platforms. The Company primarily focuses on five core content areas that include major theatrical film, sports, lifestyle, family/faith and independent film. Genius handles the distribution, marketing and sales for such brands as Asia Extreme™, Baby Genius®, Dimension Films, Dragon Dynasty™, ESPN®, IFC®, NBC News®, Sundance Channel Home Entertainment® The Weinstein Company® and Wellspring™.

We sell our own proprietary content, license content from third parties for sale and distribute content for third parties for a fee. We currently have the exclusive U.S. home video distribution rights to feature film and direct-to-video releases owned or controlled by The Weinstein Company (“TWC”), a new film company created by Robert and Harvey Weinstein (as discussed below), as well as ESPN. We have released the following TWC titles on DVD: (i) Derailed, starring Jennifer Aniston and Clive Owen on March 21; (ii) Wolf Creek, an Australian horror film, on April 11; (iii) Mrs. Henderson Presents, starring Judi Dench and Bob Hoskins, on April 18; (iv) Hoodwinked, an updated retelling of the classic story of Red Riding Hood with the voices of Anne Hathaway, Glenn Close and Jim Belushi, on May 2 (vi) Doogal with the voices of Whoopi Goldberg, Jimmy Fallon, William H. Macy and Jon Stewart, on May 16; (vii) Transamerica, starring Felicity Huffman, winner of the Golden Globe Award for best actress, on May 23; (viii) The Libertine, starring Johnny Depp and The Matador, starring Pierce Brosnan on July 4. Upcoming TWC films planned for home video release by us include: Scary Movie 4, directed by David Zucker, Lucky Number Slevin, starring Bruce Willis, Feast, produced by Wes Craven, Ben Affleck and Matt Damon, and Clerks II, directed by Kevin Smith. We will also release content on DVD for Rainbow Media and the Independent Film Channel or IFC.

We seek to leverage our increasing market share and retail sales volumes from our new relationship with The Weinstein Company to improve the distribution and sale of our owned, licensed and distributed content in our other core content areas: sports, lifestyle, family/faith and independent film, illustrated by our recently announced exclusive distribution deal with ESPN. We currently own or have the rights to publish DVDs and audio CDs under the trademarked brands described in the following table. These brands include both proprietary and licensed brands. We work with a broad range of retail outlets including Wal-Mart, Best Buy, Target, Blockbuster, Movie Gallery, Netflix and Amazon.com to implement our specialized distribution strategy that consists of in-store displays that highlight our brands and promote our products that relate to these brands. We call our specialized distribution strategy our Branded Distribution Network. We customize our displays and promotions based upon the buying patterns, habits and demographics of the consumers. As we add more content to our libraries, we intend to acquire, license, develop or distribute products with credible value and brand them for relevance to the consumer. We attempt to limit financial exposure through: i) detailed return on investment, or ROI, analysis on potential acquisitions of new content and ii) our newly implemented vendor managed inventory system that provides us a scalable infrastructure and cost effective technology to manage the supply chain process. Our brands and products are described below.

Licensed Brands and Trademarks

Bazooka^®

Genius Entertainment^®

Hollywood Classics™

IFILM^®

National Lampoon^®

Sundance Channel Home

Entertainment™

Selected Owned or Licensed Content

Berliner Film Company

J Horror Library(through Horizon

Entertainment and Pony Canyon Inc.)

Jillian Michaels

NBC News Presents

Wellspring Library

Licensed Music Brands

Ansel Adams

Baby Genius^® *

Beatrix Potter™

Curious George^®

Guess How Much I Love You™

Jay Jay the Jet Plane^®

TV Guide^®

Selected Distributed Content

Amity Entertainment

Brandissimo!

Bauer Martinez Entertainment

Classic Media

Grodfilms

IFC

Legend Films Library

Liberation Entertainment Library

Pacific Entertainment

Peace Arch Entertainment

Porchlight Entertainment

Seven Arts

Tartan Video USA

ESPN

The Weinstein Company

Kid Genius^® *

My Little Pony^®

Paddington Bear™

Raggedy Ann and Andy™

Rainbow Fish™

Spot the Dog™

The Little Tikes^® *

The Snowman™

Tonka^®

Wee Worship™ *

* See recent strategic transactions below

For the three months ended June 30, 2006, our business includes revenues from three major sources, as follows:

•

Sales of videos and DVDs (99.6% and 73.2% of gross revenues for the second quarter 2006 and 2005, respectively)

•

Sales of audio CDs and cassettes (0.2% and 9.5% of gross revenues for the second quarter 2006 and 2005, respectively)

•

Theatrical rental and other (0.2% and 9.0% of gross revenues for the second quarter 2006 and 2005, respectively)

As a result of releasing titles under our new venture with TWC as discussed below, revenue from the sale of videos and DVDs has increased relative to audio CDs and theatrical and other.

