Company Quick10K Filing
RLJ Entertainment
Price4.69 EPS-0
Shares15 P/E-10
MCap71 P/FCF-13
Net Debt51 EBIT-7
TEV122 TEV/EBIT-18
TTM 2018-06-30, in MM, except price, ratios
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-16
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-10
10-Q 2017-03-31 Filed 2017-05-11
10-K 2016-12-31 Filed 2017-03-23
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-04-15
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-06-08
10-K 2014-12-31 Filed 2015-05-08
10-Q 2014-09-30 Filed 2014-11-07
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-03-19
10-Q 2013-09-30 Filed 2013-11-07
10-Q 2013-06-30 Filed 2013-08-05
10-Q 2013-03-31 Filed 2013-05-15
10-Q 2012-06-30 Filed 2012-12-03
8-K 2018-10-31
8-K 2018-08-09
8-K 2018-08-09
8-K 2018-07-31
8-K 2018-07-29
8-K 2018-05-10
8-K 2018-05-10
8-K 2018-04-06
8-K 2017-12-31

RLJE 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements.
Note 1. Basis of Presentation
Note 2. Segment Information
Note 3. Business Combination
Note 4. Equity Earnings in Affiliate
Note 5. Accounts Receivable
Note 6. Inventories
Note 7. Investment in Content
Note 8. Debt
Note 9. Stock Warrants
Note 10. Fair Value Measurements
Note 11. Customer Relationship
Note 12. Transaction Costs and Severance
Note 13. Net Income (Loss) per Common Share Data
Note 14. Commitments and Contingencies
Note 15. Related Party Transactions
Note 16. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-10.1 ex10_1.htm
EX-10.2 ex10_2.htm
EX-10.3 ex10_3.htm
EX-10.4 ex10_4.htm
EX-10.5 ex10_5.htm
EX-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-32.1 ex32_1.htm
EX-32.2 ex32_2.htm

RLJ Entertainment Earnings 2013-06-30

Balance SheetIncome StatementCash Flow
2401831266912-452013201520172019
Assets, Equity
452811-6-23-402013201520172019
Rev, G Profit, Net Income
151050-5-102013201520172019
Ops, Inv, Fin

10-Q 1 form10q.htm RLJ ENTERTAINMENT, INC 10-Q 6-30-2013

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  205491
 


FORM 10-Q

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

For the quarterly period ended June 30, 2013.
 
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 001-35675
 


RLJ ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
 


Nevada
 
45-4950432
(State or other jurisdiction of incorporation)
 
(IRS Employer Identification Number)
 
 
 
8515 Georgia Avenue, Suite 650
Silver Spring, Maryland
 
20910
(Address of principal executive offices)
 
(Zip Code)

(301) 608-2115
(Registrant’s telephone number, including area code)
 
None
(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 Securities Exchange Act of 1934 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 þ     NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES þ    NO o

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. (Check one):
 
Large accelerated filer  £
     Accelerated filer  £
     Non- accelerated filer  £
    Smaller reporting company  R
 
 
(Do not check if a smaller reporting company)
 

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

Number of shares outstanding of the issuer’s common stock on July 25, 2013:  13,579,135
 



RLJ ENTERTAINMENT, INC.
INDEX TO FORM 10-Q
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited).
 
 
 
 
 
(a)
4
 
 
 
 
(b)
5
 
 
 
 
 
(c)
6
 
 
 
 
 
(d)
7
 
 
 
 
 
(e)
8
 
 
 
 
 
(f)
9
 
 
 
 
Item 2.
22
 
 
 
Item 3.
29
 
 
 
Item 4.
29
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
31
 
 
 
Item 1A.
31
 
 
 
Item 2.
31
 
 
 
Item 3.
31
 
 
 
Item 4.
31
 
 
 
Item 5.
31
 
 
 
Item 6.
32
 
 
 
33
FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2013 (or Quarterly Report) includes forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995.  Other than statements of historical fact, all statements made in this Quarterly Report are forward-looking, including, but not limited to, statements regarding industry prospects, future results of operations or financial position, and statements of our intent, belief and current expectations about our strategic direction, prospective and future results and condition.  In some cases, forward-looking statements may be identified by words such as “will,” “should,” “could,” “may,” “might,” “expect,” “plan,” “possible,” “potential,” “predict,” “anticipate,” “believe,” “estimate,” “continue,” “future,” “intend,” “project” or similar words.

Forward-looking statements involve risks and uncertainties that are inherently difficult to predict, which could cause actual outcomes and results to differ materially from our expectations, forecasts and assumptions.  Factors that might cause such differences include, but are not limited to:

· our ability to integrate the businesses of Image Entertainment, Inc. and Acorn Media Group, Inc.;
· the anticipated benefits of the business combination may not be fully realized or may take longer to realize than expected;
· the ability of our officers and directors to generate a number of potential investment opportunities;
· our ability to maintain relationships with customers, employees, suppliers and lessors;
· the loss of key personnel;
· delays in the release of new titles or other content;
· the effects of disruptions in our supply chain;
· our public securities’ limited liquidity and trading;
· our ability to continue to meet the NASDAQ Capital Market continuing listing standards; or
· our financial performance, including our ability to achieve new revenue growth and EBITDA margins or realize synergies.

All forward-looking statements should be evaluated with the understanding of inherent uncertainty.  The inclusion of such forward-looking statements should not be regarded as a representation that contemplated future events, plans or expectations will be achieved.  Unless otherwise required by law, we undertake no obligation to release publicly any updates or revisions to any such forward-looking statements that may reflect events or circumstances occurring after the date of this Quarterly Report.  Important factors that could cause or contribute to such material differences include those discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K filed on April 10, 2013.  You are cautioned not to place undue reliance on such forward-looking statements.
 
EXPLANATORY NOTE
 
On October 3, 2012, the business combination of RLJ Entertainment, Inc., Image Entertainment, Inc. and Acorn Media Group, Inc. was completed.  For financial reporting purposes, the financial statements accompanying this Quarterly Report have been divided into (i) the “Predecessor” period (pre-October 3, 2012) which include the activities of Acorn Media Group, Inc. and its subsidiaries, and (ii) the “Successor” period (post-October 3, 2012) which include the activities of RLJ Entertainment, Inc. and its subsidiaries, including Image Entertainment, Inc. and Acorn Media Group, Inc.  Results for the Predecessor period are not indicative of, or comparable to, results for the Successor period.  “We,” “our” or “us” when used in this Quarterly Report refer to RLJ Entertainment, Inc. and its subsidiaries for the Successor period, and Acorn Media Group, Inc. and its subsidiaries for the Predecessor period, unless otherwise indicated.
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

RLJ ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, 2013 and December 31, 2012

ASSETS
 
Successor
 
(In thousands, except share data)
 
June 30, 2013
   
December 31, 2012
 
Current assets:
 
   
 
Cash and cash equivalents
 
$
3,693
   
$
4,739
 
Accounts receivable, net
   
19,395
     
20,484
 
Inventories, net
   
15,165
     
23,029
 
Investment in content, net
   
26,507
     
30,981
 
Prepaid expenses and other assets
   
1,759
     
1,938
 
Total current assets
   
66,519
     
81,171
 
Noncurrent portion of accounts receivable
   
3,361
     
4,127
 
Noncurrent portion of investment in content
   
55,112
     
58,816
 
Property, equipment and improvements, net
   
1,448
     
1,800
 
Equity investment in ACL
   
21,470
     
25,449
 
Other intangible assets
   
21,334
     
23,883
 
Goodwill
   
47,382
     
47,382
 
Total assets
 
$
216,626
   
$
242,628
 
LIABILITIES
               
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
28,151
   
$
30,590
 
Accrued royalties and distribution fees
   
34,091
     
32,658
 
Deferred revenue
   
3,787
     
4,339
 
Current portion of long term debt
   
11,449
     
4,000
 
Total current liabilities
   
77,478
     
71,587
 
Long-term portion of debt, less debt discount
   
68,158
     
78,323
 
Deferred tax liability
   
350
     
350
 
Stock warrant liability
   
3,522
     
4,324
 
Total liabilities
   
149,508
     
154,584
 
Stockholders' equity:
               
Common stock, $0.001 par value, 250 million shares authorized, 13,430,177 and 13,377,546 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively
   
13
     
13
 
Additional paid-in capital
   
86,284
     
86,133
 
Retained earnings (deficit)
   
(18,759
)
   
1,743
 
Accumulated other comprehensive gain (loss)
   
(420
)
   
155
 
Net stockholders' equity
   
67,118
     
88,044
 
Total liabilities and stockholders’ equity
 
$
216,626
   
$
242,628
 

See accompanying notes to consolidated financial statements.
4

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
For the Three and Six Months Ended June 30, 2013 and 2012
 
 
Successor
   
Predecessor
 
(In thousands, except per share data)
 
Three Months Ended
June 30, 2013
   
Six Months
Ended
June 30, 2013
   
Three Months Ended
June 30, 2012
   
Six Months
Ended
June 30, 2012
 
 
 
   
   
   
 
Revenue
 
$
34,286
   
$
74,592
   
$
17,294
   
$
36,879
 
Cost of sales
   
36,144
     
63,880
     
9,419
     
19,484
 
Gross profit (loss)
   
(1,858
)
   
10,712
     
7,875
     
17,395
 
 
                               
Selling expenses
   
5,602
     
11,649
     
3,112
     
6,675
 
General and administrative expenses
   
6,592
     
12,267
     
4,805
     
9,652
 
Depreciation and amortization
   
1,494
     
2,920
     
130
     
261
 
Total selling, general and administrative expenses
   
13,688
     
26,836
     
8,047
     
16,588
 
INCOME (LOSS) FROM OPERATIONS
   
(15,546
)
   
(16,124
)
   
(172
)
   
807
 
 
                               
Equity earnings of affiliates
   
911
     
1,560
     
497
     
521
 
Interest expense, net
   
(1,882
)
   
(4,008
)
   
(420
)
   
(577
)
Other income (expense)
   
158
     
(919
)
   
(566
)
   
(383
)
Total other income (expense)
   
(813
)
   
(3,367
)
   
(489
)
   
(439
)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
   
(16,359
)
   
(19,491
)
   
(661
)
   
368
 
Provision (benefit) for income taxes
   
585
     
1,011
     
(107
)
   
80
 
NET INCOME (LOSS)
   
(16,944
)
   
(20,502
)
   
(554
)
   
288
 
Less net income (loss) attributable to noncontrolling interests
   
     
     
(35
)
   
56
 
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS
 
$
(16,944
)
 
$
(20,502
)
 
$
(519
)
 
$
232
 
Net income (loss) per common share:
                               
 
                               
Unrestricted common stock:
                               
Basic
 
$
(1.27
)
 
$
(1.53
)
 
$
(0.51
)
 
$
0.23
 
Diluted
 
$
(1.27
)
 
