Genius Products 10Q/A 2008 Q1 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

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

For the quarterly period ended March 31, 2008

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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.)

3301 EXPOSITION BLVD., SUITE 100

SANTA MONICA, CA 90404

(Address of principal executive offices)

(310) 401-2200

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

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

There were 67,609,094 shares outstanding of the issuer's Common Stock as of April 30, 2008.

EXPLANATORY NOTE

During meetings held on October 8, 2008 and November 13, 2008, the Audit Committee of the Board of Directors of Genius Products, Inc. (the “Company”), acting on a recommendation from the Company’s management, determined that it was necessary to restate (i) the Company’s unaudited consolidated financial statements and other financial information as of and for the three months ended September 30, 2006, March 31, June 30 and September 30, 2007 and March 31 and June 30, 2008, and (ii) the audited consolidated financial statements and other financial information of the Company and Genius Products, LLC (the “Distributor”) as of December 31, 2006 and 2007 and for the periods then ended.

The aforementioned restatements relate to (i) an error in the application of generally accepted accounting principles with respect to the recognition in the Company’s financial statements of costs paid on its behalf by the Distributor and (ii) an error in the application of generally accepted accounting principles with respect to the accounting classification and measurement of certain redemption rights of the holders of the Distributor’s Class W Units.

The Company’s prior accounting methodology with respect to costs paid on its behalf by the Distributor was based on the view that such costs should be recognized in the Company’s financial statements to the extent of the Company’s economic participation and ownership interest in the Distributor. The Company has now determined that it should recognize all such costs incurred on its behalf by the Distributor in the Company’s financial statements.

The Distributor’s prior accounting methodology with respect to the accounting classification and measurement of the aforementioned redemption rights did not properly classify and measure the Distributor’s Class W Units as redeemable securities. The Distributor will now recognize, as an asset, the fair market value of such redemption rights in the Distributor’s financial statements. In addition, the Distributor has now recorded the redeemable Class W Units outside of permanent equity in its financial statements. This accounting change in the Distributor’s financial statements has also resulted in the need to restate the Company’s financial statements to reflect a corresponding liability related to the aforementioned redemption rights at the end of each of the aforementioned reporting periods.

The impact of these restatements as of and for the three months ended March 31, 2007 and March 31, 2008, are further discussed in Note 3 and Note 5 to the unaudited condensed consolidated financial statements of the Company included herein.

This amendment is being filed for the purpose of amending and restating Items 1 and 2 of Part I and Item 6 of Part II of the Company’s Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission on May 12, 2008, solely to the extent necessary (i) to reflect the restatement of the Company’s unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2007 and 2008, as described in Note 3 and Note 5 to the unaudited condensed consolidated financial statements of the Company, (ii) to make revisions to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as warranted by the restatements, (iii) to update the certifications required by the Sarbanes-Oxley Act of 2002, and (iv) to update the exhibits .

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

INDEX

		PAGE
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements	4

	Condensed consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007	5

	Condensed consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007 (unaudited)	6

	Condensed consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (unaudited)	7

	Notes to Condensed consolidated Financial Statements (unaudited)	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4	Controls and Procedures	25

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	26

Item 1A	Risk Factors	26

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3	Defaults Upon Senior Securities	27

Item 4	Submission of Matters to a Vote of Security Holders	27

Item 5	Other Information	27

Item 6	Exhibits	27

SIGNATURES		28

NOTICE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements”. To the extent that the information presented in this Quarterly Report discusses financial projections, information or expectations about our business plans, results of operations, products or markets, or otherwise makes statements about future events, such statements are forward-looking. Such forward-looking statements can be identified by the use of words such as “intends”, “anticipates”, “believes”, “estimates”, “projects”, “forecasts”, “expects”, “plans” and “proposes”.

Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These include, among others, the cautionary statements in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this Quarterly Report. These cautionary statements identify important factors that could cause actual results to differ materially from those described in the forward-looking statements.

When considering forward-looking statements in this Quarterly Report, you should keep in mind the cautionary statements in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections, and other sections of this Quarterly Report. Except as required by law, we do not intend to update our forward-looking statements, whether written or oral, to reflect events or circumstances after the date of this Quarterly Report.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE INFORMATION)


	March 31, 2008			December 31,
	Restated (Note 3)			2007
	(unaudited)			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1,822		$	1,757
Prepaid expenses and other current assets		110			110
Notes Receivable from Distributor, net		8,352			-
Total current assets		10,284			1,867

Notes Receivable from Distributor, net		-			8,191
Investment in Distributor		65,527			73,002
Total assets	$	75,811		$	83,060

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable to Distributor, net		298			198
Total current liabilities		298			198

Class W option liability		5,691			4,168
Deferred tax liability		13,288			12,797
Total liabilities		19,277			17,163

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized; no shares outstanding		-			-
Series W preferred stock, $.0001 par value; 100 shares authorized and outstanding		-			-
Common stock, $.0001 par value; 300,000,000 shares authorized;
67,759,094 and 67,709,094 shares outstanding, respectively		7			7
Additional paid-in capital		110,966			112,293
Accumulated deficit		(54,439	)		(46,403	)
Total stockholders' equity		56,534			65,897

Total liabilities and stockholders' equity	$	75,811		$	83,060


See accompanying notes to condensed unaudited interim financial statements.

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

(UNAUDITED)

	Three Months Ended March 31,
	2008			2007
	Restated (Note 3)			Restated (Note 3)

Operating expenses:
Selling, general and administrative	$	1,361		$	1,059
Equity in net loss from Distributor		4,787			2,568

Total operating expenses		6,148			3,627

Loss from operations		(6,148	)		(3,627	)

Other income (expense)		(1,397	)		416

Loss before provision for income taxes		(7,545	)		(3,211	)

Provision (benefit) for income taxes		491			(2	)

Net loss	$	(8,036	)	$	(3,209	)

Basic and diluted EPS

Net loss per share	$	(0.12	)	$	(0.05	)

Basic and diluted weighted average shares		67,723,929			64,193,425


See accompanying notes to condensed unaudited interim financial statements.

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

	Three Months Ended March 31,
	2008			2007
	Restated (Note 3)			Restated (Note 3)

Cash flows from operating activities:
Net loss	$	(8,036	)	$	(3,209	)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Equity in net loss from Distributor		4,787			2,568
Operating expenses paid by Distributor		1,343			862
Stock compensation expense		(26	)		197
Deferred tax liability		491			(2	)
Revaluation of Class W option liability		1,523			(367	)
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses, notes receivable and deposits		(161	)		83
Decrease in accounts payable		-			(59	)
Increase in Distributor payable		100			-
Increase in accrued expenses and other		-			491
Net cash provided by operating activities		21			564

Cash flows from financing activities:
Proceeds from exercise of options		44			1,071
Proceeds from exercise of warrants		-			823
Net cash provided by financing activities		44			1,894

Net increase in cash and cash equivalents		65			2,458
Cash and cash equivalents at beginning of period		1,757			3,745
Cash and cash equivalents at end of period	$	1,822		$	6,203

See accompanying notes to condensed unaudited interim financial statements.

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. NATURE OF BUSINESS

Genius Products, Inc. (“we”, “us”, “our” or the “Company”), through our 30%-owned subsidiary, Genius Products, LLC (the “Distributor”), is a leading independent home entertainment products company that acquires, produces and licenses, through the Distributor’s multiple distribution agreements with content partners, an extensive library of motion pictures, television programming, and trend entertainment on digital versatile disks (“DVD”) and digitally. The Distributor works in partnership with major retailers to distribute widely recognized home entertainment brands to a diversified customer base. The remaining 70% of the Distributor is owned by The Weinstein Company Holdings LLC (“TWC Holdings”) (which includes a 1% percentage interest owned indirectly through its wholly-owned subsidiary, W-G Holding Corp. (“W-G Holding”). TWC Holdings is the subsidiary company of The Weinstein Company LLC (“TWC”), the largest provider of content for the Distributor’s library.

