RLJ Entertainment Earnings 2014-06-30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

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

For the quarterly period ended June 30, 2014.

 

 

Commission File Number 001-35675

RLJ ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

(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 30, 2014:  13,263,312

 

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RLJ ENTERTAINMENT, INC.

INDEX TO FORM 10-Q

 

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2014 (or Quarterly Report), includes forward-looking statements that involve risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  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 financial performance, including our ability to achieve revenue growth, gross margins, realize synergies, and earnings before income tax, depreciation, amortization, cash investment in content, interest expense, transaction and severance costs, warrants and stock-based compensation (or Adjusted EBITDA);

§

Our ability to make scheduled payments or to refinance our debt obligations;

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Our ability to satisfy financial ratios;

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Our ability to fund planned capital expenditures and development efforts;

§

Our inability to gauge and predict the commercial success of our programming;

§

Our ability to estimate sales returns;

§

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;

§

Delays in the release of new titles or other content;

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The effects of disruptions in our supply chain;

§

The loss of key personnel;

§

Our public securities’ limited liquidity and trading; or

§

Our ability to continue to meet the NASDAQ Capital Market continuing listing standards.

 

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 March 19, 2014.  You are cautioned not to place undue reliance on such forward-looking statements.

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ITEM 1.

FINANCIAL STATEMENTS

 

RLJ ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2014 (unaudited) and December 31, 2013

 

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See accompanying notes to consolidated financial statements.

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RLJ ENTERTAINMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2014 and 2013

 

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See accompanying notes to consolidated financial statements.

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RLJ ENTERTAINMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Three and Six Months Ended June 30, 2014 and 2013

 

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See accompanying notes to consolidated financial statements.

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RLJ ENTERTAINMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

For the Six Months Ended June 30, 2014 and 2013

 

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See accompanying notes to consolidated financial statements.

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RLJ ENTERTAINMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2014 and 2013

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See accompanying notes to consolidated financial statements.

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RLJ ENTERTAINMENT, INC.

NOTE 1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

RLJ Entertainment, Inc. (or RLJE) is a company with a direct presence in North America, the United Kingdom and Australia and 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 RLJE International Ltd (or RLJE U.K.), RLJ Entertainment Australia Pty Ltd. (or RLJE Australia) and RLJ Entertainment Ltd  (or RLJE Ltd).  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 consolidated subsidiaries, unless otherwise noted. Our principal executive offices are located in Silver Spring, Maryland, with additional U.S. locations in Woodland Hills, California, and Stillwater, Minnesota, and international locations in London, England and Sydney, Australia.

We acquire content rights in various categories including: British episodic mystery and drama, urban programming, and full-length independent motion pictures.  Through long-term exclusive agreements, we license rights to third-party programs.  We also develop, produce, and own original programming through our wholly-owned subsidiary, RLJE Ltd, and our majority-owned subsidiary, ACL, in addition to fitness titles through our Acacia brand.  Our owned content includes Foyle’s War made-for-TV films, multiple fitness/wellness titles, and through our 64% ownership of ACL, the works of Agatha Christie.

We exploit our products through a multi-channel strategy encompassing (1) the licensing of original drama and mystery content managed and developed through our wholly-owned subsidiary, RLJE Ltd, and our majority-owned subsidiary, ACL, (IP Licensing segment) as well as our fitness offerings; (2) wholesale exploitation through partners covering broadcast/cable, digital, online, and brick and mortar outlets (Wholesale segment); and (3)  direct relations with consumers via proprietary e-commerce, catalog, and subscription-based video on demand (or SVOD) channels (Direct-to-Consumer segment).

Our wholesale partners are broadcast, digital outlets and major retailers in the U.S., Canada, United Kingdom (or U.K.) and Australia, including, among others, DirectTV, Showtime, BET, PBS, Netflix, Amazon, Hulu, Walmart, Target, Costco, Barnes & Noble, HMV and iTunes.

Our Direct-to-Consumer segment includes the sale of video content and complementary merchandise directly to consumers through proprietary e-commerce websites and catalogs and our proprietary SVOD channels, AcornTV and Acacia TV, which was launched in January 2014.  In June 2014, we launched our urban content SVOD channel.  We also plan to develop other audience-based, premium SVOD channels.