$
(1.53
)
 
$
(0.51
)
 
$
0.23
 
Restricted common stock:
                               
Basic
 
$
(1.27
)
 
$
(1.53
)
 
$
   
$
 
Diluted
 
$
(1.27
)
 
$
(1.53
)
 
$
   
$
 
 
                               
Unrestricted weighted average shares outstanding:
                               
Basic
   
13,340
     
13,340
     
1,023
     
1,023
 
Diluted
   
13,340
     
13,340
     
1,023
     
1,031
 
Restricted weighted average shares outstanding:
                               
Basic and diluted
   
49
     
43
     
     
 

See accompanying notes to consolidated financial statements.
5

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)

For the Three and Six Months Ended June 30, 2013 and 2012
 
 
Successor
   
Predecessor
 
(In thousands)
 
Three Months Ended
June 30, 2013
   
Six Months
 Ended
June 30, 2013
   
Three Months Ended
June 30, 2012
   
Six Months
 Ended
June 30, 2012
 
 
 
   
   
   
 
NET INCOME (LOSS):
 
   
   
   
 
Net income (loss)
 
$
(16,944
)
 
$
(20,502
)
 
$
(554
)
 
$
288
 
Other comprehensive income (loss):
                               
Foreign currency translation gain (loss)
   
106
     
(575
)
   
(57
)
   
144
 
Total comprehensive income (loss)
   
(16,838
)
   
(21,077
)
   
(611
)
   
432
 
Less: comprehensive income (loss) attributable to noncontrolling interests:
                               
Share of net income (loss)
   
     
     
(35
)
   
56
 
Share of foreign currency translation loss
   
     
     
(3
)
   
(5
)
Comprehensive income (loss) attributable to noncontrolling interest
   
     
     
(38
)
   
51
 
Comprehensive income (loss) attributable to common shareholders
 
$
(16,838
)
 
$
(21,077
)
 
$
(573
)
 
$
381
 

See accompanying notes to consolidated financial statements.
6

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)

For the Six Months Ended June 30, 2013 (Successor)
 
 
Common Stock
   
   
   
   
Accumulated
   
   
   
 
(In thousands)
 
Shares
   
Par
Value
   
Additional Paid-in Capital
   
Stockholder Notes Receivable
   
Retained Earnings
   
Other Comprehensive Loss
   
Treasury
Stock
   
Non-
controlling Interests
   
Total Stockholders’ Equity
 
Balance at
January 1, 2013
   
13,378
   
$
13
   
$
86,133
   
$
   
$
1,743
   
$
155
   
$
   
$
   
$
88,044
 
Issuance of restricted common stock for services
   
52
     
     
     
     
     
     
     
     
 
Stock-based compensation
   
     
     
151
     
     
     
     
     
     
151
 
Foreign Currency Translation
   
     
     
     
     
     
(575
)
   
     
     
(575
)
Net loss
   
     
     
     
     
(20,502
)
   
     
     
     
(20,502
)
Balance at
June 30, 2013
   
13,430
   
$
13
   
$
86,284
   
$
   
$
(18,759
)
 
$
(420
)
 
$
   
$
   
$
67,118
 

For the Six Months Ended June 30, 2012 (Predecessor)
 
 
Common Stock
   
   
   
   
Accumulated
   
   
   
 
(In thousands)
 
Shares
   
Par
Value
   
Additional Paid-in Capital
   
Stockholder Notes Receivable
   
Retained Earnings
   
Other Comprehensive Loss
   
Treasury Stock
   
Non-controlling Interests
   
Total Stockholders’ Equity
 
Balance at
January 1, 2012
   
1,023
   
$
10
   
$
4,451
   
$
(684
)
 
$
26,295
   
$
(421
)
 
$
(583
)
 
$
759
   
$
29,827
 
Stock-based compensation
   
     
     
231
     
     
     
     
     
     
231
 
Net income
   
     
     
     
     
232
     
     
     
56
     
288
 
Foreign Currency Translation
   
     
     
     
     
     
149
     
     
(5
)
   
144
 
Stockholders’ Distributions
   
     
     
     
     
(3,737
)
   
     
     
(265
)
   
(4,002
)
Balance at
June 30, 2012
   
1,023
   
$
10
   
$
4,682
   
$
(684
)
 
$
22,790
   
$
(272
)
 
$
(583
)
 
$
545
   
$
26,488
 

7

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

For the Six Months Ended June 30, 2013 and 2012
 
 
Successor
   
Predecessor
 
(In thousands)
 
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
 
Net income (loss)
 
$
(20,502
)
 
$
288
 
Adjustments to reconcile net income (loss) to net cash used in operating activities:
               
Equity earnings in affiliates
   
(1,560
)
   
(521
)
Amortization of content, including impairments
   
36,588
     
8,149
 
Depreciation and amortization
   
370
     
221
 
Amortization of intangible assets
   
2,550
     
40
 
Foreign currency exchange loss
   
1,774
     
376
 
Fair value of stock warrant liability
   
(802
)
   
 
Noncash interest expense
   
584
     
 
Stock-based compensation expense
   
151
     
231
 
Changes in assets and liabilities associated with operating activities:
               
Accounts receivable, net
   
1,669
     
4,365
 
Inventories, net
   
7,793
     
592
 
Investment in content, net
   
(27,930
)
   
(8,802
)
Prepaid expenses and other assets
   
183
     
(626
)
Accounts payable and accrued liabilities
   
(1,946
)
   
(4,828
)
Deferred revenue
   
(552
)
   
 
Net cash used in operating activities
   
(1,630
)
   
(515
)
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
   
(28
)
   
(402
)
Acquisition of ACL
   
     
(21,871
)
Dividends received from ACL
   
4,005
     
1,105
 
Net cash provided by (used in) investing activities
 
$
3,977
   
$
(21,168
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings under revolving credit facility
 
$
10,398
   
$
5,901
 
Repayments of borrowings under revolving credit facility
   
(3,000
)
   
 
Proceeds from debt
   
191
     
20,700
 
Repayment of debt
   
(10,452
)
   
(1,334
)
Distributions to stockholders
   
     
(4,002
)
Net cash provided by (used in) financing activities
   
(2,863
)
   
21,265
 
Effect of exchange rate changes on cash
   
(530
)
   
(219
)
NET DECREASE IN CASH:
   
(1,046
)
   
(637
)
Cash at beginning of period
   
4,739
     
1,625
 
Cash at end of period
 
$
3,693
   
$
988
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
 
$
2,608
   
$
462
 
Income taxes
 
$
253
   
$
546
 

See accompanying notes to consolidated financial statements.

8

Note 1.                  Basis of Presentation

RLJ Entertainment, Inc. (or Successor).  RLJ Entertainment, Inc. (or RLJE) is a global entertainment company with a presence in North America, the United Kingdom and Australia and strategic sublicense and distribution relationships covering Europe, Asia and Latin America.  RLJE was incorporated in Nevada in April 2012.  On October 3, 2012, we completed the business combination of RLJE, Image Entertainment, Inc. (or Image) and Acorn Media Group, Inc. (or Acorn Media), which is referred to herein as the “Business Combination.”  Acorn Media includes its subsidiaries Acorn Media UK Limited (or Acorn UK), Acorn Media Australia Pty Ltd. (or Acorn Australia) and Acorn Productions Limited (or APL).  In February 2012, Acorn Media acquired a 64% ownership of Agatha Christie Limited (or ACL).  References to Image include its wholly-owned subsidiary Image/Madacy Home Entertainment, LLC.  “We,” “our” or “us” refers to RLJE and its subsidiaries for periods following the Business Combination and Acorn Media and its subsidiaries for periods prior to the Business Combination, unless otherwise noted.

We acquire content and distribution rights in various categories, with particular focus on full-length motion pictures, urban programming, and British episodic mystery and drama.  We distribute this content across multiple platforms, including broadcast/cable, existing digital distribution formats (download-to-own, rental, SVOD, FVOD), new digital channels platforms, DVD and Blu-ray retail and online, and international distribution and sales. We market our products through a multi-channel strategy encompassing (1) the development and licensing of original program offerings through our wholly-owned subsidiary, APL, and our majority-owned subsidiary, ACL, as well as our fitness offerings; (2) wholesale distribution through retail partners covering brick-and-mortar establishments, digital, broadcast and cable partners; and (3) a direct-to-consumer presence in the United States and United Kingdom through traditional catalog and e-commerce offerings.

APL manages the intellectual property rights that we own and revenues associated with those rights and includes ACL, which owns a the vast majority of the Agatha Christie library that includes approximately 80 novels and short story collections and 19 plays and a film library of nearly 40 made-for-television films.

Our wholesale partners are broadcast, digital outlets and major retailers in the United States, Canada, United Kingdom and Australia, including Amazon, Walmart, Target, Costco, Barnes & Noble, iTunes, Netflix, BET, Showtime, DirectTV, and Hulu.  We have a catalog of owned and long-term licensed products in excess of 5,300 titles, segmented into genre-based program lines such as Acorn (British drama/mystery, including product provided by ACL), Image (independent feature films, stand-up comedy), One Village (urban), Acacia (fitness), Slingshot Pictures (faith), Athena (educational), Criterion (art films) and Madacy (uniquely packaged collections of historical footage/documentaries).

Our direct-to-consumer segment includes the continued roll-out of our proprietary digital channels, such as the subscription-based Acorn TV platform.  We plan to extend our subscription platforms in the near-term within the United States (or US), with platforms focusing on the urban and faith/lifestyle markets.

Our principal executive offices are located in Silver Spring, Maryland, with additional US locations in Chatsworth, California, and Stillwater, Minnesota, and international locations in London, England and Sydney, Australia.

Acorn Media Group, Inc. (or Predecessor).  Acorn Media was formed as a corporation in the District of Columbia in 1984 and elected in 1989 to be treated as an S corporation.  Acorn Media is a marketer and distributor of niche content, through physical, digital and broadcast platforms, and complementary products, selling through both third party (wholesale) and proprietary direct-to-consumer channels.  Acorn Media acquires exclusive home video, digital and broadcast rights from third parties, usually for a period of seven years, for a diverse array of British television and other specialty programming.  Acorn Media also creates additional content and value-added features for its content, such as interactive menus, audio commentaries, packaging and marketing materials.  Acorn Media results include its subsidiaries Acorn UK, Acorn Australia and APL and its subsidiaries.  In February 2012, Acorn Media acquired a 64% ownership in ACL.

Business Combination.  On October 3, 2012, the Business Combination of RLJE, Image and Acorn Media was completed.
9

For financial reporting purposes, RLJE is the acquirer of Image and Acorn Media.  Acorn Media was determined to be the Predecessor based primarily on its significantly higher purchase price relative to Image.  The Business Combination was accounted for in accordance with accounting principles generally accepted in the United States (“US GAAP”) and accordingly, the assets and liabilities were recorded using fair value at October 3, 2012.  The financial statements for the three and six months ended June 30, 2013 and 2012 are not comparable as a result of the acquisition accounting.  The financial statements for the three and six months ended June 30, 2013 and 2012 are presented for two periods, the period prior to the Business Combination (“Predecessor”) and the period subsequent to the Business Combination (“Successor”).

