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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    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
(State or other jurisdiction 
of incorporation or organization)
    
    33-0852923
(IRS Employer
Identification No.)
 2230 BROADWAY
SANTA MONICA, CA 90404
(Address of principal executive offices)
 (310) 453-1222
(Registrants telephone number, including area code)
 (Former name, former address and former fiscal year,
if changed since last report)
 þ o
 
 Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




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##### 



GENIUS PRODUCTS, INC. AND SUBSIDIARIES
 INDEX
 PAGEPART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements
    
    4Condensed consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007
    
    4Condensed consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007 (unaudited)
    
    5Condensed consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (unaudited)
    
    6Notes to Condensed consolidated Financial Statements (unaudited)
    
    7Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    21Item 4
    
    Controls and Procedures
    
    21PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    22Item 1A
    
    Risk Factors
    
    22Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    22Item 3
    
    Defaults Upon Senior Securities
    
    22Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    23Item 5
    
    Other Information
    
    23Item 6
    
    Exhibits
    
    23SIGNATURES
    
    
    
    24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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NOTICE ABOUT FORWARD-LOOKING STATEMENTS
    3




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##### Table of Contents



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,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,822
    
    
    $
    1,757Prepaid expenses and other current assets
    
    
    110
    
    
    
    110Notes Receivable from Distributor, net
    
    
    8,352
    
    
    
    Total current assets
    
    
    10,284
    
    
    
    1,867Notes Receivable from Distributor, net
    
    
    
    
    
    
    8,191Investment in Distributor
    
    
    67,288
    
    
    
    73,823Total assets
    
    $
    77,572
    
    
    $
    83,881LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts
payable to Distributor, net
    
    
    298
    
    
    
    198Total current liabilities
    
    
    298
    
    
    
    198Deferred tax liability
    
    
    11,897
    
    
    
    11,406Total liabilities
    
    
    12,195
    
    
    
    11,604Commitments and contingenciesStockholders 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
    
    
    
    7Additional paid-in capital
    
    
    110,966
    
    
    
    112,293Accumulated deficit
    
    
    (45,596
    )
    
    
    (40,023
    )Total stockholders equity
    
    
    65,377
    
    
    
    72,277Total liabilities and stockholders equity
    
    $
    77,572
    
    
    $
    83,881
  4




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GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
 Three Months Ended March 31,2008
    
    
    2007Operating expenses:Selling, general and administrative
    
    $
    421
    
    
    $
    456Equity in net loss from Distributor
    
    
    4,787
    
    
    
    2,228Total operating expenses
    
    
    5,208
    
    
    
    2,684Loss from operations
    
    
    (5,208
    )
    
    
    (2,684
    )Interest and other income, net
    
    
    126
    
    
    
    49Loss before provision for income taxes
    
    
    (5,082
    )
    
    
    (2,635
    )Provision for income taxes
    
    
    491
    
    
    
    134Net loss
    
    $
    (5,573
    )
    
    $
    (2,769
    )Basic and diluted EPSNet loss per share
    
    $
    (0.08
    )
    
    $
    (0.04
    )Basic and diluted weighted average shares
    
    
    67,723,929
    
    
    
    64,193,425
  5




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GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 Three Months Ended March 31,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (5,573
    )
    
    $
    (2,769
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activitiesEquity in net loss from Distributor
    
    
    4,787
    
    
    
    2,228Operating expenses paid by Distributor
    
    
    403
    
    
    
    259Stock compensation expense
    
    
    (26
    )
    
    
    197Deferred tax liability
    
    
    491
    
    
    
    134Changes in assets and liabilities:(Increase) decrease in prepaid expenses, notes receivable and deposits
    
    
    (161
    )
    
    
    83Decrease in accounts payable
    
    
    
    
    
    
    (59
    )Increase in Distributor payable
    
    
    100
    
    
    
    Increase in accrued expenses and other
    
    
    
    
    
    
    491Net cash provided by operating activities
    
    
    21
    
    
    
    564Cash flows from financing activities:Proceeds from exercise of options
    
    
    44
    
    
    
    1,071Proceeds from exercise of warrants
    
    
    
    
    
    
    823Net cash provided by (used in) financing activities
    
    
    44
    
    
    
    1,894Net increase in cash and cash equivalents
    
    
    65
    
    
    