Through the Distributor, for which the Company serves as managing member, we produce and distribute a vast and growing content library that encompasses approximately 3,550 feature films and documentaries and 4,000 hours of television programming. This library includes feature films and television programming from critically acclaimed producers such as The Weinstein Company®, for which the Distributor has the exclusive U.S. home video distribution rights, and RHI Entertainment™ (Hallmark library). Additional content, such as independent films, sports, family, and lifestyle productions, come from partnerships with established consumer brands: IFC®, ESPN®, World Wrestling Entertainment®, Classic Media, Sesame Workshop®, Discovery Kids™, Animal Planet and The Learning Channel (TLC™).

The Distributor has developed a fully integrated direct-to-retail distribution platform that parallels the home entertainment divisions of the major Hollywood studios. This platform provides direct sales and marketing, inventory management and state-of-the-art supply-chain services. In collaboration with leading replicators and third-party logistics and supply-chain companies, the Distributor has rapidly scaled this network, which has helped to facilitate its rapid growth in revenues.

The Distributor primarily sells to major national retailers including Wal-Mart, Blockbuster Entertainment, Best Buy, Circuit City, Kmart, Target, NetFlix, Costco, Sam’s Club, Amazon, Borders, Toys R Us and Columbia House. The Distributor co-produces programming with its branded content partners and mitigates the impact of its production costs through minimum guarantees from its retail partners. We believe that the strong relationships the Distributor has developed with these well-known retailers and branded content partners help promote the Distributor’s programming and heighten consumer awareness of its programs.

The Distributor collaborates with its retail and content partners to create sales programs that exploit their widely recognized brands and endorse related content. These sales programs focus on brands to provide the retailer with solutions that simplify the retailer’s buying process, improve shelf-space utilization and help consumers quickly make informed purchase decisions. The Distributor’s ability to deliver unique, innovative solutions that improve the sales and rentals of its content has enabled it to compete successfully and maintain strong relationships with its retail and content partners.

The Distributor currently distributes its library on DVDs, next-generation DVD, and electronically in a digital format. We plan to continue to expand the distribution of the Distributor’s theatrical and non-theatrical product through the diverse emerging digital distribution markets including: Video-on-Demand (“VOD”) and Electronic Sell-Through (“EST”) on the Internet to companies such as Amazon, Apple, MovieLink and Microsoft, Internet-based subscription VOD customers (such as NetFlix) and direct-to-television peer-to-peer network solutions. Through its partnerships, the Distributor has released 128 theatrical and non-theatrical titles since inception (including ninety titles released in 2007). The Distributor distributes products to basic channels distributed on cable, Direct Broadcast Satellite (“DBS”) and Internet Protocol Television (“IPTV”), which delivers television programming to households via a broadband connection using Internet protocols.

The Distributor primarily focuses on four core branded content categories that we call Content Verticals:

	·	Theatrical/Independent Films (includes Independent Film Channel (IFC®) , RHI Entertainment™ (Hallmark library), Tartan, The Weinstein Company® and Wellspring™)
	·	Sports (includes ESPN® and World Wrestling Entertainment®)

	·	Lifestyle (includes Animal Planet, The Learning Channel (TLC™) and Wellspring™)
	·	Family/Faith (includes Classic Media, Discovery Kids™, and Sesame Workshop®)

THE WEINSTEIN COMPANY TRANSACTION

On July 21, 2006 (the “Closing Date”), the Company completed a transaction (the “TWC Transaction”) with TWC Holdings and W-G Holding (two subsidiaries of TWC) pursuant to which we launched 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. On the Closing Date, the Company contributed substantially all of its assets (except for $1 million in cash and certain liabilities), its employees, and its existing businesses to the Distributor.

Thus, the Distributor is owned 70% by TWC Holdings and W-G Holding and 30% by the Company. The 70% interest in the Distributor held by TWC Holdings and W-G Holding consists of Class W Units and is redeemable, at TWC Holdings’ and W-G Holding’s option commencing at any time from July 21, 2007 for up to 70% of the Company’s outstanding common stock, or with TWC Holdings’ and W-G Holding’s approval, cash. The redemption value of the Class W Units may not be less than $60.0 million. The Company’s 30% membership interest in the Distributor consists of the Distributor’s Class G Units (see Equity Investment in Distributor section below).

In addition, the Company issued an aggregate of 100 shares of the Company’s Series W Preferred Stock to TWC Holdings and W-G Holding in connection with the TWC Transaction. The Series W Preferred Stock provides the holders thereof with (i) the right to elect five of the seven directors on the Company’s Board of Directors, of which two are currently TWC executives, (ii) majority voting power over other actions requiring approval of our stockholders, and (iii) the right to approve certain specified actions. The Series W Preferred Stock has no rights to receive dividends and minimal liquidation value.

On the Closing Date, the Company entered into a Registration Rights Agreement with TWC Holdings and W-G Holding pursuant to which we agreed to register for resale the shares of our common stock issuable upon redemption of Class W Units in the Distributor currently held by them. The Company and/or the Distributor also entered into the following agreements on the Closing Date: (i) an Amended and Restated Limited Liability Company Agreement of the Distributor, (ii) Video Distribution Agreement (the “TWC Distribution Agreement”), (iii) Services Agreement, and (iv) Assignment and Assumption Agreement.

From December 5, 2005 through the Closing Date, the Company operated under an interim distribution agreement with TWC and recorded the results from titles we released for TWC on our consolidated financial statements. After the Closing Date, substantially all of the operating activities we previously conducted, as well as the results from releasing TWC product, are reflected in the financial statements of the Distributor.

For a full description of the TWC Transaction, please see our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on July 26, 2006.

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying interim consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods indicated. The results of operations for any interim period are not necessarily indicative of results for the full year. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company. All significant inter-company transactions and accounts have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS.

The carrying amounts of cash and cash equivalents, prepaid expenses, accounts payable, accrued expenses, and Class W Option Liability approximate the fair value thereof.

INVESTMENT IN DISTRIBUTOR

At the closing of the TWC Transaction, we contributed to the Distributor all of our operating businesses, including substantially all of our assets, except for $1 million in cash and certain liabilities, and received a 30% equity interest in the Distributor. The accompanying consolidated financial statements account for the Company’s investment in the Distributor (30% membership interest represented by the Distributor’s Class G units) using the equity method of accounting. On the Company’s consolidated statement of operations subsequent to the Closing Date, the Company recorded its 30% share of the Distributor’s profit or loss as equity in net profit or loss from the Distributor, adjusted for non-cash basis differences (see Note 5 ) and costs incurred by the Distributor on behalf of the Company. Pursuant to Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, the Company will periodically assess whether a decrease in value of the investment has occurred (which is other than temporary) and which should be recognized immediately, resulting in an impairment loss.

Under the equity method of accounting, only the Company’s investment in and amounts due to and from the Distributor have been included as an asset in the Company’s condensed consolidated balance sheet. The TWC Transaction represented a non-monetary exchange of a business controlled by the Company for a non-controlling interest in the Distributor. Accordingly, the amount recorded for the Company’s investment in the Distributor was partially based on the Company’s fair value as determined by reference to the quoted market prices of the Company’s shares at the close of the market on the Closing Date and partially based on the historical basis of the net assets surrendered in the TWC Transaction. On the Closing Date, we recorded a gain based on the difference between the fair market value of assets contributed and their net book value, reduced for the portion of the gain associated with the retained economic interest in the Distributor. The Distributor is treated as a partnership for U.S. federal income tax purposes.