Prior to the closing of the Business Combination on October 3, 2012, RLJE had no meaningful operating activities.  The “Predecessor” period (pre-October 3, 2012) includes the activities of Acorn Media.  The “Successor” period (post-October 3, 2012) includes the activities of RLJE, Image and Acorn Media.  All information as of and for the three and six months ended June 30, 2012 solely relate to Acorn Media.

The balance sheet as of December 31, 2012 included in this report, which has been derived from audited financial statements, and the accompanying unaudited interim consolidated financial statements have been prepared in accordance with US GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Commission.   Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.

In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.  Due to the seasonal nature of our business and other factors, including our new release schedule, interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying unaudited financial information should, therefore, be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K filed on April 10, 2013.  Note 2 of our audited consolidated financial statements included in our Annual Report on Form 10-K contains a summary of our significant accounting policies.

Principles of Consolidation and Significant Accounting Policies.  The operations of ACL are entirely managed by RLJE, subject to oversight by ACL’s Board of Directors.  The investment in ACL is accounted for using the equity method of accounting given the voting control of the Board of Directors over the majority shareholders.  We have included our share of ACL’s operating results, using the equity method of accounting, in our consolidated financial statements beginning from when Acorn Media acquired its 64% ownership interest in ACL (February 29, 2012).

Our consolidated financial statements include the accounts of all majority-owned subsidiary companies, except for ACL. Investment in ACL is carried as a separate asset on the Condensed Consolidated Balance Sheet at cost adjusted for equity in undistributed earnings. Except for dividends and changes in ownership interest, changes in equity in undistributed earnings of ACL are included in “Other income (expense)” on the Consolidated Statements of Operations. All intercompany transactions and balances have been eliminated.

We generate our revenue primarily from the exploitation of acquired or produced content rights through multiplatform distribution channels.  The content is monetized in DVD format to wholesale, licensed to broadcast and cable, video-on-demand, direct-to-consumer, catalogs, subscription streaming video and licensed to digital platforms like Amazon and Netflix.  Revenue is presented net of sales returns, rebates, unit price adjustments, sales return reserve, sales discounts and market development funds.

Reclassifications.  Some balances have been reclassified to conform to the current presentation.  We have changed our consolidated balance sheet presentation from an unclassified presentation to a classified presentation.  Current assets and liabilities are presented separately from long-term balances.
10

Note 2.                  Segment Information

In accordance with the requirements of ASC 280 “Segment Reporting,” selected financial information regarding our reportable business segments, Intellectual Property (or IP) Licensing, Wholesale Distribution, and Direct-to-Consumer, are presented below.  Our reportable segments are determined based on the distinct nature of their operations, and each segment is a strategic business unit that is managed separately and either exploits our content over a different customer base or acquires content differently.  Our IP Licensing segment includes intellectual property (content) owned or created that is licensed for distribution worldwide.  The IP Licensing segment includes our investment in ACL.  Our Wholesale Distribution segment consists of the acquisition, content enhancement and worldwide distribution of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), video-on-demand (or VOD), streaming video, downloading and sublicensing.  Our Direct-to-Consumer segment consists of our mail-order catalog and e-commerce businesses and our proprietary digital streaming channel.

Management currently evaluates segment performance based primarily on revenue, and operating income (loss), including earnings from ACL.  Operating costs and expenses allocated below to Corporate include only those expenses incurred by us at the parent corporate level, which are not allocated to our reporting segments, and transaction costs incurred in connection with the acquisitions of Image, Acorn Media and ACL.  Interest expense and other income (expense) are evaluated on a consolidated basis and are not allocated to our reportable segments.

For the Three Months Ended June 30, 2013:

 
 
Successor
 
 
 
Three Months Ended June 30, 2013
 
(In thousands)
 
IP Licensing
   
Wholesale Distribution
   
Direct-to-
Consumer
   
Corporate
   
Total
 
Revenue
 
$
411
   
$
26,890
   
$
6,985
   
$
   
$
34,286
 
Operating costs and expenses
   
(1,475
)
   
(39,450
)
   
(7,634
)
   
(1,273
)
   
(49,832
)
Share in ACL earnings
   
911
     
     
     
     
911
 
Segment contribution
 
$
(153
)
 
$
(12,560
)
 
$
(649
)
 
$
(1,273
)
 
$
(14,635
)

For the Six Months Ended June 30, 2013:

 
 
Successor
 
 
 
Six Months Ended June 30, 2013
 
(In thousands)
 
IP Licensing
   
Wholesale
Distribution
   
Direct-to-
Consumer
   
Corporate
   
Total
 
Revenue
 
$
8,024
   
$
50,724
   
$
15,844
   
$
   
$
74,592
 
Operating costs and expenses
   
(7,958
)
   
(63,572
)
   
(17,058
)
   
(2,128
)
   
(90,716
)
Share in ACL earnings
   
1,560
     
     
     
     
1,560
 
Segment contribution
 
$
1,626
   
$
(12,848
)
 
$
(1,214
)
 
$
(2,128
)
 
$
(14,564
)

For the Three Months Ended June 30, 2012:

 
 
Predecessor
 
 
 
Three Months Ended June 30, 2012
 
(In thousands)
 
IP Licensing
   
Wholesale
Distribution
   
Direct-to-
Consumer
   
Corporate
   
Total
 
Revenue
 
$
   
$
10,833
   
$
6,461
   
$
   
$
17,294
 
Operating costs and expenses
   
(161
)
   
(8,518
)
   
(7,184
)
   
(1,603
)
   
(17,466
)
Share in ACL earnings
   
497
     
     
     
     
497
 
Segment contribution
 
$
336
   
$
2,315
   
$
(723
)
 
$
(1,603
)
 
$
325
 

For the Six Months Ended June 30, 2012:

 
 
Predecessor
 
 
 
Six Months Ended June 30, 2012
 
(In thousands)
 
IP Licensing
   
Wholesale
Distribution
   
Direct-to-
Consumer
   
Corporate
   
Total
 
Revenue
 
$
   
$
22,555
   
$
14,324
   
$
   
$
36,879
 
Operating costs and expenses
   
(161
)
   
(17,927
)
   
(14,717
)
   
(3,267
)
   
(36,072
)
Share in ACL earnings
   
521
     
     
     
     
521
 
Segment contribution
 
$
360
   
$
4,628
   
$
(393
)
 
$
(3,267
)
 
$
1,328
 

11

A reconciliation of total segment contribution to income (loss) before provision for income taxes is as follows:

 
 
Successor
   
Predecessor
 
(In thousands)
 
Three Months Ended
June 30, 2013
   
Six Months
Ended
June 30, 2013
   
Three Months Ended
June 30, 2012
   
February 29, 2012 to
June 30, 2012
 
 
 
   
   
   
 
Total segment contribution
 
$
(14,635
)
 
$
(14,564
)
 
$
325
   
$
1,328
 
Interest expense
   
(1,882
)
   
(4,008
)
   
(420
)
   
(577
)
Other income (expenses)
   
158
     
(919
)
   
(566
)
   
(383
)
Income (loss) before provision for income taxes
 
$
(16,359
)
 
$
(19,491
)
 
$
(661
)
 
$
368
 

Total assets by segment are as follows:

 
 
Successor
 
(In thousands)
 
June 30, 2013
December 31, 2012
 
IP Licensing
 
$
23,812
   
$
34,736
 
Wholesale Distribution
   
166,635
     
179,787
 
Direct-to-Consumer
   
22,470
     
24,897
 
Corporate
   
3,709
     
3,208
 
 
 
$
216,626
   
$
242,628
 

Total assets for each segment primarily includes accounts receivable, inventory, investment in content and goodwill.  The Corporate segment primarily includes assets not fully allocated to a segment including consolidated cash accounts, prepaid assets and fixed assets used across all segments.

Note 3.                  Business Combination

On October 3, 2012, pursuant to (1) an agreement and plan of merger and (2) a preferred stock purchase agreement, as amended, RLJE acquired all of the outstanding common and preferred stock of Image.  RLJE’s acquisition of Image is referred to as the “Image Merger.”  Concurrently with the Image Merger, and pursuant to a stock purchase agreement, as amended, RLJE acquired all of the outstanding common stock of Acorn Media.  RLJE’s acquisition of Acorn Media is referred to as the “Acorn Merger.”

The Image and Acorn Mergers have been accounted for as business acquisitions in accordance with ASC 805, Business Combinations.  The purchase price allocation was based upon our preliminary valuation using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets acquired, based on their estimated fair values.

Our allocation of the purchase consideration is preliminary because (1) the valuation of net assets acquired is not final, (2) the fair value of certain options to acquire future programming content has not been determined, (3) the fair value of our obligation under a registration rights agreement has not been determined, (4) the acquired deferred tax assets and liabilities are subject to adjustment upon the finalization of Image’s and Acorn Media’s final tax returns as of October 2, 2012, including the completion of our utilization study of acquired net operating loss carryforwards and (5) our allocation of goodwill to our reporting segments is preliminary as the segments’ enterprise values have not been finalized.  Once we finalize our valuations, we will adjust the amounts for which we initially recorded the acquired net assets and also goodwill.  We expect to finalize our valuations and tax returns by September 30, 2013.  These adjustments could be significant to the book value of intangible assets and related tax treatment.

Note 4.                  Equity Earnings in Affiliate

In February 2012, the Predecessor acquired a 64% interest in ACL for total purchase consideration of £13.7 million or approximately $21.9 million excluding direct transaction costs.  The acquisition gave Acorn Media a majority ownership of ACL’s extensive works including more than 80 novels and short story collections, 19 plays, and a film library of nearly 40 made-for-television films.  The acquisition was funded by a combination of cash on hand, a three-year, $18 million term loan from a bank and $2.7 million in subordinated debt from certain Acorn Media stockholders, which were all paid off at the closing of the Business Combination.
12

Notwithstanding Acorn Media’s acquisition of 64% of ACL’s outstanding stock, Acorn Media is accounting for its investment in ACL using the equity method of accounting because (1) Acorn Media is only entitled to appoint one-half of ACL’s board members and (2) in the event the board is deadlocked, the chairman of the board, who is appointed by the directors elected by the minority shareholders, casts a deciding vote.

We have continued to account for ACL using the equity method of accounting.

The following summarized financial information is derived from unaudited financial statements of ACL for the Successor periods of three and six months ended June 30, 2013 and for the Predecessor periods of the three months ended June 30, 2012 and February 29, 2012 to June 30, 2012.

