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. Description of Business and Basis of Presentation
Note 2. Segment Information
Note 3. Equity Earnings of Affiliate
Note 4. Accounts Receivable
Note 5. Inventories
Note 6. Investments in Content
Note 7. Debt
Note 8. Redeemable Convertible Preferred Stock and Equity
Note 9. Stock Warrants
Note 10. Fair Value Measurements
Note 11. Net Loss per Common Share Data
Note 12. Statements of Cash Flows
Note 13. Commitments and Contingencies
Note 14. Related Party Transactions
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3, Quantitative and Qualitative Disclosures About Market Risk Is Not Required for Smaller Reporting Companies.
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 rlje-ex311_8.htm
EX-31.2 rlje-ex312_7.htm
EX-32.1 rlje-ex321_6.htm

RLJ Entertainment Earnings 2016-03-31

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 rlje-10q_20160331.htm 10-Q rlje-10q_20160331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

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 March 31, 2016.

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 x     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 x    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   o

 

Accelerated filer   o

 

Non- accelerated filer   o

 

Smaller reporting company   x

 

(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 x

Number of shares outstanding of the issuer’s common stock on May 13, 2016:  14,132,820

 

 


RLJ ENTERTAINMENT, INC.

INDEX TO FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements  (Unaudited)

4

 

 

 

 

 

 

 

(a)

Consolidated Balance Sheets — March 31, 2016 and December 31, 2015 (audited)

4

 

 

 

 

 

 

 

(b)

Consolidated Statements of Operations — Three Months Ended March 31, 2016 and 2015

5

 

 

 

 

 

 

 

(c)

Consolidated Statements of Comprehensive Loss — Three Months Ended March 31, 2016 and 2015

6

 

 

 

 

 

 

 

(d)

Consolidated Statements of Changes in Shareholders’ Deficit — Three Months Ended March 31, 2016 and 2015

7

 

 

 

 

 

 

 

(e)

Consolidated Statements of Cash Flows — Three Months Ended March 31, 2016 and 2015

8

 

 

 

 

 

 

 

(f)

Notes to Consolidated Financial Statements

9

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

 

Item 4.

 

Controls and Procedures

33

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

34

 

 

 

 

Item 1A.

 

Risk Factors

34

 

 

 

 

Item 6.

 

Exhibits

35

 

 

 

 

SIGNATURES

36

 

 

 

2


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016, 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 improved results from operations and Adjusted EBITDA;

 

·

The effects of limited cash liquidity on operational performance;

 

·

Our obligations under the credit agreement, including our principal repayment obligations;

 

·

Our ability to satisfy financial ratios;

 

·

Our ability to generate sufficient cash flows from operating activities;

 

·

Our ability to raise additional capital to reduce debt, improve liquidity and fund capital requirements;

 

·

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 maintain relationships with customers, employees and suppliers, including our ability to enter into revised payment plans, when necessary, with our vendors that are acceptable to all parties;

 

·

Delays in the release of new titles or other content;

 

·

The effects of disruptions in our supply chain;

 

·

The loss of key personnel;

 

·

Our public securities’ limited liquidity and trading; or

 

·

Our ability to meet the NASDAQ Capital Market continuing listing standards and maintain our listing.

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 15, 2016. You are cautioned not to place undue reliance on such forward-looking statements.

 

 

 

3


PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

RLJ ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

March 31, 2016 (unaudited) and December 31, 2015

 

 

 

March 31,

 

 

December 31,

 

(In thousands, except share data)

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

4,965

 

 

$

4,530

 

Accounts receivable, net

 

 

12,639

 

 

 

24,997

 

Inventories, net

 

 

9,267

 

 

 

10,742

 

Investments in content, net

 

 

59,712

 

 

 

60,407

 

Prepaid expenses and other assets

 

 

1,496

 

 

 

1,969

 

Property, equipment and improvements, net

 

 

2,298

 

 

 

2,485

 

Equity investment in affiliate

 

 

20,100

 

 

 

20,098

 

Other intangible assets, net

 

 

10,685

 

 

 

10,769

 

Goodwill

 

 

14,631

 

 

 

14,631

 

Total assets

 

$

135,793

 

 

$

150,628

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

16,424

 