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Our management views the operations of RLJE based on these three distinctive reporting segments: (1) IP Licensing; (2) Wholesale; and (3) Direct-to-Consumer.  Operations and net assets that are not associated with any of these stated segments are reported as “Corporate” when disclosing and discussing segment information.  The IP Licensing segment includes intellectual property (or IP) rights that we own or create and then sublicense for exploitation worldwide.  Our Wholesale and Direct-to-Consumer segments consist of the acquisition, content enhancement and worldwide exploitation of exclusive content in various formats, including broadcast (including cable and satellite), DVD, Blu-ray, digital, video-on-demand (or VOD), SVOD, downloading and sublicensing.  The Wholesale segment exploits content through third-party vendors such as DirectTV, Showtime, BET, Netflix, Amazon, Walmart, Best Buy, Target and Costco, while the Direct-to-Consumer segment exploits the same content and complementary merchandise directly to consumers through our proprietary e-commerce websites, mail-order catalogs and digital streaming channels.

During the first quarter of 2014, we changed the names of a few of our subsidiaries.  A summary of the name changes are as follows:

Former Subsidiary Name	New Subsidiary Name
Acorn Productions Limited (or APL)	RLJ Entertainment Ltd  (or RLJE Ltd)
Acorn Productions (UK) Limited	Acorn Productions Ltd
Acorn Media UK Limited (or Acorn UK)	RLJE International Ltd (or RLJE U.K.)

 

 

Basis of Presentation

Unaudited Interim Financial Statements

The financial information presented in the accompanying unaudited interim consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 has been prepared in accordance with accounting principles generally accepted in the United States (or U.S. GAAP) and with the Securities and Exchange Commission’s (or SEC) instructions for interim financial reporting instructions for the Form 10-Q (or 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 U.S. GAAP for complete audited 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 in which a disproportionate amount of sales occur in the fourth quarter, and other factors, including our content 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 March 19, 2014 (or the 2013 Form 10-K).  Our significant accounting policies are included in our 2013 Form 10-K within Note 2, Summary of Significant Accounting Policies of our audited consolidated financial statements.  As of June 30, 2014, no material changes to our significant accounting policies disclosed in our 2013 Form 10-K have been made.

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Accounting and Reporting Pronouncements Adopted

Since the filing of our 2013 Form 10-K, there were no new accounting pronouncements adopted.  A summary of the accounting pronouncement issued but, not required to be adopted for the preparation of our current financial statements is as follows:

On May 28, 2014, the Financial Accounting Standards Board issued accounting standard update (or ASU) No. 2014-09, Revenue from Contracts with Customers (or ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for RLJE on January 1, 2017. Early application is not permitted. The standard permits the use of one of three transition methods. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We are also assessing the transition methods available to implement this new accounting standard.  This update could impact the timing and amounts of revenue recognized within our consolidated financial statements.

Earnings Per Share Presentation

During the first quarter of 2014, we changed our presentation of our earnings per share (or EPS) by excluding our restricted common stock from the calculation, and as a result, we removed our two-class method presentation of EPS per Accounting Standards Codification (or ASC) 260, Earnings Per Share.  This change was determined because our restricted common stock is not obligated to fund our reported net losses.  We also removed 898,438 founder shares from unrestricted common stock for the periods ended June 30, 2013, as these shares could be forfeited in future periods (see Note 8, Equity).  For the three and six month periods ended June 30, 2013, the unrestricted weighted average shares outstanding was reduced by 898,438 founder shares and the loss per share for unrestricted common stock increased to $(1.36) per share from $(1.27) per share for the three months ended June 30, 2013 and $(1.65) per share from $(1.53) per share for the six months ended June 30, 2013.  We have assessed this change in presentation for materiality and determined this change is not material to our consolidated financial statements.

Reclassifications

Some balances within our consolidated financial statements have been reclassified to conform to the current presentation.  We reclassified certain expenses which had been reported in previous periods within our Wholesale segment to Corporate.  Also, beginning in 2014, we began reporting depreciation and amortization as a separate line item within our segment tables.

 

NOTE 2.

SEGMENT INFORMATION

In accordance with the requirements of the ASC 280, Segment Reporting, selected financial information regarding our reportable business segments - IP Licensing, Wholesale, 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 (or content) owned or created by us, other than certain fitness related content, that is licensed for exploitation worldwide. The IP Licensing segment includes our investment in ACL.  Our Wholesale segment consists of the acquisition, content enhancement and worldwide exploitation of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), 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 channels.

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 include costs associated RLJE’s corporate functions such as finance and accounting, human resources, legal and our information technology departments.  Interest expense, other income (expense) and provision for income tax are evaluated by management on a consolidated basis and are not allocated to our reportable segments.