 
 
Successor
   
Predecessor
 
(In thousands)
 
Three Months Ended
June 30, 2013
   
Six Months
Ended
June 30, 2013
   
Three Months Ended
June 30, 2012
   
February 29, 2012 to
June 30, 2012
 
 
 
   
   
   
 
Revenues
 
$
8,476
   
$
16,987
   
$
2,238
   
$
2,650
 
Film cost amortization
   
(5,510
)
   
(11,526
)
   
(496
)
   
(496
)
General, administrative and other expenses
   
(800
)
   
(1,488
)
   
(498
)
   
(782
)
Income from operations
   
2,166
     
3,973
     
1,244
     
1,372
 
Net income
 
$
1,668
   
$
2,897
   
$
948
   
$
1,045
 

Amounts have been translated from British Pound to US Dollar using the average exchange rate for the periods presented.  The above operating results of ACL do not include step-up basis amortization from the acquisition.

Note 5.                  Accounts Receivable

Accounts receivable are primarily derived from (1) the sale of physical content (DVDs) to wholesale distributors who ship to mass retail, (2) direct-to-consumer, e-commerce, catalog and download-to-own and (3) video content we license to broadcast, cable/satellite providers and digital subscription platforms like Acorn TV, Netflix and Amazon.  Our accounts receivable typically trends with retail seasonality.

 
 
Successor
 
(In thousands)
 
June 30, 2013
   
December 31, 2012
 
IP Licensing
 
$
301
   
$
 
Wholesale Distribution
   
35,556
     
42,037
 
Direct-to-Consumer
   
100
     
3,032
 
Less advances from distributor
   
(6,500
)
   
(9,023
)
Accounts receivable before allowances and reserves
   
29,457
     
36,046
 
Less reserve for returns
   
(6,564
)
   
(11,297
)
Less allowance for doubtful accounts
   
(137
)
   
(138
)
Accounts receivable, net
 
$
22,756
   
$
24,611
 

Accounts receivable includes both the current and noncurrent portion of accounts receivable.  Wholesale distribution receivables are primarily billed and collected by our distribution partner.

As of June 30, 2013 and December 31, 2012, our distribution partner advanced us approximately $6.5 million and $9.0 million, respectively, against future collection of our receivables, which they manage on our behalf.  Because our distribution partner has the right to offset our obligation to repay these advances against the receivables that are collected for us, these advances are netted against our receivables.
13

Note 6.                  Inventories

Inventories at June 30, 2013 and December 31, 2012 are summarized as follows:

 
 
Successor
 
(In thousands)
 
June 30, 2013
   
December 31, 2012
 
Packaged discs
 
$
9,553
   
$
17,248
 
Packaging materials
   
2,719
     
2,144
 
Other merchandise
   
2,893
     
3,637
 
Inventories, net
 
$
15,165
   
$
23,029
 

Other merchandise consists of third-party products, primarily gifts, jewelry, and home accents.

During the three and six months ended June 30, 2013, we incurred charges of $4,772,000 and $4,961,000, respectively, associated with adjustments for lower of cost or market valuation, shrinkage, and excess and obsolescence.  During the three and six months ended June 30, 2012, we incurred similar charges of $143,000 and $292,000, respectively.  During the quarter ended June 30, 2013, we began discussions to early terminate a content distribution arrangement with a key supplier.  We reached an agreement effective July 23, 2013.  As a result of the early termination we incurred an additional inventory charge of $3,257,000 reflecting the shortened sell-off period of the remaining inventory on hand and at retail.

Note 7.                  Investment in Content

Investment in content as of June 30, 2013 and December 31, 2012 are as follows:
 
    Successor      
   
June 30, 2013 
   
December 31, 2012  
 
(In thousands)  
Advances and Production Costs
   
Production Development Costs
   
Advances and Production Costs
   
Production Development Costs
 
Leased Content:
 
   
   
   
 
Released
 
$
62,503
   
$
3,038
   
$
69,737
   
$
2,907
 
Unreleased
   
9,261
     
1,924
     
5,730
     
217
 
Produced and Acquired Content:
                               
Released
   
4,240
     
188
     
1,420
     
223
 
Completed, not released
   
239
     
160
     
415
     
36
 
In-production
   
52
     
14
     
9,106
     
6
 
Investment in content, net
 
$
76,295
   
$
5,324
   
$
86,408
   
$
3,389
 

Investment in content includes both the current and noncurrent portion of investment in content.

Unamortized content investments are charged to cost of sales as revenues are earned.  These unrecouped investments are amortized to expense in the same ratio that current period revenue for a title or group of titles bears to the estimated remaining unrecognized ultimate revenue for that title.

Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release, or for episodic television series a period not to exceed 10 years from the date of delivery of the first episode or, if still in production, five years from the date of delivery of the most recent episode, if later.

Investment in content is stated at the lower of amortized cost or estimated fair value. The valuation of investment in content is reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value of content is less than its unamortized cost. During the three and six months ended June 30, 2013 (Successor), there were impairment charges of $2,620,000 and $3,227,000, respectively.  As a result of the early termination with a key supplier during the quarter ended June 30, 2013, we incurred accelerated amortization and an impairment charge totaling $1.5 million reflecting the shortened content distribution arrangement.  During the three and six months ended June 30, 2012 (Predecessor), there were impairment charges of $430,000 and $860,000, respectively.  In determining the fair value of content (Note 10), we employ a discounted cash flows (or DCF) methodology with assumptions for cash flows. Key inputs employed in the DCF methodology include estimates of ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on our weighted average cost of capital plus a risk premium representing the risk associated with producing a particular content.
14

Note 8.                  Debt

Successor

Long term debt as of June 30, 2013 and December 31, 2012, consist of the following:

(In thousands)
 
June 30, 2013
   
December 31, 2012
 
Revolving credit facility
 
$
14,949
   
$
7,551
 
               
Senior term notes:
               
Term loan – A
   
22,821
     
24,375
 
Term loan – B
   
13,692
     
14,625
 
Term loan – C
   
15,338
     
15,089
 
Principal balance outstanding
   
51,851
     
54,089
 
Less: debt discount
   
(2,523
)
   
(2,864
)
Total senior term notes
   
49,328
     
51,225
 
               
Subordinated notes payable and other debt
   
15,330
     
23,547
 
Total long term debt, including current portion, less debt discount
 
$
79,607
   
$
82,323
 
               
Current portion of long term debt
 
$
11,449
   
$
4,000
 

As of June 30, 2013, the long term portion of our debt includes $7.5 million related to our revolving credit facility; the remaining $7.5 million of the outstanding balance is included in the current liabilities.  Management believes its cash flow will be sufficient to pay down half of the revolving credit facility balance within the next twelve months.  As of December 31, 2012, amounts owed pursuant to our revolving credit facility are included in our long term portion of our debt.

Revolving Credit Facility

On October 3, 2012, in connection with the consummation of the Business Combination, RLJE and certain of its subsidiaries (collectively, the Borrowers) entered into a Credit Agreement (the Credit Facility) with certain lenders and SunTrust, N.A., as Administrative Agent. The Credit Facility includes a five-year $15 million revolving credit facility and three tranches of senior term loans totaling $55 million.  The obligations under the Credit Facility are secured by a lien on substantially all of the assets of the Borrowers.

Advances under the revolving facility bear interest at prime rate plus 5% or LIBOR plus 6% per annum and is payable quarterly.  As of June 30, 2013, we had borrowings outstanding of approximately $14.9 million under the revolving facility.  In addition to interest, the revolving facility also bears a fee of 0.5% applied to the unused portion of the line that was available but not drawn.  As of June 30, 2013, there was no availability for future borrowings.

As of June 28, 2013, the Borrowers and the lenders entered into an Amendment and Waiver (the Amendment) with respect to the Credit Facility. The Amendment modifies the Credit Facility (a) to increase the maximum permitted Leverage Ratio (as defined in the Credit Facility) from 3.0 to 1.0 to 3.8 to 1.0 for the quarter ended June 30, 2013, (b) to permit the Borrowers to retain (and not apply to debt service) dividends received from ACL and its subsidiaries between June 25, 2013 and December 31, 2013 and (c) to exclude aged trade payables from the Leverage Ratios until 2015. In addition, the Amendment requires that the Borrowers, for at least one business day of each calendar year, beginning with calendar year 2015, cause the principal amount of the revolving loans outstanding to be $7.5 million or less. After any repayment required by this provision, the Borrowers may reborrow all or any part of the revolving loans to the extent they are otherwise permitted to do so under the terms of the Credit Facility.

The Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to certain other contracts (including, for example, business arrangements with Sony parties and other material contracts) and indebtedness and events constituting a change of control or a material adverse effect in any of our results of operations or condition (financial or otherwise).  The occurrence of an event of default will increase the applicable rate of interest and could result in the acceleration of our obligations under the Credit Facility.
15

The Credit Facility imposes restrictions on such items as encumbrances and liens, payments of dividends, other indebtedness, stock repurchases and capital expenditures.  The Credit Facility also requires us to comply with minimum financial and operating covenants.

The Credit Facility provides for certain loan covenants, as defined in the agreement, including financial covenants to be measured at the end of each quarter, which at June 30, 2013 provided for a senior leverage ratio of not greater than 2.50 to 1.00, a total leverage ratio of not greater than 3.80 to 1.00 and an interest coverage ratio of not less than 3.00 to 1.00.  The covenants related to total debt and senior debt are predicated on the actual amounts of obligations calculated against a cash EBITDA base.  Cash EBITDA is defined as net income before income taxes and interest expense plus noncash items such as depreciation and amortization and certain other cash and noncash movements within the balance sheet.  Additional covenants restrict the level of production spending, prints and advertising spending for theatrical releases, disposal of fixed assets and entering into new lease obligations. At June 30, 2013, we were in compliance with all covenants.

Senior Term Notes

Our senior term loans have final maturities ranging from five to five and one-half years from issuance (October 2012), bear interest at rates that range from prime rate plus 5.0% to 6.25% or LIBOR plus 6.0% to 7.25%, payable quarterly.  The term loan - C bears additional interest at a rate of 3% per annum paid-in-kind at maturity.  On December 10, 2012, RLJE entered into a forward interest rate swap agreement that effectively caps the LIBOR rate of interest at 1.25%. The interest rate swap has a notional amount of $30.0 million and has a maturity date of November 30, 2014.  We paid a one-time fixed fee of $22,750 for this rate cap agreement.  The fair value of this interest rate swap agreement is insignificant.

Future minimum principal payments under the above senior term notes as of June 30, 2013 are as follows:

(In thousands)
 
 
2013
 
$
2,000
 
2014
   
4,000
 
2015
   
4,000
 
2016
   
4,000
 
2017
   
15,571
 
Thereafter
   
22,280
 
 
 
$
51,851
 

Subordinated Notes Payable and Other Debt

Upon consummation of the Image Merger, we issued to the selling preferred stockholders of Image unsecured subordinated promissory notes in the aggregate principal amount of $14.8 million.  The unsecured subordinated notes bear interest at 12% per annum, of which 5.4% is payable in cash annually and at our discretion the balance is either paid through the issuance of shares of our common stock valued at their then-current market price, or accrues and is added to principal, which is payable upon maturity. The subordinated notes mature on October 3, 2018 or six months after the latest stated maturity of the senior debt issued pursuant to the Credit Facility.  In May 2013, $439,000 interest was due on the promissory notes, of which $198,000 was paid in cash and the balance was added to principal.