    2,458Cash and cash equivalents at beginning of period
    
    
    1,757
    
    
    
    3,745Cash and cash equivalents at end of period
    
    $
    1,822
    
    
    $
    6,203
  6




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GENIUS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 1. NATURE OF BUSINESS
  ® ® ® ® ®
      
    
    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®)
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NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         8




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NOTE 3. FAIR VALUE MEASUREMENTS
 Fair Value Measurements
  NOTE 4. INVESTMENT IN DISTRIBUTOR (GENIUS PRODUCTS, LLC)
  GENIUS PRODUCTS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
 Three Months Ended March 31,2008
    
    
    2007Revenues, net of sales, returns, discounts and allowances of $29,006 and $31,672
    
    $
    98,211
    
    
    $
    83,117Total cost of revenues
    
    
    (101,995
    )
    
    
    (76,155
    )Gross profit
(loss)
    
    
    (3,784
    )
    
    
    6,962Total operating expenses
    
    
    (10,660
    )
    
    
    (9,098
    )Loss from operations
    
    
    (14,444
    )
    
    
    (2,136
    )Interest, net
    
    
    (997
    )
    
    
    (263
    )Net loss
    
    $
    (15,441
    )
    
    $
    (2,399
    )
 10




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GENIUS PRODUCTS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
 March 31, 2008
    
    
    December 31, 2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,552
    
    
    $
    3,102Restricted cash  short term
    
    
    5,877
    
    
    
    7,765Accounts receivable, net of allowance for doubtful accounts
of $3,352 and $4,311 and sales returns of $42,104 and $68,159
    
    
    90,283
    
    
    
    123,295Inventories, net of reserves for obsolescence of $13,974
and $13,257
    
    
    9,667
    
    
    
    11,282Prepaid expenses and other current assets
    
    
    940
    
    
    
    1,110Total current assets
    
    
    112,319
    
    
    
    146,554Restricted cash  long term
    
    
    3,186
    
    
    
    3,323Property and equipment, net of accumulated depreciation of
$560 and $455
    
    
    2,732
    
    
    
    953Royalty advances, net of uncollectible advances of $7,890
and $5,112
    
    
    37,481
    
    
    
    31,492Film library, net of accumulated amortization of $8,702
and $6,452
    
    
    12,154
    
    
    
    14,403Goodwill
    
    
    87,512
    
    
    
    87,512Other intangible assets, net of accumulated amortization of
$13,030 and $9,675
    
    
    8,241
    
    
    
    11,596Deferred financing fees
    
    
    1,488
    
    
    
    1,654Deposits and other
    
    
    2,366
    
    
    
    2,968Total assets
    
    $
    267,479
    
    
    $
    300,455LIABILITIES AND MEMBERS EQUITYCurrent liabilities:Accounts payable
    
    $
    39,178
    
    
    $
    31,477Notes payable
    
    
    25,732
    
    
    
    31,297Notes payable
to Genius Products Inc.
    
    
    8,352
    
    
    
    Remittance to TWC
    
    
    72,261
    
    
    
    78,759Remittance to other licensors
    
    
    24,114
    
    
    
    20,000Accrued advertising and marketing
    
    
    18,185
    
    
    
    24,515Other accrued expenses
    
    
    17,495
    
    
    
    20,910Deferred revenue
    
    
    2,965
    
    
    
    8,492Total current liabilities
    
    
    208,282
    
    
    
    215,450Long term liabilities:Notes payable to Genius Products, Inc.
    
    
    
    
    
    
    8,191Long term notes payable
    
    
    1,081
    
    
    
    627Long term capital lease
    
    
    41
    
    
    
    30Total long term liabilities
    
    
    1,122
    
    
    
    8,848Total members equity
    
    
    58,075
    
    
    
    76,157Total liabilities and members equity
    
    $
    267,479
    
    
    $
    300,455
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Three Months Ended March 31,2008
    
    
    2007Genius Products, Inc. 30% share of net loss from the Distributor
    
    $
    4,632
    
    
    $
    720Adjustments for basis differences
    
    
    1,111
    
    
    
    1,111Benefit/Expense for stock compensation for Distributor employees
    
    
    (908
    )
    
    
    397Genius Products, Inc. 30% share of interest on the
Distributors notes payable
    
    
    (48
    )
    