Consistent with other retail product distributors, we experience some degree of sales seasonality. Excluding the impact of acquisitions and new content agreements, our second quarter (period ending June 30) is typically the lowest sales period and our fourth quarter the highest. We have also historically experienced higher returns during the first two quarters than during the last two quarters. However, our historic changes in revenues may not be indicative of future trends and may not track industry seasonality norms. In addition, we are currently placing a higher focus on our branded and proprietary business and less of a focus on non-branded, value priced products compared to prior years. This change in focus may also affect the fluctuation in our quarterly results.

We do not report our different product lines as segments because we do not allocate our resources among product lines nor do we measure performance by product line. We do not maintain discrete financial information regarding product lines. Our sales, marketing and product development efforts among our different product lines are supported by one integrated group of individuals. Additionally, our warehousing costs also reflect support of all product lines and as such cannot be segmented.

Recent Strategic Transactions

The Weinstein Company Transaction: On July 21, 2006, we completed our pending strategic transaction with The Weinstein Company LLC (“TWC”) and formed a venture named Genius Products, LLC (the “Distributor”) to exploit the exclusive U.S. home video distribution rights to feature film and direct-to-video releases owned or controlled by TWC (the “Closing”). The transaction closed, following a Special Meeting of Stockholders of the Company to approve the transaction and related matters. Under the terms of the transaction, Genius Products, Inc. contributed substantially all of its assets, employees and existing businesses to Genius Products, LLC, which holds the exclusive U.S. home video distribution rights for filmed entertainment and direct-to-video product of TWC. The new venture also operates the existing businesses of Genius Products, Inc., that involves the marketing, sales and distribution for other major branded entertainment content, including ESPN, NBC News, Sundance Home Entertainment, Asia Extreme, Dragon Dynasty and IFC. Genius Products, LLC is owned 70% by TWC and 30% by Genius Products, Inc. In addition, as part of the transaction with TWC, Genius Products, Inc. added to its Board of Directors two TWC executives, Larry Madden, Executive Vice President and CFO, and Irwin Reiter, Executive Vice President of Accounting and Financial Reporting.

The Company’s interest in the Distributor consist of Class G Units representing a 30% membership interest in the Distributor, and the interest of TWC or its owners consist of Class W Units representing a 70% membership interest in the Distributor. The 70% interest in the Distributor held by TWC or its owners is redeemable, at their option at any time from one year after the Closing, for up to 70% of the outstanding common stock of Genius Products, or with their approval, cash. As further discussed in Note 8 to the consolidated financial statements included elsewhere herein, commencing on December 5, 2005, the date we entered into a Master Contribution Agreement (the “Agreement”) in connection with the formation of a new venture to exploit the exclusive U.S. home video distribution rights to feature film and direct-to-video releases owned or controlled by TWC, through the Closing, we operated under an interim distribution agreement with TWC and recorded the results from titles we first released for TWC commencing in March 2006 through the second quarter of 2006 in our financial statements.

On the Closing, the Distributor adopted an Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”) in the form agreed to by the parties. The Distributor, which will be renamed Genius Products, LLC, will operate the new distribution business and our existing businesses, and continue to operate under the LLC Agreement following the Closing.

Effective July 21, 2006, we issued to TWC 100 shares of Series W Preferred Stock in us. The Series W Preferred Stock provides TWC or its permitted transferees with (a) the right to elect five of the seven directors on our Board of Directors, (b) majority voting power over other actions requiring approval of our stockholders, and (c) the right to approve certain specified actions by the Company. The Series W Preferred Stock has no rights to receive dividends and minimal liquidation value. On the Closing, we amended and restateed our Certificate of Incorporation to, among other things, provide for the designation of the Series W Preferred Stock.