On July 3, 2012 Foyle’s War 8 Productions Ltd, a wholly-owned subsidiary of APL, entered into a cash advance facility (the “Facility”) with U.K. based Coutts and Co. for purposes of producing three ninety-minute television programs entitled “Foyle’s War 8.” The facility was capped at approximately $8.5 million, based on exchange rates as of June 30, 2013, and carries an interest rate of LIBOR plus 2.25% (interest paid quarterly or monthly by rolling up into the loan) with the principal plus interest to be repaid on or before July 1, 2013, except for $0.3 million which may be paid after the maturity date provided it is repaid by November 29, 2013. The facility is fully secured by executed license agreements for the shows being produced that are in place with ITV Networks and ITV Broadcasting and, to a lesser extent, WGBH Educational Foundation and Acorn Media. As of June 30, 2013, the outstanding balance on the facility was approximately $0.3 million, which is expected to be repaid in October 2013.
16

Predecessor

The Predecessor had a revolving line of credit which provided for borrowings of up to $10 million at the prevailing one-month LIBOR rate plus 1.90% (4.0% as of June 30, 2012). At June 30, 2012, the Predecessor had approximately $6.0 million outstanding on the line of credit. The line of credit required the Predecessor to comply with certain financial covenants and was collateralized by the assets of Acorn Media. In February 2012, in connection with the closing of the acquisition of ACL, the Predecessor renegotiated and closed on a new borrowing facility with its existing bank. The new facility provided for borrowings of $28 million, which consisted of an $18 million term loan (the “Term Loan”) and a $10 million revolving line of credit (the “Line of Credit”), which replaced the previous line of credit. For outstanding borrowings on the Term Loan and the Line of Credit, the Predecessor could choose an interest rate equal to LIBOR or a fixed rate equal to the bank’s prime rate plus a margin based upon the Predecessor’s then leverage ratio.  Interest on outstanding borrowings was due monthly on the Line of Credit, and all amounts outstanding on the Line of Credit, including unpaid interest were due upon maturity of February 28, 2015. Principal only payments were due quarterly over the three-year term of the Term Loan and all remaining unpaid principal and all accrued interest were due upon maturity, February 28, 2015.  The Line of Credit was fully repaid in connection with the Image and Acorn Media Mergers.

Also in connection with the acquisition of ACL, the Predecessor borrowed $2.7 million from existing stockholders of Acorn Media (the “Subordinated Loans”). Amounts outstanding under the Subordinated Loans were subordinated to those amounts outstanding under the Term Loan, accrued interest at a rate of 12.5% per annum, but interest was only required to be paid upon maturity along with all outstanding principal on February 28, 2015.  The Subordinated Loans were fully repaid in connection with the Image and Acorn Media Mergers.

Note 9.    Stock Warrants

As of June 30, 2013, RLJE had the following warrants outstanding:

(In thousands, except per share data)
 
Shares
   
Exercise Price
 
Remaining Life
Registered warrants
   
12,525
   
 
  
Sponsor warrants
   
6,667
   
 
  
Unregistered warrants
   
1,850
   
 
  
 
   
21,042
   
$
12.00
 
4.25 years

The registered warrants have a term of five years beginning October 3, 2012 and provide the warrant holder the right to acquire a share of our common stock for $12.00 per share.  The warrants are redeemable by us for $0.01 per warrant share if our common stock trades at $17.50 per share for 20 out of 30 trading days.  The warrants contain standard anti-dilution provisions.

The Sponsor warrants contain the same provisions as the registered warrants.  However, RLJE has agreed with the Sponsor that we would not redeem the Sponsor warrants if our stock price was $17.50 or higher as long as the Sponsor continues to hold the Sponsor warrants.  The unregistered warrants contain the same provisions as the registered warrants except neither they nor the shares of our common stock that would be acquired upon exercise have been registered.

All of the warrants contain a provision whereby the exercise price will be reduced if RLJE reorganized as a private company.  The reduction in exercise price depends upon the amount of other consideration, if any, received by the warrant holders in the reorganization and how many years after the Business Combination a reorganization is consummated.  Generally, the reduction in exercise price would be between $6.00 and $9.00 assuming no additional consideration was received.  Because of this provision, all warrants are being accounted for as a derivative liability in accordance with ASC 815-40, Contracts in Entity’s Own Equity.

The fair value of the warrants as of June 30, 2013 was $3.5 million.  The valuation of the registered warrants is a Level 1 measurement as the warrants are traded on the over-the-counter market.  Because RLJE has agreed not to exercise its redemption right pertaining to the Sponsor warrants and because the unregistered warrants have a discounted fair value as compared to the registered warrants, the valuation of the other warrants is a Level 3 measurement.  The decrease in the fair value of the warrants for the three and six months ended June 30, 2013 of $599,000 and $802,000, respectively, was included as a component of other income.
17

Note 10.                  Fair Value Measurements

Successor

The following table represents RLJE’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013.

(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
   
   
   
 
Warrant liability – June 30, 2013
 
$
(2,255
)
 
$
   
$
(1,267
)
 
$
(3,522
)

The following table includes a rollforward of amounts for the six-month period ended June 30, 2013 for liabilities classified within Level 1 and Level 3.

(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
   
   
   
 
Warrant liability – December 31, 2012
 
$
(2,755
)
 
$
   
$
(1,569
)
 
$
(4,324
)
Change in fair value of warrant liability
   
500
     
     
302
     
802
 
Warrant liability – June 30, 2013
 
$
(2,255
)
 
$
   
$
(1,267
)
 
$
(3,522
)

We have warrants outstanding to purchase 21,041,667 shares of our common stock, which are recorded at fair value on the condensed consolidated balance sheet.

When events and circumstances indicate that an investment in content is impaired, we determine the fair value of the investment; and if the fair value is less than the carrying amount, we recognize additional amortization expense equal to the excess.  Our nonrecurring fair value measurement information of assets and liabilities during the six months ended June 30, 2013 is classified in the table below:

(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Loss
 
 
 
   
   
   
   
 
Investment in content
 
$
   
$
   
$
5,345
   
$
5,345
   
$
3,227
 

During the three months ended June 30, 2013, the investment in content was written down by $2.6 million as a result of a change in fair value.  In determining the fair value of our acquired and produced content, we employ a discounted cash flows (“DCF”) methodology with assumptions for cash flows. Key inputs employed in the DCF methodology include estimates of a film's ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on our weighted average cost of capital plus a risk premium representing the risk associated with producing a particular film or television program. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a Level 3 measurement.

While we believe that our methodology provides us with a reasonable and appropriate estimate of film ultimate revenues, we have begun to improve our process for achieving our forecasted revenue by title (or “ultimates”).  This process will incorporate more input and review from our sales and operations to more accurately predict revenue forecast based on prior experience and anticipated business actions.  At this time, we cannot predict the outcome of this improved process.  Changes to our ultimates could have an impact in our fair value assessment, and on a prospective basis, the amount of amortization expense to be recognized on our film assets.  We expect to conclude this process by September 30, 2013.

Predecessor

The following table represents Predecessor’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of and for the six months ended June 30, 2012.
18

(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
               
Interest rate derivative – December 31, 2011
 
$
   
$
(36
)
 
$
   
$
(36
)
Change in fair value of interest rate derivative
   
     
     
     
 
Interest rate derivative – June 30, 2012
 
$
   
$
(36
)
 
$
   
$
(36
)

During the six months ended June 30, 2012, royalty and distribution fee advances with a carrying amount of $1.4 million were written down to their fair value resulting in an impairment charge of $860,000.  Of this amount, $430,000 was written down during the three months ended June 30, 2012.  Our nonrecurring fair value measurement information of assets and liabilities during the six months ended June 30, 2012 is classified in the table below:

(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Loss
 
 
 
   
   
   
   
 
Investment in content
 
$
   
$
   
$
537
   
$
537
   
$
860
 

Note 11.              Customer Relationship

During the quarter ended June 30 2013, the Company terminated its business relationship with an inventory fulfillment partner and recorded a sales return of approximately $2.4 million, which negatively impacted our gross margin by approximately $1.1 million.  Additionally, we agreed terms to early terminate a content output agreement with a content supplier effective December 31, 2013.  The result of the termination was a non-cash charge of approximately $4.6 million related to its unamortized content assets, including inventories, on the Company’s balance sheet.  There were no comparable events in the prior periods.

Note 12.               Transaction Costs and Severance

During the three and six months ended June 30, 2012, the Predecessor incurred transaction costs of $1,599,000 and $3,263,000, respectively, related to the Image and Acorn Mergers (Note 3) as well as the acquisition of ACL (Note 4).  These costs are included in general and administrative expenses.  There were no similar transaction costs during 2013.

During the three and six months ended June 30, 2013 (Successor), we incurred a severance charge of $1.4 million and $2.0 million, respectively, as part of the implemented reorganization from the formation of RLJE with former employees.  The severance charge was recorded as a component of general and administrative expense.  There were no severance charges incurred during the six months ended June 30, 2012.

Note 13.              Net Income (Loss) per Common Share Data

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per common share for the three and six months ended June 30, 2013 (Successor) and June 30, 2012 (Predecessor):

 
 
Successor
   
Predecessor
 
(In thousands, except per share data)
 
Three Months
Ended
June 30, 2013
   
Six Months
Ended
June 30, 2013
   
Three Months
 Ended
June 30, 2012
   
Six Months
Ended
June 30, 2012
 
Numerator – basic and diluted:
 
   
   
   
 
Net income (loss)
 
$
(16,944
)
 
$
(20,502
)
 
$
(554
)
 
$
288
 
Less net income (loss) attributable to noncontrolling interest
   
     
     
(35
)
   
56
 
Net income (loss) applicable to common shareholders
   
(16,944
)
   
(20,502
)
   
(519
)
   
232
 
Less net loss applicable to restricted common shareholders
   
(62
)
   
(66
)
   
     
 
Net income (loss) applicable to unrestricted common shareholders
 
$
(16,882
)
 
$
(20,436
)
 
$
(519
)
 
$
232
 
Unrestricted common shareholders - net income (loss) per share:
                               
Net income (loss) – numerator
 
$
(16,882
)
 
$
(20,436
)
 
$
(519
)
 
$
232
 
Weighted-average common shares outstanding – basic denominator
   
13,340
     
13,340
     
1,023
     
1,023
 
Effect of dilutive securities
   
     
     
     
8
 
Weighted-average common shares outstanding – diluted denominator
   
13,340
     
13,340
     
1,023
     
1,031
 
Net income (loss) per common share – unrestricted:
                               
Basic
 
$
(1.27
)
 
$
(1.53
)
 
$
(0.51
)
 
$
0.23
 
Diluted
 
$
(1.27
)
 
$
(1.53
)
 
$
(0.51
)
 
$
0.23
 
Restricted common shareholders - net income (loss) per share:
                               
Net loss – numerator
 
$
(62
)
 
$
(66
)
 
$
   
$
 
Weighted-average common shares outstanding – basic and diluted denominator
   
49
     
43
     
     
 
Net loss per common share – restricted:
                               
Basic and diluted
 
$
(1.27
)
 
$
(1.53
)
 
$
   
$
 

19

For the Successor periods, outstanding warrants to acquire 21,041,667 shares of common stock are not included in the computation of diluted net loss per common share as the effect would not change the result of the calculation.