CLASS W OPTION LIABILITY

The Company records the Class W Option Liability at fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“FAS 157”), which the Company adopted beginning on January 1, 2008. The Company has utilized a lattice valuation model to simulate future stock movements of the Company’s Common Stock in order to determine the fair value of the Class W Option Liability. The assumptions used in preparing such model include, among other things, inputs such as volatility, risk-free interest rates, dividend yield, expected time of redemption and assessment of counterparty risk.

STOCK-BASED COMPENSATION

Under SFAS No. 123R, “Share-Based Payment”, which was adopted by the Company beginning on January 1, 2006, 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 using a modified prospective application. The valuation provisions apply to new awards and to awards that were outstanding on the effective date and subsequently modified or cancelled. Share-based compensation expense relates to share-based awards granted subsequent to January 1, 2006, and share-based awards granted prior to, but not yet vested as of January 1, 2006, are based on the grant date fair value.

Subsequent to the Closing Date of the TWC Transaction, the Company’s stock-based compensation expense consists of expense associated with stock options held by and subsequently granted to independent members of the Company’s Board of Directors. The stock-based compensation expense associated with the former employees of the Company, who became employees of the Distributor as of the Closing Date, are recorded on the books of the Distributor. Stock-based compensation expense is calculated using the Black-Scholes-Merton formula as our closed-form valuation option pricing model (the “Option Model”). The Option Model requires the use of subjective and complex assumptions, per the requirements of FAS123R, that include: (i) the option's expected term, (ii) the estimated future price volatility of the underlying stock, (iii) the risk-free interest rate, (iv) the dividend yield and (v) expected forfeitures.

The Distributor records stock-based compensation expense associated with Company stock options held by and subsequently granted to the Distributor’s employees (the former employees of the Company before the TWC Transaction) in accordance with Emerging Issues Task Force (”EITF”) Issue No. 00-12, “Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee”, (“EITF 00-12”). EITF 00-12 requires that the Distributor recognize the costs of stock-based compensation incurred by an investor on its behalf.

For a complete discussion of the Option Model and assumptions used to calculate stock-based compensation expense, please refer to Note 9 below.

INCOME TAXES

The Company files a consolidated corporate tax return and accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting basis and the tax basis of the Company’s assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when some portion or the entire deferred tax asset will not be realized on a more likely than not basis. Based on the Company’s assessment of all available evidence, the Company has concluded that its deferred tax assets are not more likely than not to be realized. This conclusion is based primarily on our history of net operating losses, annual net operating loss limitations under Internal Revenue Code (“IRC”) Section 382, and the need to generate significant amounts of taxable income in future periods on a consistent and prolonged basis in order to utilize the deferred tax assets. Accordingly, the Company has recorded a full valuation allowance on its deferred tax assets and has recorded a net deferred tax liability related to its investment in the Distributor. The deferred tax liability related to the Distributor is not offset against the deferred tax assets as the reversal period for this amount is not considered to be determinable on a more likely than not basis.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have no material unrecognized tax benefits at March 31, 2008.

BASIC AND DILUTED LOSS PER COMMON 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 potential dilutive common shares, such as options and warrants, had been issued. The treasury stock method is used to calculate dilutive shares and reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised.

The effects of the potentially dilutive securities (options and warrants that are outstanding) were not included in the computation of diluted loss per share for the periods presented since to do so would have been anti-dilutive.

NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS OF THE COMPANY

During meetings held on October 8, 2008 and November 13, 2008, the Audit Committee of the Board of Directors of the Company, acting on a recommendation from the Company’s management, determined that it was necessary to restate (i) the Company’s unaudited consolidated financial statements and other financial information as of and for the three months ended September 30, 2006, March 31, June 30 and September 30, 2007 and March 31 and June 30, 2008, and (ii) the audited consolidated financial statements and other financial information of the Company and the Distributor as of December 31, 2006 and 2007 and for the periods then ended.

In addition, the Company previously did not account for its obligation to deliver shares of its Common Stock to the Distributor upon the redemption of the aforementioned Class W Units. The Company has now accounted for such obligation as a written call option (the “Class W Option Liability”), by recording the fair value of the Class W Option Liability as of July 21, 2006 (i.e., the date that the Class W Units of the Distributor were issued), and subsequently re-measuring the fair value of the Class W Option Liability through its Statements of Operations (in other income (expense)) at the end of every reporting period. As of July 21, 2006, the Class W Option Liability was valued at $3.8 million. Subsequently, the Company has re-measured and recorded in its financial statements the fair value movements in the Class W Option Liability as of March 31, 2008 and 2007. As a result of these re-measurements, other income for the three months ended March 31, 2008 decreased by $1.5 million to $1.4 million of other expense, and other income for the three months ended March 31, 2007 increased by $0.4 million to $0.4 million.

The cumulative impact of the above-described restatement adjustments on selling, general and administrative expenses, equity in net loss from Distributor, other income (expense), provision (benefit) for income taxes, net loss, net loss per share, investment in Distributor, total assets, Class W Option Liability, deferred tax liability, total liabilities, accumulated deficit and total stockholders’ equity as of and for the three months ended March 31, 2008 and 2007 are as follows:

(In thousands)	Three Months Ended March 31, 2008 (Unaudtied)									Three Months Ended March 31, 2007 (Unaudited)
	As Originally reported			Restatement Adjustments			As Restated			As Originally reported			Restatement Adjustments			As Restated

Selling, general and administrative	$	421		$	940		$	1,361		$	456		$	603			1,059
Equity in net loss from Distributor		4,787			-			4,787			2,228			340			2,568
Other income (expense)		126			(1,523	)		(1,397	)		49			367			416
Provision (Benefit) for income taxes		491			-			491			134			(136	)		(2	)
Net loss		(5,573	)		(2,463	)		(8,036	)		(2,769	)		(440	)		(3,209	)
Net loss per share		(0.08	)		(0.04	)		(0.12	)		(0.04	)		(0.01	)		(0.05	)
Investment in Distributor		67,288			(1,761	)		65,527			82,877			1,955			84,832
Total assets		77,572			(1,761	)		75,811			89,884			1,955			91,839
Class W option liability		-			5,691			5,691			-			2,649			2,649
Deferred tax liability		11,897			1,391			13,288			13,154			1,371			14,525
Total liabilities		12,195			7,082			19,277			14,510			4,020			18,530
Accumulated deficit		(45,596	)		(8,843	)		(54,439	)		(32,667	)		(2,065	)		(34,732	)
Total stockholders' equity		65,377			(8,843	)		56,534			75,374			(2,065	)		73,309

RESTATEMENT OF FINANCIAL STATEMENTS OF THE DISTRIBUTOR

The restatements to the Distributor’s financial statements relate to an error in the application of generally accepted accounting principles with respect to the accounting classification and measurement of certain redemption rights of the holders of the Distributor’s Class W Units.

The Distributor’s prior accounting methodology with respect to the accounting classification and measurement of the aforementioned redemption rights did not properly classify and measure the Distributor’s Class W Units as redeemable securities. The Distributor has now recorded the cash redemption value of the Class W Units outside of permanent equity in its financial statements. Subsequent changes to the cash redemption value of such units has resulted in increase or decrease, as applicable, to the Redeemable Class W Units amount, with a corresponding increase or decrease, as applicable, in member’s deficit, which now consists of only the value of the Distributor’s Class G Units. As of July 21, 2006 (the issuance date of the Distributor’s Class W Units), the value of the Redeemable Class W Units was recorded at $277.6 million.