We and TWC also entered into a Registration Rights Agreement pursuant to which we will register for resale our shares of Common Stock issuable upon redemption of TWC’s Class W Units in the Distributor.

Sale of Baby Genius: On December 31, 2005, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Klaus Moeller, who was our founder and formerly our CEO. Under the Asset Purchase Agreement, we agreed to sell to Mr. Moeller all of our right, title and interest in and to the following assets (the “Assets”), subject to the terms, conditions and limitations set forth in the Asset Purchase Agreement:

•

Audio and audiovisual works entitled “Baby Genius”;

•

Audio and audiovisual works entitled “Kid Genius”;

•

Audio and audiovisual works entitled “Little Tikes”;

•

Audio works entitled “Wee Worship”; and

•

Related intellectual property, agreements, documents and instruments.

Subject to limited exceptions, Mr. Moeller agreed to assume any and all obligations for royalties, advances, reporting requirements, and all other obligations of any kind arising out of or in connection with all talent agreements, producer agreements, and any and all other agreements relating to the Assets and due after the signing of the Asset Purchase Agreement.

The purchase price for the Assets was $3 million, payable as follows:

•

$250,000 in cash on signing;

•

$750,000 by means of a secured promissory note due and payable in full, together with all accrued interest, on January 30, 2006, bearing interest at the rate of 4.5% per annum; and

•

$2 million by means of a secured promissory note due and payable in full, together with all accrued interest, on the fifth anniversary of the closing date, bearing interest at the rate of 4.5% per annum.

We will continue to distribute Baby Genius, Little Tikes and Wee Worship DVDs and music CDs and all new products under these brands. Under the distribution agreement, we will receive a distribution fee and recoup all of our expenses. The $3 million purchase price was determined by negotiations between the parties and our assessment of the reasonable value of the Assets and the distribution arrangement.

In conjunction with this transaction we recorded a gain on sale in the amount of $1,351,710, a note receivable in the amount of $1,712,353 representing the present value of a $2 million secured promissory note that we received in this transaction and a deferred gain of $1,212,353. We will recognize the deferred gain based upon the relative percentage of revenue we generate in each period relative to the total revenue expected to be generated over the term of the distribution agreement. During the three and six months ended June 30, 2006, we recognized $23,179 and $63,446 of this gain, respectively. We have received payment in full for the secured promissory note, due on January 30, 2006, in the amount of $750,000, plus interest.

CRITICAL ACCOUNTING POLICIES

ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS. The allowance for doubtful accounts and provision for sales returns includes management’s estimate of the amount expected to be uncollectible or returned on specific accounts and for losses or returns on other accounts as yet to be identified included in accounts receivable. In estimating the allowance component for unidentified losses and returns, management relies on historical experience and takes into account current information obtained from retailers including retail sell-through data and retail inventory data as available. The amounts we will ultimately realize could differ materially in the near term from the amounts estimated in arriving at the allowance for doubtful accounts and provision for sales returns in the accompanying financial statements.

INVENTORIES. Inventories consist of raw materials and finished goods and are valued at the lower of cost or market. Cost is determined on a first-in-first-out method of valuation. The Company regularly monitors inventory for excess or obsolete items and makes any valuation corrections when such adjustments are needed.

LONG-LIVED ASSETS. Property and Equipment: Property and equipment purchases are recorded at cost and are depreciated and amortized over the estimated useful lives of the assets (three to seven years generally) using the straight-line method.

Production Masters: Music production masters are stated at cost net of accumulated amortization. Costs incurred for music production masters, including licenses to use certain classical compositions, royalties, and recording and design costs, are capitalized and amortized over a three or seven year period using the straight-line method from the time a title is initially released. All exploitation costs, including print and advertising (P&A) costs associated with our theatrical department, are expensed as incurred.

Film Library: We capitalize the costs of production and acquisition of film libraries. Costs of production include costs of film and tape conversion to DLT master format, menu design, authoring and compression. These costs are amortized to direct operating expenses in accordance with Statement of Position (“SOP”) 00-2, “Accounting by Producers or Distributors of Films”, using the individual film forecast method over a period of ten years. Costs are stated at the lower of unamortized film costs or estimated fair value. For acquired film libraries, ultimate revenue includes estimates over a period not to exceed ten years. Management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and/or a write-down of all or a portion of the unamortized costs of the library to its estimated fair value. No assurances can be given that unfavorable changes to revenue and cost estimates will not occur, which may result in significant write-downs affecting our results of operations and financial condition.