For the three-month Predecessor period ended June 30, 2012, outstanding options to acquire 75,140 shares of common stock of Acorn Media are not included in the computation of diluted net income per share as the effect would not change the result of the calculation.

Note 14.              Commitments and Contingencies

In the normal course of business, we are subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations relating to employment and tax matters.  While it is not possible to predict the outcome of these matters, the opinion of management is, based on consultations with internal and external legal counsel, that the ultimate disposition of known proceedings will not have a material adverse impact on our financial condition, results of operations or liquidity.  Accordingly, we record a charge to earnings based on the probability of settlement and determination of an estimated amount.  These charges were not material to our results.

Note 15.         Related Party Transactions

All of ACL’s staff are employed by APL.  ACL was charged overhead and personnel costs for the three and six months ended June 30, 2013 (Successor) of approximately $493,000 and $943,000, respectively.  Amounts were recorded as a reduction in general and administrative expenses in the accompanying consolidated statements of operations.

ACL paid dividends to APL of $2,194,000 and $4,005,000 during the three and six months ended June 30, 2013 (Successor) and $92,000 and $1,105,000 during the three and six months ended June 30, 2012 (Predecessor), respectively.  Dividends received were recorded as a reduction to the ACL investment account.

On February 29, 2012, certain shareholders of the Predecessor lent $2.7 million to the Predecessor in connection with the purchase of a 64% ownership interest in ACL (see “Note 7. Debt” above for further discussion).

We recognized foreign currency gains and losses as a component of other income (expense) on amounts Acorn Media lent to APL and Acorn Australia.  Amounts lent will be repaid based on available cash.  During the three and six months ended June 30, 2013, we recognized a loss of $0.4 million and $1.8 million, respectively.  During the three and six months ended June 30, 2012, we recognized a loss of $540,000 and $376,000, respectively.

On June 27, 2013, The RLJ Companies, LLC purchased from one of our vendors $3,486,000 of contract obligations that we owed to the vendor beginning June 27, 2013.  As of June 30, 2013, there was $255,000 due the vendor and was recorded in our accounts payable.  The Chairman of the Board of RLJE is the sole manager and sole voting member of The RLJ Companies, LLC.  The obligations were payable to the vendor between June 27, 2013 and September 5, 2013. Pursuant to the purchase, The RLJ Companies, LLC has become the account creditor with respect to these accounts, but the accounts have not been otherwise modified, and the vendor continues to be the account creditor with respect to other outstanding accounts payable by us after September 5, 2013.
20

During the three months ended June 30, 2013, 52,631 shares of restricted common stock were granted to an executive officer in connection with the terms of his employment contract.  The shares were fair valued on the date of grant at $3.72 per share, for a total value of approximately $196,000.  The restricted shares will vest and be expensed over a three-year period subject to certain service and performance criteria being achieved.

Note 16.         Subsequent Events

We have performed an evaluation of subsequent events through the date we issued these financial statements.

On July 18, 2013, we entered into an employment agreement with Mr. Miguel Penella, its Chief Executive Officer and President. Mr. Penella’s employment agreement provides that it continues until terminated in accordance with its terms by the Company or Mr. Penella.  On July 19, 2013, 128,576 shares of restricted common stock were granted to an executive officer in connection with the terms of his employment contract.  The shares were fair valued on the date of grant at $5.37 per share, or total value of approximately $690,000.  The restricted shares will vest and be expensed by January 1, 2016 subject to certain service and performance criteria being achieved.

On July 23, 2013, we terminated our relationship with a key supplier effective December 31, 2013 (see Note 11).


21

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

The following discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions.  As described at the beginning of this Quarterly Report under the heading “Forward-Looking Statements,” our actual results could differ materially from those anticipated in these forward-looking statements.  Factors that could contribute to such differences include those discussed elsewhere in this Quarterly Report under the heading “Forward-Looking Statements.”  You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report.  Except as may be required under federal law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related footnotes included in Item 1 of this Quarterly Report and with our audited consolidated financial statements and notes thereto, and with the information under the headings entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our Annual Report on Form 10-K.

Overview

RLJ Entertainment, Inc. (or RLJE) is a leading global entertainment company with a strong presence in North America, the United Kingdom and Australia and strategic sublicense and distribution relationships covering Europe, Asia and Latin America.  RLJE was incorporated in Nevada in April 2012.  On October 3, 2012, the business combination of RLJE, Image Entertainment, Inc. (or Image) and Acorn Media Group, Inc. (or Acorn Media) was completed, which is referred to herein as the “Business Combination.”  Acorn Media includes its subsidiaries Acorn Media UK Limited (or Acorn UK), Acorn Media Australia Pty Ltd. (or Acorn Australia) and Acorn Productions Limited (or APL).  In February 2012, Acorn Media acquired a 64% ownership of Agatha Christie Limited (or ACL).  References to Image include its wholly-owned subsidiary Image/Madacy Home Entertainment, LLC.  “We,” “our” or “us” refers to RLJE and its subsidiaries for periods following the Business Combination and Acorn Media and its subsidiaries for periods prior to the Business Combination, unless otherwise noted.

We acquire content and distribution rights in various categories, with particular focus on full-length motion pictures, urban programming, and British episodic mystery and drama.  We distribute this content across multiple platforms, including broadcast/cable, existing digital distribution formats (download-to-own, rental, SVOD, FVOD), new digital channels platforms, DVD and Blu-ray retail and online, and international distribution and sales.  Our principal executive offices are located in Silver Spring, Maryland, with additional U.S. locations in Chatsworth, California, and Stillwater, Minnesota, and international locations in London, England and Sydney, Australia.

We market our products through a multi-channel strategy encompassing (1) the development and licensing of original program offerings through our wholly-owned subsidiary, APL, and our majority-owned subsidiary, ACL, as well as our fitness offerings; (2) wholesale distribution through partners covering brick and mortar establishments, and digital, broadcast and cable partners; and (3) a strong direct-to-consumer presence in the United States and United Kingdom through traditional catalog and e-commerce offerings.

APL manages our British drama co-productions, including the intellectual property rights owned by ACL and revenues associated with those rights.  ACL is home to some of the world’s greatest works of mystery fiction, including Murder on the Orient Express and Death on the Nile and includes all rights to iconic sleuths such as Hercule Poirot and Miss Marple.  The Agatha Christie library includes approximately 80 novels and short story collections, 19 plays and a film library of nearly 40 made-for-television films.

Our wholesale partners are broadcast, digital outlets and major retailers in the United States, Canada, United Kingdom and Australia, including, among others, Amazon, Walmart, Target, Costco, Barnes & Noble, iTunes, Netflix, BET, Showtime, DirectTV, and Hulu.  We have a catalog of owned and long-term licensed products in excess of 5,300 titles, segmented into genre-based program lines such as Acorn (British drama/mystery, including product provided by ACL), Image (independent feature films, stand-up comedy), One Village (urban), Acacia (fitness), Slingshot Pictures (faith), Athena (educational), Criterion (art films) and Madacy (uniquely packaged collections of historical footage/documentaries).
22

Our direct-to-consumer segment includes the continued roll-out of our proprietary digital channels, such as the subscription-based Acorn TV platform.  We plan to extend our subscription platforms in the near-term within the United States (or US), with platforms focusing on the urban and faith/lifestyle markets.  As television and internet converge, the proprietary digital channels will increasingly engage distinct audiences with unique programming that appeal to their individual interests.

Results of Operations

Our unaudited consolidated financial information for the three and six months ended June 30, 2013, should be read in conjunction with our consolidated financial statements and the notes thereto and the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed on April 10, 2013.

The financial results for the three and six months ended June 30, 2013 reflect the operating activities of RLJE and its subsidiaries (referred to as the “Successor” periods).  The results for the three and six months ended June 30, 2012 reflect the operations of only Acorn Media and its subsidiaries businesses (referred to as the “Predecessor” periods).  The comparative discussion below for these periods is based on Generally Accepted Accounting Principles (or GAAP) and the results for the 2012 Predecessor periods are not indicative of, or comparable to, results for the 2013 Successor periods.

A proforma presentation which combines the Image business with the Acorn Media business follows the discussion below.

Revenue

Revenue increased $17.0 million for the three months ended June 30, 2013 compared to 2012.  The increase in the second quarter 2013 was due to Image revenues included in the Successor’s results.  Image’s second quarter 2013 revenues were $19.4 million.  Acorn’s (Predecessor) revenue was down $2.4 million for the second quarter 2013 compared to the prior year due primarily to sales return of $2.4 million associated with the early termination of a distribution and fulfillment partner agreement.  Management elected to terminate this agreement to consolidate fulfillment and distribution to one larger distributor to gain improved retail sell-through, along with improved pricing and services from increased scale.  Management expects the returned inventory will be re-sold and distributed at normal pricing in the ordinary course of business.

Revenue increased $37.7 million for the six months ended June 30, 2013 compared to 2012.  The increase in the year-to-date period was due to Image revenues included in the Successor’s results.  For the six months ended June 30, 2013, Image revenues were $33.2 million.  Acorn (Predecessor) revenue increased by 12.2% or $4.5 million for the six months ended June 30, 2013 versus 2012.  The increase was the result of a strong first quarter premiere of “Foyle’s War 8.”

Cost of Goods Sold (“COGS”)

COGS increased by $26.7 million and $44.4 million for the three and six months ended June 30 2013 compared to 2012.  The increase in COGS is primarily related to the inclusion of Image’s costs to Acorn’s (Predecessor) costs.  Image’s COGS was $25.4 million and $36.3 million for the three and six month period ended June 30, 2013.  During the current quarter and year-to-date results, we recorded in COGS charges of $7.4 million and $8.2 million for non-cash impairment of content rights, write-down of inventories from impairment, shrinkage and obsolescence.  Acorn’s COGS increased by $1.3 million and $8.1 million for the three and six months ended June 30, 2013.  Acorn’s increase in COGS for the current quarter and year-to-date was driven by two items:  (a) increased content amortization from the purchase price accounting step-up basis in connection with the Business Combination and (b) content amortization from the release of “Foyle’s War 8” in the first quarter of 2013.
23

Selling, General and Administrative Expenses (“SG&A”)

SG&A increased by $5.6 million and $10.2 million for the three and six months ended June 30 2013 compared to 2012.  The increase in SG&A is primarily related to the inclusion of Image’s expenses to Acorn’s (Predecessor) results.  Image’s SG&A totaled $5.5 million and $10.4 million for the three and six months ended June 30, 2013.  During the current quarter, Image’s SG&A increased by 12% related to one-time severance charges for staff reductions taken in conjunction with synergies related to the Business Combination.  Acorn’s SG&A was consistent when compared to the prior periods.