The Distributor also previously did not account for its right to receive shares of the Company’s Common Stock upon the redemption of the aforementioned Class W Units. The Distributor has now recognized, as an asset, the fair market value relating to its right to obtain shares of the Company’s Common Stock to affect the Class W Unit redemption in the Distributor’s financial statements as a Class W Purchased Call Option (included in deposits and other). As of July 21, 2006, this Class W Purchased Call Option was valued at $3.8 million and is carried at cost within deposits and other. Any impairments of the Class W Purchased Call Option have been reflected in the Distributor’s Statements of Operations in other income (expense).

As of March 31, 2007, the cash redemption value of the Redeemable Class W Units increased by $169.7 million, to $447.3 million (resulting in a deficit balance in the Class G Units member’s deficit of $349.4 million as of March 31, 2007), and as of March 31, 2008, the cash redemption value of the Class W Units decreased by $336.6 million, to $110.7 million (resulting in a deficit balance in the Class G Units member’s deficit of $49.9 million as of March 31, 2008).

The Distributor recorded an impairment of $1.1 million to the Class W Purchased Call Option asset (included in deposits and other) as of March 31, 2007 (with a corresponding increase to the Distributor’s other expense for the three months ended March 31, 2007 of $1.1 million).

The cumulative impact of the above-described restatement adjustments on other expense, net loss, Class W Purchased Call Option (included in deposits and other), total assets, Redeemable Class W Units, and member’s equity (deficit) as of and for the three months ended March 31, 2008 and 2007 are as follows:

(In thousands)	Three Months Ended March 31, 2008 (Unaudited)									Three Months Ended March 31, 2007 (Unaudited)
	As Originally Reported			Restatement Adjustments			As Restated			As Originally Reported			Restatement Adjustments			As Restated

Other expense	$	(997	)	$	-		$	(997	)	$	(263	)	$	(1,134	)	$	(1,397	)
Net loss		(15,441	)		-			(15,441	)		(2,399	)		(1,134	)		(3,533	)
Deposits and other		2,366			2,649			5,015			205			2,649			2,854
Total assets		267,479			2,649			270,128			250,449			2,649			253,098
Redeemable Class W units		-			110,673			110,673			-			447,267			447,267
Member's equity (deficit)		58,075			(108,024	)		(49,949	)		95,231			(444,618	)		(349,387	)

NOTE 4. FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards (“Statement”) No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The Company adopted on January 1, 2008, certain provisions of FAS 157 related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis. The adoption of FAS 157 for financial assets and liabilities did not have a material impact on the Company’s consolidated financial statements. The provisions of FAS 157 related to other non-financial assets and liabilities will be effective on January 1, 2009, and will be applied prospectively. The Company is currently evaluating the impact the provisions of FAS 157 will have on the Company’s consolidated financial statements as it relates to other non-financial assets and liabilities.

The Company adopted the provisions of FAS 157 as of January 1, 2008, to value the Class W Option Liability. The Distributor is owned 70% by TWC Holdings and W-G Holding (collectively, the “TWC Parties”) and 30% by the Company. The Company’s 30% membership interest in the Distributor consists of the Distributor’s Class G Units. The 70% interest in the Distributor held by the TWC Parties consists of Class W Units. Pursuant to the Distributor’s Amended and Restated Limited Liability Company Agreement (the “Distributor LLC Agreement”), at any time after July 21, 2007, the TWC Parties have the option to redeem all or a portion of their Class W Units for either (i) shares of the Company’s common stock or, (ii) at the option of the Distributor (and with the consent of the TWC Parties), cash. In order to exercise such redemption right, the TWC Parties must provide to the Distributor and the Company written notice of redemption (“Notice of Redemption”), specifying the number of Class W Units being tendered for redemption.

Upon receipt of a Notice of Redemption, the number of Company common shares issuable to the TWC Parties is determined by multiplying (i) the number Class W Units being redeemed, by (ii) a fraction, the numerator of which is the number of outstanding Company common shares as of the date of the Notice of Redemption, and the denominator of which is the number of outstanding Company common shares as of July 21, 2006 (the intent of this adjustment factor being that the TWC Parties would receive no less than 70% of the Company’s common stock upon redemption of all of the Class W Units). Notwithstanding the above-described computation, in the event that the trading price of the Company’s common stock is less than $0.42 as of the date of the Notice of Redemption, the number of common shares issuable to the TWC Parties is determined by dividing (i) $60 million dollars (the “Floor Amount”), by (ii) the trading price of the Company’s common stock as of the date of the Notice of Redemption (such calculation being referred to as the “Floor Calculation”). In other words, if on the date of the Notice of Redemption the trading price of the Company’s common stock is less than $0.42, then the TWC Parties would be entitled to receive either cash or shares of the Company’s common stock with a value of no less than the Floor Amount of $60 million.

The Class W Option Liability recorded at fair value in the Company’s balance sheet as of March 31, 2008 is categorized based upon the level of judgment associated with the inputs used to measure its fair value. Hierarchical levels defined by FAS 157 are directly related to the amount of subjectivity associated with the inputs to the fair valuation of the Class W Option Liability, which is as follows:

Level 1 – inputs are un-adjusted quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2 – inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 – unobservable inputs developed using estimates and assumptions developed by management, which reflect those that a market participant would use.

The Company has utilized a lattice valuation model to simulate future stock movements of the Company’s Common Stock in order to determine the fair value of the Class W Option Liability. The assumptions used in preparing such model include, among other things, inputs such as volatility, risk-free interest rates, dividend yield, expected time of redemption and assessment of counterparty risk, which the Company has classified as unobservable, Level 3 inputs. The Company determined the fair value of the Class W Option Liability as of March 31, 2008 to be $5.7 million resulting in a corresponding decrease to other income of $1.5 million for the three months ended March 31, 2008 (as compared to December 31, 2007). The following table summarizes our fair value measurements using significant Level 3 inputs, and changes therein, for the three months ended March 31, 2008 :

	Three Months Ended
	March 31, 2008

Class W Option Liability:
Balance at December 31, 2007	$	4,168
Re-measurement of Class W Option Liability		1,523
Balance at March 31, 2008	$	5,691

In addition, in February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“FAS 159”), which the Company adopted as of January 1, 2008. FAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure certain financial assets and liabilities and any changes in fair value are recognized in earnings. The Company did not elect the fair value option upon adoption of FAS 159.

NOTE 5 . INVESTMENT IN DISTRIBUTOR (GENIUS PRODUCTS, LLC)

Summaries of the statements of operations, balance sheet and the computations of the Company’s equity in net loss of the Distributor are shown below.

GENIUS PRODUCTS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS)

(UNAUDITED)

	Three Months Ended March 31,
	2008			2007
	Restated (Note 3)			Restated (Note 3)

Revenues, net of sales, returns, discounts and allowances of $29,006 and $31,672	$	98,211		$	83,117

Total cost of revenues		(101,995	)		(76,155	)
Gross (loss)		(3,784	)		6,962

Total operating expenses		(10,660	)		(9,098	)
Loss from operations		(14,444	)		(2,136	)

Other expense		(997	)		(1,397	)
Net loss	$	(15,441	)	$	(3,533	)

GENIUS PRODUCTS, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

	March 31, 2008 Restated (Note 3)			December 31, 2007
	(unaudited)			Restated

ASSETS
Current assets:
Cash and cash equivalents	$	5,552		$	3,102
Restricted cash - short term		5,877			7,765
Accounts receivable, net of allowance for doubtful accounts of $3,352 and $4,311
and sales returns of $42,104 and $68,159		90,283			123,295
Inventories, net of reserves for obsolescence of $13,974 and $13,257		9,667			11,282
Prepaid expenses and other current assets		940			1,110