Goodwill: We evaluate the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When performing the impairment review, we determine the carrying amount of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units. A reporting unit is defined as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is deemed a reporting unit if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component.

To evaluate whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. We determine the fair value of each reporting unit using the present value of expected future cash flows for that reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of the reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

Long-lived assets are reviewed annually for impairment and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is necessary when the undiscounted cash flows estimated to be generated by the asset are less than the carrying amount of the asset.

LOSS PER SHARE. Basic EPS is calculated using income available to common stockholders divided by the weighted average of common shares outstanding during the year. Diluted EPS is similar to Basic EPS except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential of common shares, from the exercise of options or warrants, had been issued. The treasury stock method is used to calculate dilutive shares which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. We are currently evaluating the impact of this new standard but believe that it will not have a material impact on our financial position, results of operations, or cash flows. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the application of FIN 48 will have on its results of operations and financial condition.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

Revenues:

Video and DVD revenues for the three and six months ended June 30, 2006 were composed of sales of The Weinstein Company (“TWC”) titles, Derailed, Mrs. Henderson Presents,Transamerica, Wolf Creek, Have No Fear: The Life of Pope John Paul II, Hoodwinked and Doogal, sales of branded and proprietary products including branded classic movies and television shows on DVD as well as non-branded classic movies and television shows on DVD, and Wellspring titles from AVMC. Video revenues increased $98.1 million and $132.9 million during the three months and six months ended June 30, 2006, respectively to $101.9 million and $138.1 million, as compared to $3.8 million and $5.2 million during the comparable prior year periods. This increase from 2005 was primarily due to the addition of revenues from the video release of TWC’s titles.

Theatrical revenues were composed of sales generated from film rentals by our theatrical division. Theatrical revenues were $0.1 million and $0.2 million for the three months and six months ended June 30, 2006, respectively, compared to $0.5 million and $0.5 million for the comparable prior year periods. In February 2006, we announced we will no longer release films theatrically.

Audio revenues for the three months and six months ended June 30, 2006 were composed of Baby Genius, Kid Genius, licensed music CDs, interactive music programs, non-branded and value music products sold at an entry level price point at retail. Audio revenues decreased $0.3 million and $0.8 million during the three months and six months ended June 30, 2006, respectively, to $0.2 million and $1.0 million, as compared to $0.5 million and $1.8 million during the comparable prior year periods. The decrease was attributable to lower sales of the Baby Genius music, licensed music product, value music products and Lifestyles Music Program.

Royalties, licensing and other revenues were composed of royalties from licensing fees from Wellspring Media, Inc. and the license of our Baby Genius brand name. Royalties, licensing and other revenues decreased $0.4 million during the three months ended June 30, 2006 to $53,877, as compared to $0.4 million during the comparable prior year period. For the six months ended June 30, 2006, royalties, licensing, and other revenues decreased slightly to $0.4 million as compared to $0.5 million during the comparable prior year period. The changes resulted from a decrease in licensing revenues from our acquisition of AVMC on March 22, 2005 and the sale of Baby Genius rights on December 31, 2005.

As a result of the foregoing, total gross revenues increased $97.2 million and $131.8 million during the three and six months ended June 30, 2006, respectively, to $102.4 million and $139.8 million as compared to $5.2 million and $8.0 million during the comparable prior year periods, due primarily to increased sales of video products as discussed above.

Sales returns, discounts and allowances increased $26.1 million and $34.7 million during the three and six months ended June 30, 2006 to $27.3 million and $36.2 million, respectively, as compared to $1.3 million and $1.5 million during the comparable prior year periods. The increase resulted primarily from the increase in sales from the video release of TWC’s Derailed, Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked, and Doogal. The provision for sales returns and allowances is calculated in accordance with historical averages and industry changes, but may vary in the future based on customer and product mix.

Net revenues increased $71.1 million and $97.1 million during the three and six months ended June 30, 2006, respectively, to $75.0 million and $103.6 million as compared to $3.9 million and $6.5 million during the comparable prior year periods, primarily due to the increase in sales of DVDs from the release of TWC’s titles.