Operating Income

Operating income decreased by $15.4 million and $16.9 million for the three and six months ended June 30, 2013 versus the prior year.  The decrease in operating income for the periods relates primarily to the inclusion of Image operating losses in the Successor results.  The Image losses in the quarter and year-to-date were driven by (a) increased COGS from significant non-cash content impairment charges (b) inventory write downs (c) increased content amortization and (d) severance charges from Business Combination synergies.  The details of these charges are discussed above and in the related footnotes.

Interest Expense

Interest expense for the three and six months ended June 30, 2013 was $1.9 million and $4.0 million, respectively compared to interest expense of $420,000 and $577,000 for the three and six months ended June 30, 2012.  The increase in interest expense is the result of the expanded debt structure the company entered during the Business Combination.  The company has principal debt outstanding of $79.6 million as of June 30, 2013 compared to $25.5 million as of June 30, 2012.

Total Other Income (Expenses)

Total Other Income/(Expense) for the three and six months ended June 30, 2013 totaled an expense of $813,000 and $3.4 million as compared to $489,000, and $439,000 in the three and six months ended June 30, 2012.  The increase is primarily due to increases in interest expense and foreign currency exchange expense offset by increased equity earning in affiliate recognition from improved profits from our 64% ownership interest in ACL and decreased warrant expense from the change in fair market value.

Income Taxes

We recorded income tax expense (benefit) of approximately $585,000 and $1,011,000 for the three and six months ended June 30, 2013 (Successor), respectively, compared to ($107,000) and $80,000 for the three and six months ended June 30, 2012 (Predecessor), respectively.  We provide income tax expense on pre-tax income from our consolidated U.K. subsidiaries at an effective tax rate of approximately 24%.  We are not providing a tax provision (benefit) on our U.S. operations as we have historically had and continue to provide a full valuation allowance on the U.S. net operating losses.

24

Proforma Income Statement

The following unaudited proforma financial information for the three and six months ended June 30, 2013 and 2012 reflects the operating results of RLJE as if Image and Acorn Media were acquired as of January 1, 2012.  The unaudited proforma financial information does not include adjustments for Business Combination transaction costs and severance incurred and other one-time expenses, nor does it include adjustments for synergies.  These combined results are not necessarily indicative of the results that may have been achieved had the companies been combined as of such historical dates or periods, or of RLJE’s future operating results.

 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(in thousands)
 
2013
Actual
   
2012
Proforma (1)
   
2013
Actual
   
2012
Proforma (1)
 
Revenues
 
$
34,286
   
$
40,563
   
$
74,592
   
$
82,009
 
Costs of sales
   
36,144
     
29,341
     
63,880
     
58,199
 
Gross profit
   
(1,858
)
   
11,222
     
10,712
     
23,810
 
Selling, general and administrative expenses
   
13,688
     
13,895
     
26,836
     
29,759
 
Income (loss) from operations
   
(15,546
)
   
(2,673
)
   
(16,124
)
   
(5,949
)
Equity earnings of affiliates
   
911
     
496
     
1,560
     
1,024
 
Interest expense, net
   
(1,882
)
   
(1,938
)
   
(4,008
)
   
(3,876
)
Other income (expense)
   
158
     
(751
)
   
(919
)
   
1,775
 
Provision (benefit) for income taxes
   
585
     
30
     
1,011
     
77
 
Net income (loss)
 
$
(16,944
)
 
$
(4,836
)
 
$
(20,502
)
 
$
(6,949
)
                               
Adjusted EBITDA
 
$
(6,274
)
 
$
5,801
   
$
(2,538
)
 
$
11,050
 

*Notes to the Proforma Income Statement Table:
(1)  An adjustment for interest expense has been made to the prior year three and six month ended June 30, 2012 as if the existing debt was in place throughout the period.

Proforma Revenue

Revenue decreased by $6.3 million to $34.3 million from $40.6 million for the three months ended June 30, 2013 versus 2012.  The decline in revenue was attributed to the timing of certain releases between quarters and a significant one-time transaction charge related to our execution of synergies to consolidate fulfillment partners.  This consolidation of our fulfillment partners resulted in a revenue decline of $2.4 million in the quarter.  This management action to terminate the agreement was taken to position the company for future cost savings by combining at scale all of our operations with a single significant distribution and fulfillment partner.  Further, during the three months ended June 30, 2012, Acorn released a key franchise title “Doc Martin 5” without a commensurate size release in 2013.  We plan to begin releasing “Doc Martin 6” in the fourth quarter of 2013.  Revenues from our feature film operations (Image) declined by approximately $3.9 million in the three months ended June 30, 2013 versus prior year resulting from a net increase in gross (net of actual returns) sales of 4% in 2013 versus 2012 offset by a greater increase in price/rebate adjustments and sales return reserves in three months ended June 30, 2013.  The Image revenue for the three months ended June 30, 2012 included a significant reduction in rebates and sales return reserves that did not repeat in the same quarter of the current year.

Revenue for the six months ended June 30, 2013 declined by $7.4 million to $74.6 million from $82.0 million compared to 2012.  The majority (85%) of the decline resulted from second quarter 2013 activities discussed above; however we did see a slight decline in first quarter 2013 versus 2012.  Our Acorn revenues were up 35% in the three months ended March 31, 2013 and 12% in the six months ended June 30, 2013, versus prior year primarily due to the release of “Foyle’s War 8” offset by our Image operations revenues decline resulting from the number and performance certain titles.  In the year-to-date 2012 we released three high-profile titles, “The Double,” “All Things Fall Apart” and “Beneath the Darkness” that performed at or above expectations.  Conversely in the year-to-date 2013 we had only two high-profile titles, “The Numbers Station” and “Day of the Falcon.”  Moreover, while “The Numbers Station” met our expectations, the initial results on “Day of the Falcon” have been disappointing.

25

Proforma Cost of Goods Sold (“COGS”)

COGS increased by $6.8 million to $36.1 million from $29.3 million for the three months ended June 30, 2013 versus 2012.  The increase in COGS resulted from (a) an early termination of a content output agreement and (b) the noncash impairment of certain content rights and related inventory.

During the quarter ended June 30, 2013, management began the early termination of a multi-year content output arrangement with a key supplier.  The supplier agreement was originally scheduled to expire in 2017 but is now scheduled to terminate effective December 31, 2013, with a 90-day sell off period through March 2014.  The termination agreement was executed on July 23, 2013.  After careful consideration, management terminated this arrangement because our analysis indicated we could achieve higher risk-adjusted returns on other product lines and the content did not meet several of our strategic guidelines, including prospects for growth and opportunity to distribute across multiple distribution channels.  The impact of this management decision resulted in a non-cash accelerated amortization and an impairment of the remaining content rights and inventory of $4.6 million for the quarter ended June 30, 2013.  Beginning in 2014, the company intends to invest the cash historically spent on the terminated agreement on other new content rights expected to meet management’s return thresholds.

Additionally during this quarter, we recorded noncash impairment charge of $3.4 million on our content rights and related inventory as management refines its investment strategy and evaluates the ultimate revenue forecast for every title.  The company’s Madacy content line, which is in transition to a new strategy, represented 32% or $1.1 million of the total $3.4 million charge in the second quarter.

COGS increased by $5.7 million for the six months ended June 30, 2013 compared to 2012.  The increase in COGS resulted from second quarter 2013 activities discussed above.  During the first quarter 2013 versus 2012, COGS decreased by $1.1 million or 3.9%.  The first quarter decrease in COGS resulted from a favorable sales mix as we had more revenue in 2013 from our Acorn IP Licensing and direct to consumer businesses compared to proportionately higher sales in 2012 of our feature film content due to fewer high-profile titles released in 2013.

While we believe that our methodology provides us with a reasonable and appropriate estimate of film ultimate revenues, we have begun to improve our process for achieving our forecasted revenue by title (or “ultimates”).  This process will incorporate more input and review from our sales and operations to more accurately predict revenue forecast based on prior experience and anticipated business actions.  At this time, we cannot predict the outcome of this improved process.  Changes to our ultimates could have an impact in our fair value assessment, and on a prospective basis, the amount of amortization expense to be recognized on our film assets.  We expect to conclude this process by September 30, 2013.

Proforma Selling, General and Administrative Expenses (“SG&A”)

SG&A decreased by $0.2 million to $13.7 million from $13.9 million for the three months ended June 30, 2013 compared to 2012. SG&A was impacted in both periods by material one-time charges. For 2013, these include (a) severance charges totaling $1.4 million from the integration of the combined companies and (b) an increase of $0.5 million in contingency reserve for asserted and unasserted legal claims.  One-time charges in 2012 totaled $2.0 million from one-time Business Combination transactions costs, of which $1.6 million was incurred by Acorn.

SG&A expense decreased by 10% or $2.9 million for the six months ended June 30 2013 compared to 2012.  The decrease in total SG&A expense year-to-date relates to expense reductions from one-time merger transactions cost recorded in 2012 totaling $4.8 million, of which $3.3 million was incurred by Acorn, and cost benefits from staff reductions and operational efficiencies of approximately $2.6 million offset by increased amortization from intangible assets of $2.5 million and severance charge of $2.0 million.

Proforma Operating Income

Operating income (loss) decreased by $12.9 million and $10.2 million, respectively, for the three and six months ended June 30, 2013 compared to 2012.  The three months ended June 30, 2013 decrease is due to a $6.3 million decrease in revenue and $6.8 million increase in COGS offset by a decrease in SG&A of $0.2 million.  The six months ended June 30, 2013 decrease is due to a $7.4 million decrease in revenue and $5.7 million increase in COGS offset by a decrease in SG&A of $2.9 million.

26

Proforma Adjusted EBITDA

Unaudited proforma financial information reflects the operating results of RLJE as if Image and Acorn Media were acquired as of the periods indicated. These combined results are not necessarily indicative of the results that may have been achieved had the combined companies been combined as of such dates or periods, or of our future operating results.