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The following tables summarize the segments for the three month periods ended June 30, 2014 and 2013:

 

(1)

Certain reclassifications have been made during the second quarter of 2014 to allocate costs between our segments for the year-to-date period of 2014.  Corresponding reclassifications were made to the prior period presentations.

 

 

 

During the second quarter of 2013, we recognized additional operating costs and expenses of approximately $10.5 million, which was primarily recognized within our Wholesale segment as follows:  $4.6 million when management entered into an early termination of a feature film content output deal, increased reserves for inventory and content impairments in the aggregate of approximately $3.4 million, primarily attributable to costs associated with transitioning of the Madacy product line, and incurred increased integration costs from a distributor when we combined our Image and Acorn operations of $1.1 million and $1.4 million associated with certain severance agreements entered into. The Wholesale revenue for the three months ended June 30, 2014 includes $852,000 of revenue that resulted from the correction of an immaterial error in our marketing development fund liabilty estimate at March 31, 2014.

The following tables summarize the segments for the six month periods ended June 30, 2014 and 2013:

 

 

(1)

Certain reclassifications have been made during the second quarter of 2014 to allocate costs between our segments for the year-to-date period of 2014.  Corresponding reclassifications were made to the prior period presentations.

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In March of 2013, our IP Licensing segment released Foyle’s War 8 and recognized $8.0 million in revenues and related amortization costs during the six months ended June 30, 2013.  Our IP Licensing segment did not have a similar release thus far in 2014.  Currently, Foyle’s War 9 is expected to be released in the third quarter of 2014.

Included in our Wholesale segment contribution for the six months ended June 30, 2014 is a loss of $3.1 million incurred during the sell-off period under a feature film output deal that was recognized in the first quarter of 2014.  For the six months ended June 30, 2013, our Wholesale segment recognized certain expenses and charges aggregating to approximately $10.5 million, which were recorded during the second quarter of 2013 as disclosed above.

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

 

 

Total assets for each segment primarily include accounts receivable, inventory, investments in content, goodwill, other intangible assets and equity investment in affiliate.  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.

Total assets by segment are as follows:

 

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Goodwill by segment is as follows:

 

 

NOTE 3.

EQUITY EARNINGS IN AFFILIATE

In February 2012, we acquired 64% of ACL’s outstanding stock.  We account for the investment in ACL using the equity method of accounting because (1) we are 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.

The following summarized financial information is derived from unaudited financial statements of ACL:

 

 

ACL’s functional currency is the British Pound Sterling.  Amounts have been translated from British Pound to U.S. Dollar using the average exchange rate for the periods presented.  The above operating results of ACL do not include step-up basis amortization resulting from the Business Combination.

 

NOTE 4.

ACCOUNTS RECEIVABLE

Accounts receivable are primarily derived from (1)  the sales of physical content (DVDs) to retailers and certain resellers, (2) direct-to-consumer, e-commerce, catalog and download-to-own sales of content and other merchandise, or both, and (3) the licensing of content to broadcast, cable/satellite providers and digital subscription platforms including AcornTV, Netflix and Amazon.  Our accounts receivable typically trends with retail seasonality.

 

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Wholesale receivables are primarily billed and collected by our U.S. and U.K. distribution partners and include certain adjustments for receivables previously settled.  Each quarter, our distribution partners preliminarily settle our wholesale receivables assuming a timing lag on collections and an average return rate.  When actual returns differ from the amounts previously assumed, adjustments are made that give rise to payable and receivables between us and our distribution partners.  Amounts vary and tend to be seasonal following our sales activity.  As of June 30, 2014 and 2013, we owed our distribution partners $9.0 million and $6.5 million, respectively, for receivables settled as of periods end.  Because our distribution partners have the right to offset our obligation to repay any over advances due them against receivables that will be collected on our behalf in the future, over advances are recorded against the Wholesale receivables.  As of December 31, 2013, our distribution partners owed us $700,000 for receivables settled as of year-end.

 

NOTE 5.

INVENTORIES

Inventories are summarized as follows:

 

(1)

Other merchandise primarily consists of gifts, jewelry, and home accents purchased from third-parties.

During the three and six months ended June 30, 2014 and 2013, we incurred impairment charges associated with our inventories due to adjustments for lower of cost or market valuation, shrinkage, and excess and obsolescence.  Impairment charges for the three months ended June 30, 2014 and 2013 were $515,000 and $4.8 million, respectively, and for the six months ended June 30, 2014 and 2013, they were $1.2 million and $5.0 million, respectively.  Inventory impairments are included in the cost of sales.