Costs and expense:

Cost of Sales:

Cost of sales consists primarily of the cost of products sold to customers, packaging and shipping costs, amortization of production masters and royalties paid on sales of licensed products. For analytical purposes we review amortization of production masters as a stand-alone cost element and discuss the aggregate cost of producing, packaging, and shipping of the audio, DVD, and royalty, licensing and other products. Generally, cost of sales increased as a result of the increased sales. We include remittances to TWC in cost of sales. Under our distribution agreement with TWC, we record remittances to TWC based upon net revenues we receive from sales of TWC titles released on DVD (net of reserves and allowances), deduct our distribution fee, deduct cost of goods sold (including manufacturing expenses), deduct certain marketing expenses, and record the remaining balance as a remittance to licensor under cost of goods sold.

Video and DVD cost of sales increased $56.8 million and $77.2 million during the three and six months ended June 30, 2006, respectively, to $59.5 million and $81.6 million, as compared to $2.7 million and $4.4 million during the comparable prior year periods. The increase resulted from an increase in video and DVD sales, primarily due to the video release of TWC’s titles during the three and six months ended June 30, 2006. Cost of sales related to TWC’s titles include the remittance to The Weintstein Company and the related product cost of sales.

Theatrical cost of sales, composed primarily of print and advertising costs related to sales generated from film rental by our theatrical division, were zero and $0.1 million during the three and six months ended June 30, 2006, respectively, primarily from the theatrical release of Unknown White Male during the first quarter 2006, as compared to $1.2 million for both the three and six months ended June 30, 2005. Our theatrical division was discontinued in February 2006.

Audio cost of sales decreased $0.5 million and $0.7 million during the three and six months ended June 30, 2006, respectively, to $0.2 million and $0.8 million, as compared to $0.7 million and $1.5 million during the comparable prior year periods. The decrease in cost of sales was due to the lower audio sales during the three and six months ended June 30, 2006.

Amortization of production masters and film library decreased $0.6 million and $0.5 million during the three and six months ended June 30, 2006, respectively, to $0.4 million and $0.7 million, as compared to $1.0 million and $1.2 million during the comparable prior periods. Amortization of production masters and film library is primarily the result of the acquisition of AVMC.

Operating Expense:

Product development expenses increased $0.3 million and $0.8 million during the three and six months ended June 30, 2006, respectively, to $0.5 million and $1.3 million, as compared to $0.2 million and $0.4 million during the comparable prior year periods. The increase was attributed to the addition of new titles into our libraries.

Sales and marketing expenses increased $10.4 million and $15.5 million during the three and six months ended June 30, 2006, respectively, to $11.0 million and $16.5 million as compared to $0.6 million and $1.1 million for the comparable prior year periods. The increase in sales and marketing is primarily attributable to the advertising campaigns for the video release of TWC’s Derailed, Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked and Doogal which were released during the six months ended June 30, 2006.

General and administrative expenses increased by $4.8 million and $8.2 million during the three and six months ended June 30, 2006, respectively, to $7.4 million and $12.3 million, as compared to $2.6 million and $4.1 million during the comparable prior periods. These increases were primarily due to increased payroll, rent, and utilities as a result of the acquisition of AVMC, increased payroll and overhead to support the increased sales volume anticipated as part of the new relationship with The Weinstein Company, increased transaction costs including investment banking, audit and legal fees of $2.4 million and $2.8 million during the three and six months ended June 30, 2006, respectively, related to the transaction announced with The Weinstein Company, severance costs associated with employees and outside consultants of $1.1 million and $1.8 million during the three and six months ended June 30, 2006 and warrants and options expense associated with compensation to certain employees and outside consultants of $0.7 million and $1.7 million during the three and six months ended June 30, 2006, respectively. General and administrative expenses were 9.9% and 11.9% of net revenues for the three and six months ended June 30, 2006, respectively, compared to 67.3% and 63.0% for the three and six months ended June 30, 2005.

On December 31, 2005, we sold to Klaus Moeller, our founder and former Chief Executive Officer, all of our right, title and interest in and to our “Baby Genius”, “Kid Genius”, “Little Tikes” and “Wee Worship” lines of business for a total purchase price of $3 million.