Total current assets		112,319			146,554

Restricted cash - long term		3,186			3,323
Property and equipment, net of accumulated depreciation of $560 and $455		2,732			953
Royalty advances, net of uncollectible advances of $7,890 and $5,112		37,481			31,492
Film library, net of accumulated amortization of $8,702 and $6,452		12,154			14,403
Goodwill		87,512			87,512
Other intangible assets, net of accumulated amortization of $13,030 and $9,675		8,241			11,596
Deferred financing fees		1,488			1,654
Deposits and other		5,015			5,617

Total assets	$	270,128		$	303,104

LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable	$	39,178		$	31,477
Notes payable		25,732			31,297
Notes payable to Genius Products, Inc.		8,352			-
Remittance to TWC		72,261			78,759
Remittance to other licensors		24,114			20,000
Accrued advertising and marketing		18,185			24,515
Other accrued expenses		17,495			20,910
Deferred revenue		2,965			8,492

Total current liabilities		208,282			215,450

Long term liabilities:
Notes payable to Genius Products, Inc.		-			8,191
Long term notes payable		1,081			627
Long term capital lease		41			30

Total long term liabilities		1,122			8,848

Redeemable Class W units		110,673			284,378

Total member's deficit		(49,949	)		(205,572	)

Total liabilities and member's deficit	$	270,128		$	303,104

Our equity in net loss of the Distributor is adjusted each period for non-cash basis differences between the investment and the underlying equity in the Distributor and for the impact of certain costs incurred by the Distributor on behalf of the Company.

As a result of restating the Distributor’s financial statements as detailed in Note 3, the net loss of the Distributor for the three months ended March 31, 2007 increased by $1.1 million to $3.5 million. This resulted in a basis difference adjustment to our investment in the Distributor of $0.3 million (30% of the net loss from the Distributor for the three months ended March 31, 2007).

	Three Months Ended March 31,
	2008			2007 Restated (Note 3)

Genius Products, Inc. 30% share of net loss from the Distributor	$	4,632		$	1,060

Adjustments for basis differences		1,111			1,111

(Benefit)/Expense for stock compensation for Distributor employees		(908	)		397

Genius Products, Inc. 30% share of interest on the Distributor's notes payable		(48	)		-

Equity in net loss from Distributor	$	4,787		$	2,568

NOTE 6 . CONTINGENCIES

GUARANTY OF CREDIT FACILITY

On August 10, 2007, the Distributor entered into a three-year, senior secured revolving credit facility (the “Credit Agreement”) with Société Générale (‘‘Soc Gen’’), as lender and agent. The Credit Agreement provided for an initial commitment of $30 million and up to a total of $70 million. On November 1, 2007, the Distributor, Soc Gen and Alliance Leicester entered into the Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which increased the total commitment to $50 million, based on expected incremental commitments. The Amended Credit Agreement terminates on June 30, 2010, and may be extended to August 10, 2010, under satisfaction of certain conditions. Borrowings outstanding under the Amended Credit Agreement were $25.1 million at March 31, 2008. The maximum amount available at March 31, 2008 was $25.2 million. Soc Gen holds a security interest in substantially all personal property of the Company, the Distributor, and its direct and indirect subsidiaries, other than TWC accounts receivable. TWC continues to have a first priority security interest in accounts receivable attributable to TWC content.

The Company and the direct and indirect subsidiaries of the Distributor have unconditionally guaranteed the obligations of the Distributor under the Amended Credit Agreement (i.e., full and punctual payment of the Distributor’s obligations, when and as due). Management has assessed the Company’s potential obligations under this guarantee and considered the provisions of FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, noting that the likelihood of making any payments related to this guarantee is remote and therefore has not recorded a liability on the Company’s balance sheets associated with this guarantee.

LITIGATION

Except as described below, neither we nor the Distributor are a party to any legal or administrative proceedings, other than routine litigation incidental to our business and that of the Distributor that we do not believe, individually or in the aggregate, would be likely to have a material adverse effect on our, or the Distributor’s, financial condition or results of operations.

Falcon Picture Group Matter

We have disclosed in prior reports filed with the Securities and Exchange Commission a complaint filed against the Company in the Circuit Court of Cook County, Illinois by Falcon Picture Group, LLC (“Falcon”), and the related counterclaim filed by the Company against Falcon and its owner, Carl Amari. There have been no material developments in these matters. For a complete description of the facts and circumstances surrounding this litigation, please see the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2007 under Part I, Item 3., “Legal Proceedings”, which is incorporated herein by reference.

Entertainment Resource Matter

We have disclosed in prior reports filed with the Securities and Exchange Commission a complaint filed against the Company in the Circuit Court of Broward County, Florida, Case No. 06-012249 CACE 05, by Larry S. Hyman, as assignee for Entertainment Resource, Inc. (“ERI”). There have been no material developments in this matter. For a complete description of the facts and circumstances surrounding the ERI litigation, please see the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2007 under Part I, Item 3., “Legal Proceedings”, which is incorporated herein by reference.

NOTE 7 . NOTES PAYABLE TO RELATED PARTY (RELATED PARTY LOANS)

On September 27, 2007, the Distributor borrowed $6.0 million from the Company and issued a promissory note in favor of the Company in the principal amount of $6.0 million. On November 1, 2007, the Distributor borrowed an additional $2.0 million from the Company and issued a promissory note in favor of the Company in the principal amount of $2.0 million. Under each of the aforementioned notes, interest is due on the unpaid principal balance at a monthly rate equal to the LIBOR Rate (as defined in the notes) plus five percent (5%) until paid. On March 16, 2008, the Company ’s Board of Directors approved amendments to each of (i) that certain promissory note, dated September 27, 2007, by the Distributor in favor of the Company, in the principal amount of $6 million and (ii) that certain promissory note, dated November 1, 2007, by the Distributor in favor of the Company in the principal amount of $2 million, pursuant to which principal and accrued interest under the notes would be due and payable on demand at any time after January 1, 2009.

In the event payment of principal or interest due under the notes is not made when due, the outstanding principal balance will bear interest at the rate of two percent (2%) above the interest rate which is otherwise provided under the notes for so long as such event continues. If the notes are not paid when due, the Distributor agreed to pay the Company’s reasonable costs of collection, including, without limitation, all reasonable attorneys’ fees and all reasonable expenses actually incurred by the Company in connection with such collection efforts. The principal amount of the notes may be prepaid in whole or in part, provided that all accrued interest on the amount to be prepaid is also paid at such time. The proceeds from the notes were used to pay amounts owed by the Distributor to TWC under the TWC Distribution Agreement. As of March 31, 2008, an aggregate of $8.4 million in principal and accrued interest expense was outstanding under the notes.

Payments to TWC pursuant to the TWC Distribution Agreement are due 45 days from the last day in the calendar month. As needed, these terms are extended anywhere from 15 to 45 days in order to provide flexibility and manage cash flows. The Distributor expects TWC to continue to provide such flexibility through at least December 31, 2008.

NOTE 8 . STOCKHOLDERS' EQUITY

COMMON STOCK

During the three months ended March 31, 2008, we issued 50,000 common shares related to the exercise of stock options for proceeds of $0.04 million. No warrants were exercised during the three months ended March 31, 2008.

During the three months ended March 31, 2007, we issued 1,491,073 common shares related to the exercise of warrants for proceeds of $0.8 million. Additionally, during the three months ended March 31, 2007, we issued 625,493 common shares related to the exercise of options for proceeds of $1.1 million.