 

NOTE 6.

INVESTMENTS IN CONTENT

 

 

Investments in content are stated at the lower of unamortized cost or estimated fair value. The valuation of investments 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.  For the three months ended June 30, 2014 and 2013, impairment charges were $204,000 and $2.6 million, respectively.  For the six months ended June 30, 2014 and 2013, impairment charges were $1.3 million and $3.2 million, respectively.  Impairments are included in cost of sales.

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RLJ ENTERTAINMENT, INC.

 

In determining the fair value of content (Note 10, Fair Value Measurements), 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 a market participant’s weighted average cost of capital plus a risk premium representing the risk associated with producing a particular type of content.

 

NOTE 7.

DEBT

Debt consists of the following:

 

 

At June 30, 2014 and December 31, 2013, the carrying value of our debt approximates its fair value due to the relative short-term maturities of the debt, their interest rate approximates market rates, or both.

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 $15.0 million revolving credit facility and three tranches of senior term loans totaling $55.0 million.  The obligations under the Credit Facility are secured by a lien on substantially all of the Borrowers’ assets.  On November 6, 2013, we entered into the Second Amendment with respect to the Credit Facility which increased the Credit Facility’s maximum permitted Leverage Ratios (as defined in the Credit Facility) through December 31, 2014.  At June 30, 2014, we are in compliance with all of the leverage ratios required by the Credit Facility.

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RLJ ENTERTAINMENT, INC.

As of June 30, 2014, we had borrowings outstanding of approximately $14.9 million under the revolving facility and there was no borrowing capacity under the revolving 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.

On December 10, 2012, RLJE entered into a forward interest rate cap agreement that effectively caps the LIBOR rate of interest at 1.25%.  The interest rate cap has a notional amount of $30.0 million and has a maturity date of November 30, 2014.  In 2012, we paid a one-time fixed fee of $23,000 for this rate cap agreement. The fair value of this interest rate cap agreement is de-minimus.

Future minimum principal payments under the Credit Facility as of June 30, 2014 are as follows:

 

 

Subordinated Notes Payable and Other Debt

Upon consummation of the Business Combination, we issued unsecured subordinated promissory notes in the aggregate principal amount of $14.8 million to the selling preferred stockholders of Image.  The subordinated notes mature on the earlier of October 3, 2018 or six months after the latest stated maturity of the senior debt issued pursuant to the Credit Facility.  During the second quarter of 2014, interest was due of $992,000 and added to the principal balance of these notes.  At June 30, 2014, our principal balance due pursuant to these notes was $16.0 million.

In October 2013, we began our production of the next franchise series of Foyle’s War.  Acorn Productions Limited, and Acorn Global Enterprises Limited, both wholly-owned subsidiaries of RLJE Ltd, entered into a cash advance facility (the FW9 Facility) with Coutts and Co., a U.K. based lender, for purposes of producing three ninety-minute television programs entitled “Foyle’s War Series 9.” The facility carries interest at a rate of LIBOR plus 2.15%.  Interest and repayment of advances received are due on or before November 8, 2014.  This facility is substantially secured by (i) executed license agreements whereby we have pre-sold certain broadcast and distribution rights and (ii) U.K. tax credits based on anticipated qualifying production expenditures.  The assets and intellectual property will become secured collateral of our senior credit facility once the production loan is fully paid and settled.  At June 30, 2014, our principal balance due pursuant to these notes was $11.0 million.

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NOTE 8.

EQUITY

Founder and Treasury Shares

As of June 30, 2014, our common shares outstanding are 456,405 shares held by certain founding shareholders as part of the initial public offering of RLJE.  These shares will be returned to the Company over a period ending October 2014, if certain stock price targets are not achieved.  During the three months ended June 30, 2014, an additional 442,031 shares were forfeited.  As shares are forfeited, they are held by RLJE as treasury stock.

During the three months ended June 30, 2014, there were 12,226 shares forfeited by employees who resigned that were unvested restricted stock awards, which are being held as treasury stock.  Treasury shares are available to RLJE for future grants or issuances as the Company may elect.

Stock Based Compensation

Compensation expense relating to the restricted stock awards for the three months ended June 30, 2014 and 2013 was $421,000 and $77,000, respectively, and for the six months ended June 30, 2014 and 2013 stock based compensation was $456,000 and $151,000, respectively.  Compensation expense related to restricted stock awards is included in general and administrative expenses.