 

$

23,233

 

Accrued royalties and distribution fees

 

 

49,456

 

 

 

51,552

 

Deferred revenue

 

 

1,636

 

 

 

1,900

 

Debt, net of discounts and debt issuance costs

 

 

61,117

 

 

 

61,250

 

Deferred tax liability

 

 

1,839

 

 

 

1,839

 

Stock warrant and other derivative liabilities

 

 

18,854

 

 

 

10,678

 

Total liabilities

 

 

149,326

 

 

 

150,452

 

Redeemable convertible preferred stock, $0.001 par value, 1,000,000

   shares authorized; 31,046 shares issued and outstanding at March 31, 2016 and

   December 31, 2015; liquidation preference of $33,272 at March 31, 2016 and

   $32,617 at December 31, 2015

 

 

22,472

 

 

 

21,346

 

Shareholders' Deficit:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 250,000,000 shares authorized, 14,151,519

   shares issued and 14,132,820 shares outstanding at March 31, 2016; and

   14,151,519 shares issued and outstanding at December 31, 2015

 

 

14

 

 

 

14

 

Additional paid-in capital

 

 

84,590

 

 

 

85,391

 

Accumulated deficit

 

 

(118,989

)

 

 

(105,514

)

Accumulated other comprehensive loss

 

 

(1,620

)

 

 

(1,061

)

Treasury shares, at cost, 18,699 shares at March 31, 2016 and zero at

   December 31, 2015

 

 

 

 

 

 

Total shareholders' deficit

 

 

(36,005

)

 

 

(21,170

)

Total liabilities and shareholders' deficit

 

$

135,793

 

 

$

150,628

 

 

See accompanying notes to consolidated financial statements.

 

 

4


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended March 31, 2016 and 2015

 

 

 

Three Months Ended March 31,

 

(In thousands, except share data)

 

2016

 

 

2015

 

Revenues

 

$

22,806

 

 

$

26,116

 

Cost of sales

 

 

 

 

 

 

 

 

Content amortization and royalties

 

 

8,451

 

 

 

11,887

 

Manufacturing and fulfillment

 

 

8,342

 

 

 

8,768

 

Total cost of sales

 

 

16,793

 

 

 

20,655

 

Gross profit

 

 

6,013

 

 

 

5,461

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

3,621

 

 

 

6,121

 

General and administrative expenses

 

 

5,035

 

 

 

5,515

 

Depreciation and amortization

 

 

936

 

 

 

1,165

 

Total operating expenses

 

 

9,592

 

 

 

12,801

 

LOSS FROM OPERATIONS

 

 

(3,579

)

 

 

(7,340

)

 

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

499

 

 

 

250

 

Interest expense, net

 

 

(2,205

)

 

 

(2,943

)

Change in fair value of stock warrants and other derivatives

 

 

(8,176

)

 

 

497

 

Other income (expense)

 

 

27

 

 

 

(776

)

LOSS BEFORE PROVISION FOR INCOME TAXES

 

 

(13,434

)

 

 

(10,312

)

Provision for income taxes

 

 

(41

)

 

 

(318

)

NET LOSS

 

 

(13,475

)

 

 

(10,630

)

Accretion on preferred stock

 

 

(1,126

)

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$

(14,601

)

 

$

(10,630

)

Net loss per common share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(1.14

)

 

$

(0.84

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

12,841

 

 

 

12,680

 

 

See accompanying notes to consolidated financial statements.

 

 

5


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

Three Months Ended March 31, 2016 and 2015

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2016

 

 

2015

 

Net loss

 

$

(13,475

)

 

$

(10,630

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(559

)

 

 

(369

)

Total comprehensive loss

 

$

(14,034

)

 

$

(10,999

)

 

See accompanying notes to consolidated financial statements.