A summary of warrant activity follows:

			Weighted
			Average		Aggregate
	Warrants		Exercise		Intrinsic
	Outstanding		Price		Value
December 31, 2007		10,425,958	$	2.45
Exercised		-		-
March 31, 2008		10,425,958	$	2.45	$	25,581,631
Warrants exercisable, March 31, 2008		10,425,958	$	2.45	$	25,581,631

The following information applies to warrants outstanding at March 31, 2008:

					Weighted				Weighted
					average				average
					exercise price of				exercise price of
	Warrants		Average		warrants		Warrants		warrants
	outstanding		remaining life		outstanding		exercisable		exercisable
Under $1.50		943,757		0.22	$	1.40		943,757	$	1.40
$1.50 - $1.99		170,723		2.51		1.88		170,723		1.88
$2.00 - $2.99		7,664,478		2.34		2.48		7,664,478		2.48
$3.00 - $3.99		1,647,000		1.00		3.00		1,647,000		3.00
		10,425,958		1.94	$	2.45		10,425,958	$	2.45

NOTE 9 . STOCK-BASED COMPENSATION

The following table summarizes the activity for outstanding options for the three months ended March 31, 2008:

				Weighted
				Average		Aggregate
	Options			Exercise		Intrinsic
	Outstanding			Price		Value
December 31, 2007		17,770,041		$	1.82
Exercised		(50,000	)		0.89
Canceled		(76,666	)		1.73
March 31, 2008		17,643,375		$	1.83	$	(19,902,057	)
Options exercisable, March 31, 2008		14,586,443		$	1.79	$	(15,899,638	)

The following table summarizes additional information regarding outstanding and exercisable stock options as of March 31, 2008:

					Weighted				Weighted
					average				average
					exercise price of				exercise price of
	Options		Average		options		Options		options
	outstanding		remaining life		outstanding		exercisable		exercisable
Under $1.50		1,900,752		3.82	$	0.67		1,900,752	$	0.67
$1.50 - $1.99		10,670,373		6.75		1.72		8,654,941		1.69
$2.00 - $2.99		3,917,500		6.72		2.15		2,876,000		2.10
$3.00 - $3.99		793,750		5.82		3.00		793,750		3.00
$4.00 + over		361,000		4.33		5.07		361,000		5.07
		17,643,375		6.34	$	1.83		14,586,443	$	1.79

For the service-based stock options, the Distributor estimated share-based compensation expense for the three months ended March 31, 2008 and 2007 using the Black-Scholes-Merton formula with the following weighted average assumptions:

	Three Months Ended March 31,
	2008		2007
Risk free interest rate		3.3%		4.5%
Expected dividend yield		-		-
Expected volatility		73.0%		106.6%
Expected life (in years)		6.0		5.3

For market-based options, the Company utilizes the Monte Carlo Simulation as the stock option model to provide the most accurate fair value estimate due to the path dependency of the options valued under the provisions of this grant. Monte Carlo Simulation is a lattice model, which - unlike the closed-form model – can incorporate a range of expected volatilities. These valuations were performed on a multi-tranche basis considering three vesting tranches and the weighted average volatility for these grants is calculated to be 54.94%. The risk-free rates have been determined based upon the interest rates for zero-coupon U.S. Treasury bonds as of March 31, 2008. A yield curve has been determined based upon interpolating between the rates ranging from 1.22% to 3.45%. Consistent with the service-based stock option grants, the dividend rate is 0.0% for the performance-based option grants.

Total share-based compensation benefit recognized by the Company for the three months ended March 31, 2008 was $0.07 million versus compensation expense of $0.2 million for the three months ended March 31, 2007. No income tax benefit was recognized in the statement of operations for share-based compensation arrangements for the Company.

In relation to options issued by the Company to employees of the Distributor, the Distributor recorded share-based compensation benefit of $1.3 million for the three months ended March 31, 2008 versus an expense of $0.6 million for the three months ended March 31, 2007.

NOTE 10 . INCOME TAXES

The Company recorded a federal and state tax provision of $0.5 million for the three months ended March 31, 2008. The tax provision resulted from the net increase in the deferred tax liability related to our investment in the Distributor. As noted above, the Company currently has a full valuation allowance on its deferred tax assets and has recorded a net deferred tax liability relating to its investment in Distributor.

NOTE 11 . SUBSEQUENT EVENTS

In April 2008, the Distributor began to execute its strategic decision to move away from non-branded business, improve efficiencies, and restructure the organization. As a consequence, the Distributor eliminated thirty two positions. The expected charge to operations relating to involuntary termination costs is approximately $0.9 million.

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 “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 19, 2008.

NATURE OF BUSINESS

Genius Products, Inc. (“we”, “us”, “our” or the “Company”), through our 30%-owned subsidiary, Genius Products, LLC (the “Distributor”), is a leading independent home entertainment products company that acquires, produces and licenses, through the Distributor’s multiple distribution agreements with content partners, an extensive library of motion pictures, television programming, and trend entertainment on digital versatile disks (“DVD”) and digitally. The Distributor works in partnership with major retailers to distribute widely recognized home entertainment brands to a diversified customer base. The remaining 70% of the Distributor is owned by The Weinstein Company Holdings LLC (“TWC Holdings”) (which includes a 1% percentage interest owned indirectly through its wholly-owned subsidiary, W-G Holding Corp. (“W-G Holding”). TWC Holdings is the subsidiary of The Weinstein Company LLC (“TWC”), the largest provider of content for the Distributor’s library.

The Distributor currently distributes its library on DVDs, next-generation DVD, and electronically in a digital format. We plan to continue to expand the distribution of the Distributor’s theatrical and non-theatrical product through the diverse emerging digital distribution markets including: Video-on-Demand (“VOD”) and Electronic Sell-Through (“EST”) on the Internet to companies such as Amazon, Apple, MovieLink and Microsoft, Internet-based subscription VOD customers (such as NetFlix) and direct-to-television peer-to-peer network solutions. Through its partnerships, the Distributor has released 128 theatrical and non-theatrical titles since inception. The Distributor distributes products to basic channels distributed on cable, Direct Broadcast Satellite (“DBS”) and Internet Protocol Television (“IPTV”), which delivers television programming to households via a broadband connection using Internet protocols.

The Distributor primarily focuses on four core branded content categories that we call Content Verticals:

Theatrical/Independent Films (includes Independent Film Channel (IFC®) , RHI Entertainment™ (Hallmark library), Tartan, The Weinstein Company® and Wellspring™)

Sports (includes ESPN® and World Wrestling Entertainment®)

Lifestyle (includes Animal Planet, The Learning Channel (TLC™) and Wellspring™)

Family/Faith (includes Classic Media, Discovery Kids™, and Sesame Workshop®)

The Distributor maintains in perpetuity distribution rights for TWC content released during the term of the TWC Distribution Agreement, subject to certain buy-back rights of the TWC content by TWC.

Under the TWC Distribution Agreement, TWC granted a license to the Distributor to manufacture, promote and sell in the U.S. and its territories and possessions, through December 31, 2010 (or December 31, 2013 if TWC extends the term), DVDs, videocassettes and other forms of pre-recorded home video of feature films and direct-to-video releases which TWC has the right to distribute on home video. These releases include films produced by TWC as well as films which TWC acquires or obtains the right to distribute on home video. The TWC Distribution Agreement provides that the Distributor will earn a fee on sales of these home video products, depending on the level of these sales compared to theatrical box office revenues for the same films. The Distributor collects the proceeds from sales of home video products and remits these proceeds to TWC, minus the Distributor’s distribution fee, cost of goods sold (including manufacturing expenses) and certain marketing expenses.

CRITICAL ACCOUNTING POLICIES

FAIR VALUE OF FINANCIAL INSTRUMENTS.

The carrying amounts of cash and cash equivalents, prepaid expenses, accounts payable, accrued expenses, and Class W Option Liability approximate the fair value thereof.