During the six months ended June 30, 2014, 90,138 shares of restricted stock were granted, 61,202 shares were vested and 78,470 shares were forfeited.  Of the 90,138 shares granted in 2014, 59,000 shares were granted to executive officers, 5,638 shares to directors and 25,500 shares were granted to other members of management.  Of the 78,470 shares forfeited, 66,244 shares of restricted stock were forfeited based upon the failure to achieve the 2013 performance criteria and the remainder of the forfeitures were due to employee resignations.  The shares granted during 2014, were fair valued on the date of grant with a range of $4.60 - $5.01 per share, for a total value of approximately $417,000.

A summary of the activity since December 31, 2013 is as follows:

 

 

The restricted shares granted during the six months ended June 30, 2014 will vest and be expensed over a 13 month period for executive management and other management while the restricted shares granted to a director will vest in August 2014.  The vesting of restricted shares is subject to the achievement of certain service criteria, performance criteria, or both.  As of June 30, 2014, there is $399,000 of unamortized compensation that will vest solely on completion of future services over the next 24 months.  As of June 30, 2014, there is $261,000 of unamortized compensation that will vest based on achieving certain performance criteria through July 2016.

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RLJ ENTERTAINMENT, INC.

 

A summary of the activity for the period of January 1 through June 30, 2013 is as follows:

 

 

During the six months ended June 30, 2013, 52,631 shares of restricted stock were granted.  All of the shares granted in 2013, were granted to an executive officer.  The shares granted during 2013, were fair valued on the date of grant a $3.72 per share, for a total value of approximately $196,000.

 

NOTE 9.

STOCK WARRANTS

RLJE had the following warrants outstanding:

 

 

We have warrants outstanding to purchase 21,041,667 shares of our common stock, which are recorded at fair value on the consolidated balance sheet.  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 or more per share for 20 out of 30 trading days. The warrants contain standard anti-dilution provisions.

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.

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RLJ ENTERTAINMENT, INC.

The fair value of the warrants as of June 30, 2014 was $4.8 million.  The valuation of the registered warrants is a Level 3 measurement.  The warrants had been traded on the over-the-counter market and previously were reported as a Level 1 measurement but, due to the lack of trade activity during the second quarter of 2014, the warrant valuation for registered warrants was transferred to Level 3 and valued in the same manner of the Sponsor and unregistered warrants.  Because RLJE has agreed not to exercise its redemption right pertaining to certain warrants held by RLJ SPAC Acquisition LLC (or the Sponsor) and because the unregistered warrants generally 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 months ended June 30, 2014 and 2013 was $1.1 million and $598,000, respectively.  The increase (decrease) in the fair value of the warrants for the six months ended June 30, 2014 and 2013 of $678,000 and ($802,000), respectively.  The changes in the fair value of the warrants are included as a component of other income.

 

NOTE 10.

FAIR VALUE MEASUREMENTS

The following tables represent RLJE’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis:

(In thousands)		June 30, 2014
		Level 1				Level 2				Level 3				Total
Warrant liability		$	—			$	—			$	4,801			$	4,801

 

 

 

 

The following tables include a roll-forward of liabilities classified within Level 1 and Level 3:

 

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When events and circumstances indicate that investments in content are 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 of assets and liabilities is classified in the tables below:

 

 

During the six months ended June 30, 2014 and 2013, the investments in content were written down by $1.3 million and $3.2 million, respectively, as a result of a change in fair value.  In determining the fair value, we employ a 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 a market participant’s 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.

 

NOTE 11.

NET LOSS PER COMMON SHARE DATA

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per common share for the three and six months ended June 30, 2014 and 2013:

 

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RLJ ENTERTAINMENT, INC.

We have outstanding warrants to acquire 21,041,667 shares of common stock that are not included in the computation of diluted net loss per common share as the effect would be anti-dilutive.  For the three and six months ended at June 30, 2014, we have weighted average outstanding shares of approximately 985,000 and 1,109,000, respectively, of restricted common stock, which includes 456,407 shares held by certain founding shareholders (See Note 8, Equity), that are not included in the computation of basic or diluted net loss per share as the effect would be anti-dilutive.  For the three and six months ended June 30, 2013, we have weighted average outstanding shares of approximately 948,000 and 942,000 shares, respectively of restricted common stock, which includes 898,438 shares held by certain founding shareholders (See Note 8, Equity), that are not included in the computation of basic and diluted net loss per share as the effect would be anti-dilutive.

 

NOTE 12.

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 13.

RELATED PARTY TRANSACTIONS