 

 

6


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(Unaudited)

Three Months Ended March 31, 2016 and 2015

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

(In thousands)

 

Shares

 

 

Par

Value

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income

 

 

Shares

 

 

At

Cost

 

 

Total

Equity

 

Balance at January 1, 2016

 

 

14,152

 

 

$

14

 

 

$

85,391

 

 

$

(105,514

)

 

$

(1,061

)

 

 

 

 

$

 

 

$

(21,170

)

Forfeiture of restricted common stock

 

 

(19

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

 

Accretion on preferred stock

 

 

 

 

 

 

 

 

(1,126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,126

)

Stock-based compensation

 

 

 

 

 

 

 

 

325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

325

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(559

)

 

 

 

 

 

 

 

 

(559

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,475

)

 

 

 

 

 

 

 

 

 

 

 

(13,475

)

Balance at March 31, 2016

 

 

14,133

 

 

$

14

 

 

$

84,590

 

 

$

(118,989

)

 

$

(1,620

)

 

 

19

 

 

$

 

 

$

(36,005

)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

(In thousands)

 

Shares

 

 

Par

Value

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Shares

 

 

At

Cost

 

 

Total

Equity

 

Balance at January 1, 2015

 

 

13,335

 

 

$

14

 

 

$

87,706

 

 

$

(50,534

)

 

$

(729

)

 

 

390

 

 

$

 

 

$

36,457

 

Forfeiture of restricted common stock

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

Forfeiture of founder shares

 

 

(437

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

437

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

194

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(369

)

 

 

 

 

 

 

 

 

(369

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,630

)

 

 

 

 

 

 

 

 

 

 

 

(10,630

)

Balance at March 31, 2015

 

 

12,896

 

 

$

14

 

 

$

87,900

 

 

$

(61,164

)

 

$

(1,098

)

 

 

829

 

 

$

 

 

$

25,652

 

 

See accompanying notes to consolidated financial statements.

 

 

7


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended March 31, 2016 and 2015

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,475

)

 

$

(10,630

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

(499

)

 

 

(250

)

Content amortization and royalties

 

 

8,451

 

 

 

11,887

 

Depreciation and amortization

 

 

936

 

 

 

1,165

 

Foreign currency exchange (gain) loss

 

 

(3

)

 

 

841

 

Fair value adjustment of stock warrant and other derivative liabilities

 

 

8,176

 

 

 

(497

)

Non-cash interest expense

 

 

584

 

 

 

500

 

Stock-based compensation expense

 

 

325

 

 

 

194

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

12,275

 

 

 

5,106

 

Inventories, net

 

 

1,450

 

 

 

958

 

Investments in content, net

 

 

(9,916

)

 

 

(8,796

)

Prepaid expenses and other assets

 

 

469

 

 

 

(767

)

Accounts payable and accrued liabilities

 

 

(7,121

)

 

 

(1,614

)

Deferred revenue

 

 

(264

)

 

 

(1,195

)

Net cash provided by (used in) operating activities

 

 

1,388

 

 

 

(3,098

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(332

)

 

 

(69

)

Net cash used in investing activities

 

 

(332

)

 

 

(69

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repayment of senior debt

 

 

(613

)

 

 

(613

)

Net cash used in financing activities

 

 

(613

)

 

 

(613

)

Effect of exchange rate changes on cash

 

 

(8

)

 

 

246

 

NET INCREASE (DECREASE) IN CASH:

 

 

435

 

 

 

(3,534

)

Cash at beginning of period

 

 

4,530

 

 

 

6,662

 

Cash at end of period

 

$

4,965

 

 

$

3,128

 

 

See accompanying notes to consolidated financial statements.

 

 

8


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

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

We acquire content rights in various categories including, British mysteries and dramas, urban programming and full-length independent motion pictures.  We acquire this content in two ways:  

 

·

through long-term exclusive licensing agreements where we secure multiple rights to third-party programs and;

 

·

through development, production and ownership of original drama television programming through our wholly-owned subsidiary, RLJE Ltd., and our 64%-owned subsidiary, ACL.  

We market 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, (our Intellectual Property, or IP, Licensing segment); (2) wholesale exploitation through partners covering broadcast/cable, digital, mobile, ecommerce and brick and mortar outlets (our Wholesale segment); and (3) direct relations with consumers via proprietary ecommerce, catalog and subscription-based video on demand (or SVOD) channels (our Direct-to-Consumer segment).  

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

Our Direct-to-Consumer segment includes the sale of video content and complementary merchandise directly to consumers through proprietary ecommerce websites and catalogs and the continued roll-out of our proprietary subscription-based SVOD channels, such as Acorn TV and UMC (or Urban Movie Channel).  