INVESTMENT IN DISTRIBUTOR

At the closing of the TWC Transaction, we contributed to the Distributor all of our operating businesses, including substantially all of our assets, except for $1 million in cash and certain liabilities, and received a 30% equity interest in the Distributor. The accompanying consolidated financial statements account for the Company’s investment in the Distributor (30% membership interest represented by the Distributor’s Class G units) using the equity method of accounting. On the Company’s consolidated statement of operations subsequent to the Closing Date, the Company recorded its 30% share of the Distributor’s profit or loss as equity in net profit or loss from the Distributor, adjusted for non-cash basis differences and costs incurred by the Distributor on behalf of the Company. Pursuant to Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, the Company will periodically assess whether a decrease in value of the investment has occurred (which is other than temporary) and which should be recognized immediately, resulting in an impairment loss.

CLASS W OPTION LIABILITY

The Company records the Class W Option Liability at fair value in accordance with SFAS No. 157, Fair Value Measurements (“FAS 157”). The Company has utilized a lattice valuation model to simulate future stock movements of the Company’s Common Stock in order to determine the fair value of the Class W Option Liability. The assumptions used in preparing such model include, among other things, inputs such as volatility, risk-free interest rates, dividend yield, expected time of redemption and assessment of counterparty risk.

STOCK-BASED COMPENSATION

Under SFAS No. 123R, “Share-Based Payment” (“FAS 123R”), which was adopted by the Company beginning on January 1, 2006, 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 using a modified prospective application. The valuation provisions apply to new awards and to awards that were outstanding on the effective date and subsequently modified or cancelled. Share-based compensation expense relates to share-based awards granted subsequent to January 1, 2006, and share-based awards granted prior to, but not yet vested as of January 1, 2006, are based on the grant date fair value.

The Distributor records stock-based compensation expense associated with Company stock options held by and subsequently granted to the Distributor’s employees (the former employees of the Company before the TWC Transaction) in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-12, “Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee”, (“EITF 00-12”). EITF 00-12 requires that the Distributor recognize the costs of stock-based compensation incurred by an investor on its behalf.

INCOME TAXES

RESULTS OF OPERATIONS OF GENIUS PRODUCTS, INC.

All of the operations of the Company relate to the activity of the Distributor. We account for our 30% investment in the Distributor using the equity method of accounting, pursuant to Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”). On our consolidated statement of operations, we record our 30% share of the Distributor’s profit (loss) as equity in net earnings (loss) from Distributor, adjusted for basis differences and costs incurred by the Distributor on behalf of the Company. Per the requirements of APB No. 18, we periodically assess whether a decrease in value of the investment has occurred which is other than temporary and which should be recognized immediately as an impairment loss. Under the equity method of accounting, only our investment in and amounts due to and from the Distributor have been included as an asset in our consolidated balance sheets.

The Company does not report its different product lines as segments as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), 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.

Revenues

The Company had no revenue for the three months ended March 31, 2008 and the three months ended March 31, 2007. All of the revenue is reflected in the results of operations of the Distributor. The Distributor generated net revenue of $98.2 million net of sales returns, discounts and allowances of $29.0 million for the three months ended March 31, 2008 versus net revenue of $83.1 million net of sales returns, discounts and allowances of $31.7 million for the three months ended March 31, 2007.

Net revenue from sales of TWC titles was $59.1 million, and net revenue from sales of non-TWC titles was $39.1 million for the three months ended March 31, 2008. For the three months ended March 31, 2007, net revenue from sales of TWC titles was $60.7 million and net revenue from sales of non-TWC titles was $22.4 million.

TWC-related revenues were primarily comprised of major TWC titles released during the three months ended March 31, 2008, which include The Mist, Awake, The Hunting Party, and strong repeat sales of Halloween which was initially released in December 2007. For the three months ended March 31, 2007, TWC-related revenues were primarily comprised of major titles including School for Scoundrels, The Protector, Harsh Times, and Shut Up and Sing.

Net revenue from non-TWC titles increased by 75% for the three months ended March 31, 2008 versus the three months ended March 31, 2007, driven by strong revenue from titles from World Wrestling Entertainment®, Sesame Workshop®, Classic Media, RHI Entertainment™, and Promenade.

Sales returns, discounts and allowances as a percentage of gross revenue was 23% for the three months ended March 31, 2008, versus 28% for the three months ended March 31, 2007.

Consistent with other retail product distributors, the Distributor has experienced some degree of sales seasonality primarily caused by the quantity and quality of made for theatrical releases and the traditionally strong fourth quarter which represented almost 40% of 2007 net revenue.

We have also historically experienced higher returns during the first and third quarters of the year than during the second and fourth quarters.

Costs and expenses

Cost of Revenues

The Company had no costs of revenues for the three months ended March 31, 2008 and for the three months ended March 31, 2007. All of the costs of revenues are reflected in the results of operations of the Distributor.

Costs of revenues for the Distributor consist primarily of the raw material and manufacturing costs of products sold to customers, packaging and shipping costs, advertising and marketing, amortization of the film library, and participations and royalties. Participation expenses related to TWC’s distribution agreement are calculated based on SOP 00-2 which amortizes such costs of revenues using the film forecast method over a period of two years.

The Distributor’s costs of revenues were $102.0 million for the three months ended March 31, 2008 versus $76.2 million for the three months ended March 31, 2007.

Product cost, supply chain, and inventory obsolescence costs were $16.4 million for the three months ended March 31, 2008 versus $20.3 million for the three months ended March 31, 2007. A reduction in cost of $3.9 million is due to efficiencies in purchasing and supply chain.

Bad debt and customer deductions decreased by $1.1 million in the three months ended March 31, 2008 versus the three months ended March 31, 2007.

Amortization of intangibles and film library increased by $4.4 million in the three months ended March 31, 2008 versus the three months ended March 31, 2007. Based on an evaluation of fair value and re-alignment of company resources, the Distributor accelerated the amortization of its film library by $1.9 million and also reviewed the value of all intangible assets which resulted in an impairment of $2.5 million.

Marketing and advertising costs decreased by $0.4 million in the three months ended March 31, 2008 versus the three months ended March 31, 2007.

Participations for TWC titles increased by $10.0 million in the three months ended March 31, 2008 versus the three months ended March 31, 2007 due to the quantity of release titles. Participation expenses for non-TWC titles increased by $17.0 million in the three months ended March 31, 2008 versus the three months ended March 31, 2007 primarily driven by the increase in the Distributor’s non-TWC branded business (net revenue from sales of non-TWC titles increased by 75% for the three months ended March 31, 2008 versus the three months ended March 31, 2007) and evaluation of unamortized advances which resulted in recording advance impairments of $2.8 million.

Operating Expenses

The Company had selling, general and administrative expenses of $1.4 million for the three months ended March 31, 2008 versus $1.1 million for the three months ended March 31, 2007. The selling, general and administrative expenses reflect an allocation of the public company costs borne by the Distributor on behalf of the Company.

The Distributors’ selling, general and administrative expenses were $10.7 million for the three months ended March 31, 2008 versus $9.1 million for the three months ended March 31, 2007, an increase of $1.6 million which primarily resulted from an increase in headcount. Selling, general and administrative expenses for the three months ended March 31, 2008 included $1.2 million of research and development costs relating to video game development. Stock compensation income for the three months ended March 31, 2008 was $1.3 million versus an expense of $0.6 million for the three months ended March 31, 2007.

The Company’s 30% equity in the net loss of the Distributor was $4.8 million for the three months ended March 31, 2008 versus $2.6 million for the three months ended March 31, 2007.