Management believes Adjusted EBITDA to be a meaningful indicator of our performance that provides useful information to investors regarding our financial condition and results of operations because it removes material noncash items that allows investors to analyze the operating performance of the business using the same metric management uses.  The exclusion of noncash items better reflects our ability to make investments in the business and meet obligations.  Presentation of Adjusted EBITDA is a non-GAAP financial measure commonly used in the entertainment industry and by financial analysts and others who follow the industry to measure operating performance. The Company uses this measure to assess operating results and performance of its business, perform analytical comparisons, identify strategies to improve performance and allocate resources to its business segments. While management considers Adjusted EBITDA to be important measures of comparative operating performance, it should be considered in addition to, but not as a substitute for, net income and other measures of financial performance reported in accordance with GAAP. Not all companies calculate Adjusted EBITDA in the same manner and the measure as presented may not be comparable to similarly-titled measures presented by other companies.

The following table includes the reconciliation of our consolidated Adjusted EBITDA to consolidated GAAP net loss:

 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(in thousands)
 
2013
Actual
   
2012
Proforma
   
2013
Actual
   
2012
Proforma
 
Net income (loss)
 
$
(16,944
)
 
$
(4,836
)
 
$
(20,502
)
 
$
(6,949
)
 
                               
Amortization of content
   
19,319
     
18,382
     
36,588
     
33,995
 
Cash investment in content
   
(13,468
)
   
(13,588
)
   
(27,930
)
   
(28,407
)
Depreciation and amortization
   
1,494
     
1,422
     
2,920
     
2,833
 
Interest expense
   
1,882
     
1,938
     
4,008
     
3.876
 
Provision (benefit) for income tax
   
585
     
(30
)
   
1,011
     
(77
)
Transactions costs and severance
   
1,379
     
2,058
     
2,018
     
4,885
 
Warrant liability
   
(598
)
   
     
(802
)
   
 
Stock-based compensation
   
77
     
455
     
151
     
894
 
Adjusted EBITDA
 
$
(6,274
)
 
$
5,801
   
$
(2,538
)
 
$
11,050
 

The above Adjusted EBITDA presentation differs from the Adjusted EBITDA presentation for the period ended March 31, 2013 and 2012.  The amounts excluded from the current presentation of Adjusted EBITDA are ACL EBITDA, foreign currency exchange gain (loss) and other income related to Madacy.

Subsequent Events

On July 18, 2013, we entered into an employment agreement with Mr. Miguel Penella, its Chief Executive Officer and President. Mr. Penella’s employment agreement provides that it continues until terminated in accordance with its terms by the Company or Mr. Penella.  On July 19, 2013, 128,576 shares of restricted common stock were granted to an executive officer in connection with the terms of his employment contract.  The shares were fair valued on the date of grant at $5.37 per share, or total value of approximately $690,000.  The restricted shares will vest and be expensed by January 1, 2016 subject to certain service and performance criteria being achieved.

On July 23, 2013, we agreed to early terminate our arrangement with a key supplier effective December 31, 2013, which resulted in accelerated amortization and an impairment charge to our investment in content and an additional inventory charge reflecting the shortened sell-off period of the remaining inventory.
27

Liquidity and Capital Resources

At June 30, 2013, our cash and cash equivalents was approximately $3.7 million and there were no unused amounts under the revolving credit facility.  As of December 31, 2012, our cash and cash equivalents was approximately $4.7 million and $7.4 million was available under our revolving credit facility.  During the first half of 2013, liquidity tightened for the following reasons:

· The company incurred higher than expected transaction cost associated with the closing of the Business Combination.
 
· The legacy Image business has significant short-term vendor debts that are past due which resulted in accelerated payments and modified business relationships in the short term.
 
· The business is seasonal similar to consumer/wholesale retail and the first quarter is historically the lowest in terms of revenues and operating profits.
 
The decrease in accounts receivable as of June 30 2013 compared to December 31, 2012 relates to the seasonality of the business.  The fourth quarter sales are generally 35 – 40% of the total year’s sales and creates a peak in our accounts receivable.  We generate positive cash flow from our Acorn operations to meet our current needs.  Management’s operational synergies, head count reduction and cost containment, have significantly reduced the cash operating expenses for our Image business.  Additionally, the company is diligently managing daily cash use to ensure the company meets its commitments.

The cash used in operating activities during the first half of 2013 was provided by our cash reserves as of December 31, 2012 and cash provided by investing activities and financing activities.  During the first half of 2013, significant factors affecting cash used in investing and financing activities were:
 
·
dividends received from ACL ($4.0 million);
 
· net borrowing under our revolving credit facility ($7.4 million); and
 
· repayment of long-term debt ($10.3 million).

On June 27, 2013, The RLJ Companies, LLC purchased from one of our vendors $3,486,000 of contract obligations that we owed to the vendor beginning June 27, 2013.  As of June 30, 2013, there was $255,000 due the vendor and was recorded in our accounts payable.  The Chairman of the Board of RLJE is the sole manager and sole voting member of The RLJ Companies, LLC.  The obligations were payable to the vendor between June 27, 2013 and September 5, 2013. Pursuant to the purchase, The RLJ Companies, LLC has become the account creditor with respect to these accounts, but the accounts have not been otherwise modified, and the vendor continues to be the account creditor with respect to other outstanding accounts payable by us after September 5, 2013.

Capital Resources

Cash.  As of June 30, 2013, we had cash of $3.7 million, as compared to $4.7 million as of December 31, 2012.

Borrowing Availability.  At June 30, 2013, there was no borrowing availability under our revolving line of credit.

Revolving Credit Facility.  On October 3, 2012, we entered into a Credit Agreement (the Credit Facility) with certain lenders, SunTrust, as Administrative Agent, and SunTrust Robinson Humphrey, Inc., as Lead Arranger and Bookrunner.  The Credit Facility includes a five-year $15.0 million revolving credit facility and three tranches of term loans totaling $55.0 million with final maturities ranging from five to five and one-half years, at interest rates ranging from prime rate plus 5% to 6.25% or LIBOR plus 6% to 7.25%, plus an additional 3% per annum paid in kind on the last $15.0 million of the facilities. The obligations under the Credit Facility are secured by a lien on substantially all of our assets, pursuant to the Pledge and Security Agreement, dated as of October 3, 2012.
28

As of June 28, 2013, we entered into an Amendment and Waiver (the Amendment) with respect to the Credit Facility. The Amendment modifies the Credit Facility (a) to increase the maximum permitted Leverage Ratio (as defined in the Credit Facility) from 3.0 to 1.0 to 3.8 to 1.0 for the quarter ended June 30, 2013, (b) to permit us to retain (and not apply to debt service) dividends received from ACL and its subsidiaries between June 25, 2013 and December 31, 2013 and (c) to exclude aged trade payables from the Leverage Ratios until 2015. In addition, the Amendment requires that we, for at least one business day of each calendar year, beginning with calendar year 2015, cause the principal amount of the revolving loans outstanding to be $7.5 million or less. After any repayment required by this provision, the Borrowers may reborrow all or any part of the revolving loans to the extent they are otherwise permitted to do so under the terms of the Credit Facility.

We were in compliance with all financial and operating covenants under the Credit Facility at June 30, 2013.  These covenants are measured at various times through-out the year, and while we believe we will be in compliance with all financial and operating covenants at those dates, there can be no assurance that we will continue to be in compliance.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Critical Accounting Policies and Procedures

There have been no significant changes in the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10‑K filed on April 10, 2013.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

29

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. “Disclosure controls and procedures” refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our system of disclosure controls and procedures as of the end of the period covered by this Quarterly Report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, we have evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes occurred to our internal control over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no such changes during the period covered by this Quarterly Report.

30

PART II - OTHER INFORMATION

Item 1.
Legal Proceedings.

In the normal course of business, we are subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations relating to employment and tax matters.  While it is not possible to predict the outcome of these matters, it is the opinion of management, based on consultations with legal counsel, that the ultimate disposition of known proceedings will not have a material adverse impact on our financial position, results of operations or liquidity.

Item 1A. Risk Factors.

Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K filed on April 10, 2013.  You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report.  Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.  As of June 30, 2013, there have been no material changes to the risk factors set forth in that Form 10-K.

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

RLJ SPAC Acquisition LLC, an affiliate of the Company, has purchased shares of our common stock in the open market and through block purchases pursuant to a 10b5-1 plan.  Robert L. Johnson, the Chairman of the Board of the Company, is the sole manager and sole voting member of RLJ SPAC Acquisition LLC. The table below sets forth information regarding purchases of our common stock by RLJ SPAC Acquisition LLC during the quarter ended June 30, 2013:

Period
 
Total Number
of Shares
 Purchased
   
Average
Price Paid
Per Share
   
Total Number of
Shares Purchased
as Part of Publicly Announced Plans
or Programs
   
Approximate
Dollar Value of
Shares that May
Yet be Purchased
 Under Publicly Announced Plans
or Programs
 
 
 
   
   
   
 
April 1, 2013 to April 30, 2013
   
     
     
   
$
2,000,000
 
May 1, 2013 to May 31, 2013
   
     
     
   
$
2,000,000
 
June 1, 2013 to June 30, 2013
   
26,500
   
$
4.40
     
26,500
   
$
1,883,400
 

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5.
Other Information.

None.

31

Item 6.
Exhibits.

10.1* Separation Agreement, dated as of April 23, 2013, by and between John Hyde, Image Entertainment, Inc. and RLJ Entertainment, Inc.

10.2* Separation Agreement, dated as of May 24, 2013, by and between John Avagliano, Image Entertainment, Inc. and RLJ Entertainment, Inc.

10.3* Employment Agreement, dated as of June 10, 2013, by and between Drew Wilson and RLJ Entertainment, Inc.

10.4* First Amendment to Amended and Restated Registration Rights Agreement, dated as of June 27, 2013, by and among RLJ Entertainment, Inc., RLJ Acquisition, Inc., RLJ SPAC Acquisition, LLC, JH Partners, LLC, JH Partners Evergreen Fund, L.P., JH Investment Partners III, L.P., JH Investment Partners GP Fund III, LLC, and Wexford Spectrum Investors, LLC.

10.5* First Amendment to and Waiver Under Credit Agreement, dated as of June 28, 2013, by and among RLJ Entertainment, Inc., RLJ Acquisition, Inc., for itself and as successor by merger with RLJ Merger Sub I, Inc., Acorn Media Group, Inc., Image Entertainment, Inc., for itself and as successor by merger with RLJ Merger Sub II, Inc., each of the Persons party to the Credit Agreement as Guarantors, the Lenders party hereto, and SunTrust Bank, as the Administrative Agent.

31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1* Section 1350 Certification of Chief Executive Officer.

32.2* Section 1350 Certification of Chief Financial Officer.

101.INS XBRL Instance Document

 
101.SCH
XBRL Taxonomy Extension Schema Document
 
  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
  101.DEF XBRL Taxonomy Extension Definition Linkbase Document
 
  101.LAB XBRL Taxonomy Extension Label Linkbase Document
 
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
___________
* Filed herewith.
Management contract or compensatory plan or arrangement.

32