RLJE’s management views the operations of the Company 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 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 (which includes 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, while the Direct-to-Consumer segment exploits the same content and digitally streaming channels.  

Basis of Presentation

Unaudited Interim Financial Statements

The financial information presented in the accompanying unaudited interim consolidated financial statements as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 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 and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements.

 

 

9


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

In management’s opinion, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Due to the seasonal nature of our business, with a disproportionate amount of sales occurring 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 April 15, 2016 (or 2015 Form 10-K). Note 2, Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2015 Form 10-K contains a summary of our significant accounting policies. As of March 31, 2016, we have made no material changes to our significant accounting policies disclosed in our 2015 Form 10-K.

Fair Value of Financial Instruments

The carrying amount of our financial instruments, which principally include cash, accounts receivable, accounts payable and accrued expenses, approximates fair value due to the relative short maturity of such instruments. The carrying amount of our debt under our senior credit agreement approximates fair value as the debt bears market rates of interest. The carrying amount of our subordinated debt, which includes accrued interest, is $1.4 million more than its fair value of $8.1 million as a result of its reduced interest rate from 12.0% to 1.5% for two years beginning January 1, 2015. The fair value of subordinated debt was determined by discounting future interest and principal payments by an estimated market rate of interest of 12.0%. This fair value assessment of our subordinated debt is a level 3 measurement as provided by Accounting Standards Codification (or ASC) 820, “Fair Value Measurements and Disclosures.”

Reclassifications and Adoption of Accounting Pronouncement

Certain amounts reported previously in our consolidated financial statements have been reclassified or adjusted to be comparable with the classifications used for our 2016 consolidated financial statements. We are now reporting technology infrastructure costs associated with delivering our subscription-based SVOD channels within cost of sales as manufacturing and fulfillment. For the three months ended March 31, 2015, we reclassified $0.4 million of these costs from selling expenses to cost of sales in our consolidated statement of operations.

On January 1, 2016, we retroactively adopted the guidance of Accounting Standards Update (or ASU) No. 2015-3, Interest – Imputation of Interest (the Update) issued by the Financial Accounting Standards Board (or FASB). We are now presenting issuance costs related to a recognized debt liability in our balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. As of December 31, 2015, we have reclassified $0.8 million of unamortized debt issuance costs from prepaid expenses and other to debt, net of discounts and debt issuance costs on our consolidated balance sheet. The adoption of ASU No. 2015-3 did not affect our results of operations.

Principles of Consolidation

The operations of ACL are 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 by the minority shareholder. We have included our share of ACL’s operating results as a separate line item in our consolidated financial statements.

Our consolidated financial statements include the accounts of all majority-owned subsidiary companies, except for ACL. We carry our investment in ACL as a separate asset on our consolidated balance sheet at cost adjusted for our share of the equity in undistributed earnings. Except for dividends and changes in ownership interest, we report changes in equity in undistributed earnings of ACL as “Equity earnings of affiliate” in our consolidated statements of operations. All intercompany transactions and balances have been eliminated.

Liquidity

For the three months ended March 31, 2016 and 2015, we recognized a net loss of $13.5 million and $10.6 million, respectively, and we generated $1.4 million of cash from operating activities during the three months ending March 31, 2016. At March 31, 2016, our cash balance was $5.0 million. At March 31, 2016, we had $61.1 million of term debt outstanding (see Note 7, Debt). We continue to experience liquidity constraints as we have several competing demands on our available cash and cash that may be generated from operations. (1) We continue to have significant past-due vendor payables. These past-due payables are largely a result of significant

10


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

past-due vendor payables acquired in 2012 when purchasing Image. As we work to catch up on the acquired past-due payables, we have fallen behind on other payables. We continue to work with our vendors to make payment arrangements that are agreeable with them and that give us flexibility in terms of when payments will be made. (2) We are forecasting that we may need to make an accelerated principal payment, which may be significant, on our senior debt during the fourth quarter of 2016 in order to meet our bank covenants.  This is because our bank covenants become more restrictive during the fourth quarter of 2016. For example, our senior debt‑to‑Adjusted EBITDA ratio goes from 3.83 : 1.00 currently to 2.67 : 1.00. For us to meet these more restrictive bank covenants, we will need to improve our Adjusted EBITDA and/or pay down our senior debt balance. (3) We must maintain a certain level of content spend necessary to acquire new content that allows us to generate the revenues and margins necessary to meet our obligations.