Other Income and Expense

The Company had other expense of $1.4 million for the three months ended March 31, 2008 versus other income of $0.4 million for the three months ended March 31, 2007. For the three months ended March 31, 2008 the Company had interest income of $0.1 million earned on outstanding cash balances accrued on the two promissory notes totaling $8.0 million, and other expense of $1.5 million related to the re-measurement of the Class W Option Liability. For the three months ended March 31, 2007, the Company had interest income of $0.1 million earned on outstanding cash balances, and other income of $0.4 million related to the re-measurement of the Class W Option Liability.

The Distributor had other expense of $1.0 million for the three months ended March 31, 2008 versus $1.4 million for the three months ended March 31, 2007. For the three months ended March 31, 2008 the Distributor had interest expense of $1.0 million on interest due on promissory notes issued by the Company to the Distributor and borrowings under the credit facility with Societe Generale. For the three months ended March 31, 2007, the Company had interest expense of $0.3 million on interest due to the promissory notes issued by the Company to the Distributor and borrowings under the credit facility with Societe Generale, and other expense of $1.1 million related to the impairment of the Class W Purchased Call Option.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations during the three months ended March 31, 2008 was $0.02 million primarily due to net loss of $8.0 million offset by equity in net losses from the Distributor of $4.8 million, operating expenses paid by the Distributor of $1.3 million, and re-measurement of the Class W Option Liability of $1.5 million.

Cash provided by financing activities for the three months ended March 31, 2008 was $0.04 million reflecting proceeds from exercise of options.

At March 31, 2008, the Company had cash balances of $1.8 million and the Distributor had cash and restricted cash balances of $14.6 million. The restricted cash balances are associated with (i) required minimum cash balances pursuant to the Credit Agreement, (ii) certain bank accounts that are subject to semi-monthly disbursements to the Distributor and other parties under a waterfall of funds prescribed by the Amended Credit Agreement, and (iii) an office lease security deposit.

We may consider additional issuances of equity and/or debt financing to fund future growth opportunities. The Company is reliant on the Distributor to pay certain costs. The Distributor has limited access to additional capital and has little availability under its current credit facility. The Distributor utilized its maximum availability which was $25.2 million as of March 31, 2008 of its $50 million facility. Accordingly, near term cash needs are met through support from TWC. Payments to TWC under the TWC Distribution Agreement are due 45 days from the last day in the calendar month. As needed, these terms are extended anywhere from 15 to 45 days in order to provide flexibility and manage cash flows. The Distributor expects TWC to continue to provide such flexibility through at least December 31, 2008.

Management expects that as non-TWC revenue increases, resulting in increased non-TWC receivables, the Distributor’s availability will increase under the Amended Credit Agreement with Societe Generale. Although we believe that the Distributor’s 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 2008, or ever, as such performance is subject to numerous variables and uncertainties, many of which are out of our control. Although we own 30% of the Distributor, we only have access to the cash on the Distributor’s balance sheet to the extent that we agree with our partner, TWC, to make a distribution to us. As of March 31, 2008, the Company had no off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2008, the Distributor’s cash and cash equivalents were invested with financial institutions with investment grade credit ratings. Due to the short duration of the Distributor’s investment portfolio and the high quality of the Distributor’s investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of the Distributor’s portfolio. Therefore, we would not expect the Distributor’s operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on the Distributor’s investment portfolio.

Neither we nor the Distributor enter into hedging or derivative instrument arrangements.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing evaluation, and in light of the material weaknesses in internal controls described below, our Chief Executive Officer and our Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were not effective in timely alerting them to material information to be included in our reports files or submitted under the Exchange Act.

In light of the material weaknesses described below, we performed additional analyses and other procedures to ensure that our consolidated financial statements included in this Quarterly Report were prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). These measures included, among other things, expansion of our quarter-end closing procedures, including the expanded review and analysis of the accounting between the Company and the Distributor, dedication of significant internal resources and external consultants to scrutinize account analyses, reserve estimates, asset valuations, proper accounting treatment for revenues and expenses and account reconciliations at a detailed level.

A material weakness is “a deficiency, or a combination of deficiencies (within the meaning of PCAOB Auditing Standard No. 5), in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.”

Company management has concluded that, as of March 31, 2008, the following material weaknesses existed at both the Company and the Distributor:

Timely and routine financial statement close/reporting process and the entity level controls surrounding this process.

We were unable to execute a timely financial close, nor were we able to properly accumulate certain analyses and reconciliations in a consistent and accurate manner, allowing for the proper application of GAAP. In addition management did not adequately supervise the financial close and reporting process which resulted in material post-closing adjustments. Furthermore, the Company was unable to timely and properly calculate its computation of its equity in the net loss of the Distributor.

Calculation of expenses related to stock compensation.

We were unable to properly accumulate, analyze and compute stock compensation in a timely manner during the quarter as the Company and Distributor lacked the appropriate financial personnel to undertake this computation.

	·	Formal processes over change management and access procedures related to our information technology systems. We were unable to properly implement and maintain an effective information technology operating environment. In addition, we did not properly maintain access or program change controls related to our critical information technology systems including the General Ledger system and Order Processing/Management system.
	·	Calculation of provision for income taxes and related oversight of this process. We did not properly supervise and review the calculation of the Company’s tax provision that was performed by an outside third party. This lack of supervision and review by management resulted in a material post-closing adjustment prior to the issuance of the financial statements.

Also, our management has found additional material weaknesses specifically related to the Distributor:

Revenue recognition process; specifically, our controls in the areas of allocating and tracking Market Development Funds (“MDF”) Spending.

The Distributor has not fully implemented a formalized process and related controls to determine the appropriate classification of MDF related expenses. Due to this weakness, there is a reasonable possibility that the Distributor could materially record revenue improperly or misclassify MDF related expenses in its statements of operations.

Licensor participations expense and related liabilities, and film library amortization.

The analyses and models utilized by the Distributor to calculate licensor participation expense and film library amortization and impairment pursuant to the provisions of SOP 00-2 "Accounting by Producers or Distributors of Films" utilized incorrect data and assumptions which resulted in material adjustments.

Management’s estimation and forecasting process as it relates to our inventory obsolescence reserve.

In calculating the Distributor’s inventory obsolescence, management utilized incorrect projections which resulted in a material audit adjustment being recorded.

The Company will continue its efforts to strengthen its accounting and finance departments and aggressively pursue remediation of all material weaknesses. Recruiting efforts are under way to fill the position of Chief Accounting Officer.

Changes in Internal Control over Financial Reporting

Other than as described above, there were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

FALCON PICTURE GROUP MATTER

ENTERTAINMENT RESOURCE MATTER

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 year ended December 31, 2007.

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

On February 17, 2008, James G. Ellis, who had previously been appointed as a director by the holders of the Company’s Series W Preferred Stock, resigned from the Company’s Board of Directors and all committees thereof. On April 21, 2008, the holders of the Company’s Series W Preferred Stock, pursuant to their rights under the Company’s Amended and Restated Certificate of Incorporation to elect up to five of the Company’s directors and to appoint a replacement for any such director in the event he or she resigns, appointed Richard Koenigsberg as a director by unanimous written consent.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

3.1	Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 20, 2006).

3.2	Amended Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005).

4.1	Specimen Certificate for Common Stock (Incorporated by reference to Exhibit 4.8 to the Registrant’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2000).
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

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GENIUS PRODUCTS, INC., a Delaware corporation
Dated: March 25, 2009	By:	/s/ Trevor Drinkwater
		Trevor Drinkwater President and Chief Executive Officer (Principal Executive Officer)

Dated: March 25, 2009	By:	/s/ Edward J. Byrnes
		Edward J. Byrnes Chief Financial Officer (Principal Financial and Accounting Officer)

Genius Products (GNPR) Inactive 10-Q/A2008 Q1 Quarterly report (amended)