The purchase price was payable as follows:

•

$250,000 in cash on signing;

•

$750,000 by means of secured promissory note due and payable in full, together with all accrued interest, on January 30, 2006, bearing interest at the rate of 4.5% per annum; and

•

$2 million by means of a secured promissory note due and payable in full, together with all accrued interest, on the fifth anniversary of the closing date, bearing interest at a rate of 4.5% per annum.

In conjunction with this transaction we recorded a gain on sale in the amount of $1,351,710 and recorded a note receivable in the amount of $1,712,353 representing the present value of a $2 million secured promissory note that we received in this transaction and a deferred gain of $1,212,353. We have subsequently received payment in full of the secured promissory note, due on January 30, 2006, in the amount of $750,000, plus interest. We will recognize the deferred gain based upon the relative percentage of revenue we generate in each period relative to the total revenue expected to be generated over the term of the distribution agreement. For the three and six months ended June 30, 2006, we recognized a gain of $23,179 and $63,446 relating to the deferred gain of $1.2 million at December 31, 2005.

We had interest income of $0.2 million and $0.4 million during the three and six months ended June 30, 2006, respectively, as compared to zero interest income for the comparable prior year periods. We had interest expense of $8,315 and $82,788 during the three and six months ended June 30, 2006 as compared to $76,948 and $0.2 million for the comparable prior year periods. The change resulted from reduced interest expense due to the repayment of notes payable during the first quarter of 2006 and an increase in interest income related to the higher average cash balance for the quarter ended June 30, 2006.

We had income tax expense of $0.1 million for the three and six months ended June 30, 2006 as compared to $8,175 and $8,975 for the comparable prior year period. The change resulted from an alternative minimum tax incurred during the quarter ended June 30, 2006.

As result of the foregoing, the net loss decreased $1.3 million and increased $2.1 million during the three and six months ended June 30, 2006, respectively, to $4.0 million and $9.7 million as compared to $5.3 million and $7.5 million during the comparable prior periods.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations during the six months ended June 30, 2006 was $18.4 million, primarily due to increases in accrued expenses, deferred revenue, remittance to licensor, and allowance for doubtful accounts and provision for returns, offset by the net loss of $9.7 million, and increases in accounts receivable, inventories, and the development of our film library. These changes are primarily related to the release of TWC titles. The increase in accounts receivable relates primarily to sales of Derailed, Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked and Doogal during the six months ended June 30, 2006. The increase in accrued expenses and inventories primarily relate to invoices received but not paid for the production of inventory and sales and marketing expenses for Matador and The Libertine. The increase in deferred revenue related primarily to invoices for shipments of The Matador and The Libertine, which both had street dates on July 4. The invoices for The Matador and The Libertine were recorded as deferred revenue since the street date for these titles occurred after June 30, 2006. The remittance to licensor primarily represents the amount owed to TWC after deducting the related cost of sales, marketing costs, and our distribution fee from net sales of TWC titles during the six months ended June 30, 2006. Under the terms of the distribution agreement, we are required to pay TWC after collection of receipts, the amount of which is determined by net revenue, which as of June 30, 2006 had not been collected. However, we bear the risk of accounts receivable collections. Allowance for doubtful accounts and provision for returns increased primarily as a result of reserves for returns related to the release of Derailed, Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked and Doogal. For the six months ended June 30, 2005, net cash used in operations was $12.2 million, driven primarily by the net loss of $7.5 million, the increase in the development of our library, the decrease in accounts payable, offset by a decrease in accounts receivable.

Net cash used in investing activities for the six months ended June 30, 2006, was $0.7 million, primarily attributed to the purchase of property and equipment. For the six months ended June 30, 2005, net cash used in investing activities was $0.4 million, which was primarily due to the payment of obligations relating to the acquisition of AVMC.

Cash used in financing activities for the six months ended June 30, 2006 was $4.8 million, resulting from the repayment of $3.8 million of the $4.0 million notes payable assumed as part of the acquisition of AVMC on March 21, 2005 and the repayment of $1.5 million of notes issued in October 2005, offset by proceeds from the exercise of options and warrants. Cash provided by financing activities for the six months ended June 30, 2005 was $12.9 million, resulting from the issuance of common stock for proceeds of $15.3 million, proceeds from the exercise of warrants and common stock, offset by the repayment of short-term debt of $2.3 million and the payment of offering costs of $0.8 million.