    
    Equity in net loss from Distributor
    
    $
    4,787
    
    
    $
    2,228
 NOTE 5. CONTINGENCIES
   Guarantors Accounting and Disclosure Requirements for Guarantees,
   Falcon Picture Group Matter
  Entertainment Resource Matter
  12




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NOTE 6. NOTES PAYABLE TO RELATED PARTY (RELATED PARTY LOANS)
    NOTE 7. STOCKHOLDERS EQUITY
     WeightedAverage
    
    
    AggregateWarrants
    
    
    Exercise
    
    
    IntrinsicOutstanding
    
    
    Price
    
    
    ValueDecember 31, 2007
    
    
    10,425,958
    
    
    $
    2.45Exercised
    
    
    
    
    
    
    March 31, 2008
    
    
    10,425,958
    
    
    $
    2.45
    
    
    $
    25,581,631Warrants exercisable, March 31, 2008
    
    
    10,425,958
    
    
    $
    2.45
    
    
    $
    25,581,631
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Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    averageexercise price of
    
    
    
    
    
    exercise price ofWarrants
    
    Average
    
    warrants
    
    Warrants
    
    warrantsoutstanding
    
    remaining life
    
    outstanding
    
    exercisable
    
    exercisableUnder $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
    
    
    
    3.0010,425,958
    
    
    
    1.94
    
    
    $
    2.45
    
    
    
    10,425,958
    
    
    $
    2.45
 NOTE 8. STOCK-BASED COMPENSATION
  WeightedAverage
    
    
    AggregateOptions
    
    
    Exercise
    
    
    IntrinsicOutstanding
    
    
    Price
    
    
    ValueDecember 31, 2007
    
    
    17,770,041
    
    
    $
    1.82Exercised
    
    
    (50,000
    )
    
    
    0.89Canceled
    
    
    (76,666
    )
    
    
    1.73March 31, 2008
    
    
    17,643,375
    
    
    $
    1.83
    
    
    $
    (19,902,057
    )Options exercisable, March 31, 2008
    
    
    14,586,443
    
    
    $
    1.79
    
    
    $
    (15,899,638
    )
  Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageexercise price of
    
    
    
    
    
    
    exercise price ofOptions
    
    
    Average
    
    
    options
    
    
    Options
    
    
    optionsoutstanding
    
    
    remaining life
    
    
    outstanding
    
    
    exercisable
    
    
    exercisableUnder $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
    
    
    
    5.0717,643,375
    
    
    
    6.34
    
    
    $
    1.83
    
    
    
    14,586,443
    
    
    $
    1.79
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Three Months Ended March 31,2008
    
    2007Risk free interest rate
    
    
    3.3
    %
    
    
    4.5
    %Expected dividend yield
    
    
    
    
    
    
    Expected volatility
    
    
    73.0
    %
    
    
    106.6
    %Expected life (in years)
    
    
    6.0
    
    
    
    5.3
    NOTE 9. INCOME TAXES
  NOTE 10. SUBSEQUENT EVENTS
  15




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  NATURE OF BUSINESS
  ® ® ® ® ®
     16




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
    
    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, Entertainment
Rights and Sesame Workshop®)
   CRITICAL ACCOUNTING POLICIES
       17




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RESULTS OF OPERATIONS OF GENIUS PRODUCTS, INC.
   18




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Revenues
   The Mist Awake The Hunting Party Halloween School for
Scoundrels The Protector Harsh Times Shut Up and Sing
 ® ®
    Costs and expenses
 Cost of Revenues
        19




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Operating Expenses
    Other Income and Expense
  LIQUIDITY AND CAPITAL RESOURCES
      20




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
      
    
    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 during the quarter close.
 21




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
    
    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.
  Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 FALCON PICTURE GROUP MATTER
  ENTERTAINMENT RESOURCE MATTER
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  22




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 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. 23




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SIGNATURES
  GENIUS PRODUCTS, INC.,
a Delaware corporationDated: May 12, 2008
    By:
    /s/ Trevor DrinkwaterTrevor DrinkwaterPresident and Chief Executive Officer
(Principal Executive Officer)Dated: May 12, 2008
    By:

/s/
Edward J. ByrnesEdward J. ByrnesChief Financial Officer
(Principal Financial and Accounting Officer) 24