At June 30, 2006, we had cash balances of $43,489,769 and net accounts receivable of $48,457,391. We feel that we have sufficient liquidity to fund our operations through the remainder of 2006. However, we will consider additional issuance of equity and debt financing to fund future growth opportunities. Although we believe that our expanded product line offers us the opportunity for significantly improved operating results in future quarters, no assurance can be given that we will operate on a profitable basis in 2006, or ever, as such performance is subject to numerous variables and uncertainties, many of which are out of our control.

The table below summarizes information as of June 30, 2006 regarding certain future minimum contractual obligations and commitments for the next five years:

	Remainder of 2006		2007		2008		2009		2010		Thereafter		Total

Lease obligations	$	536,310	$	1,092,459	$	976,302	$	728,507	$	734,880	$	185,068	$	4,253,526
Employment agreements	$	958,068	$	1,275,833		-		-		-		-		2,233,902
Consulting agreements		106,667		-		-		-		-		-		106,667
Royalty advances		231,386		-		-		-		-		-		231,386
Total	$	1,832,431	$	2,368,292	$	976,302	$	728,507	$	734,880	$	185,068	$	6,825,480

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2006, our cash and cash equivalents were invested with financial institutions with investment grade credit ratings. Due to the short duration of our investment portfolio and the high quality of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

We do not enter into hedging or derivative instrument arrangements.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures.

Although we are not required to be compliant with the provisions of Section 404 of the Sarbanes-Oxley Act in the current year, we anticipate that we will identify additional processes and procedures that will require further documentation, revision and possibly remediation as we begin our effort to implement Section 404 of the Sarbanes-Oxley Act.

Changes in Internal Controls Over Our Financial Reporting

There was no change in our internal control over the financial reporting during the period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We have disclosed in previous reports filed with the Securities and Exchange Commission (i) a complaint filed against our new subsidiary American Vantage Media Corporation and Wellspring Media, Inc. in U.S. Bankruptcy Court for the District of Delaware by the Chapter 7 Trustee of the Winstar Communications, Inc. Estate, and (ii) a possible rescission offer in Washington State. There have been no material developments in these matters. For a complete description of the facts and circumstances surrounding the Winstar litigation, see the disclosures in our Annual Report on Form 10-KSB for the year ended December 31, 2004 under “Item 3. Legal Proceedings”, which are incorporated by reference herein.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K


3.1	Certificate of Incorporation (incorporated by reference from Exhibit 3.1 to the Company’s Form 10-KSB filed on March 31, 2005).
3.2	Bylaws as amended (incorporated by reference from Exhibit 3.2 to the Company’s Form 10-KSB filed on March 31, 2005).
10.1	Second Amendment to Master Contribution Agreement by and between Genius Products, Inc., The Weinstein Company LLC, The Weinstein Company Holdings LLC and The Weinstein Company Funding LLC entered into on April 26, 2006 (incorporated by reference from Exhibit 2.3 to the Company’s Form 8-K filed on May 2, 2006).
10.2	Third Amendment to Master Contribution Agreement by and between Genius Products, Inc., The Weinstein Company LLC, The Weinstein Company Holdings LLC and The Weinstein Company Funding LLC entered into on May 30, 2006 (incorporated by reference from Exhibit 2.4 to the Company’s Form 8-K filed on June 2, 2006).
10.3	Fourth Amendment to Master Contribution Agreement by and between Genius Products, Inc., The Weinstein Company LLC, The Weinstein Company Holdings LLC and The Weinstein Company Funding LLC entered into on June 28, 2006 (incorporated by reference from Exhibit 2.5 to the Company’s Form 8-K filed on June 29, 2006).

31.1	Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act.*

31.2	Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act.*

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*

* Filed herewith.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 14, 2006	GENIUS PRODUCTS, INC., a Delaware Corporation

	By:	/s/ Trevor Drinkwater
		Trevor Drinkwater President and Chief Executive Officer (Principal Executive Officer)

Dated: August 14, 2006	By:	/s/ John Mueller
		John Mueller Chief Financial Officer (Principal Financial and Accounting Officer)

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Genius Products (GNPR) Inactive 10-Q2006 Q2 Quarterly report

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