We have taken actions to improve our operating results and Adjusted EBITDA in 2016 by exiting certain non-core operations that have been generating losses. During December 2015, we approved and started implementing a plan to close our Acacia catalog operations (see Note 2, Segment Information). We are also evaluating our options in terms of raising additional capital by issuing equity securities, convertible notes or a combination of both, as well as refinancing our existing senior debt. There can be no assurances that we will be able to secure additional capital or be able to refinance our senior debt. While our ability to meet our commitments is not dependent upon these efforts, if we were to complete one of these transactions, it would help to address our liquidity risk. We believe that our current financial position combined with our 2016 forecasted operational results and management efforts will be sufficient to meet our commitments. However, there can be no assurances that we will be successful in realizing improved results from operations including improved adjusted EBITDA, generating sufficient cash flows from operations necessary to meet our future covenant requirements, or agreeing with vendors revised payment terms.

 

 

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, is presented below. Our reportable segments are determined based on the distinct nature of their operation. 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 also includes our investment in ACL. Our Wholesale segment consists of the acquisition, 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 ecommerce businesses and our proprietary digital streaming channels.

Management currently evaluates segment performance based primarily on revenues and operating results, including earnings from ACL. Operating costs and expenses attributable to our Corporate segment include only those expenses incurred by us at the parent corporate level, which are not allocated to our reporting segments and include costs associated with RLJE’s corporate functions such as finance and accounting, human resources, legal and information technology departments. Interest expense, change in the fair value of stock warrants and other derivatives, other income (expense) and provision for income taxes are evaluated by management on a consolidated basis and are not allocated to our reportable segments.

The following tables summarize the segment contribution for the three months ended March 31, 2016 and 2015:

 

 

 

Three Months Ended March 31, 2016

 

(In thousands)

 

IP Licensing

 

 

Wholesale

 

 

Direct-to-

Consumer

 

 

Corporate

 

 

Total

 

Revenues

 

$

26

 

 

$

14,180

 

 

$

8,600

 

 

$

 

 

$

22,806

 

Operating costs and expenses

 

 

(116

)

 

 

(14,062

)

 

 

(8,373

)

 

 

(2,898

)

 

 

(25,449

)

Depreciation and amortization

 

 

(34

)

 

 

(329

)

 

 

(451

)

 

 

(122

)

 

 

(936

)

Share in ACL earnings

 

 

499

 

 

 

 

 

 

 

 

 

 

 

 

499

 

Segment contribution (loss)

 

$

375

 

 

$

(211

)

 

$

(224

)

 

$

(3,020

)

 

$

(3,080

)

 

11


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

 

 

Three Months Ended March 31, 2015

 

(In thousands)

 

IP Licensing

 

 

Wholesale

 

 

Direct-to-

Consumer

 

 

Corporate

 

 

Total

 

Revenues

 

$

458

 

 

$

17,987

 

 

$

7,671

 

 

$

 

 

$

26,116

 

Operating costs and expenses

 

 

(487

)

 

 

(19,502

)

 

 

(9,275

)

 

 

(3,027

)

 

 

(32,291

)

Depreciation and amortization

 

 

(29

)

 

 

(368

)

 

 

(670

)

 

 

(98

)

 

 

(1,165

)

Share in ACL earnings

 

 

250

 

 

 

 

 

 

 

 

 

 

 

 

250

 

Segment contribution (loss)

 

$

192

 

 

$

(1,883

)

 

$

(2,274

)

 

$

(3,125

)

 

$

(7,090

)

 

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

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2016

 

 

2015

 

Total segment loss

 

$

(3,080

)

 

$

(7,090

)

Interest expense, net

 

 

(2,205

)

 

 

(2,943

)

Change in fair value of stock warrants and other

   derivatives

 

 

(8,176

)

 

 

497

 

Other income (expense)

 

 

27

 

 

 

(776

)

Loss before provision for income taxes

 

$

(13,434

)

 

$

(10,312

)

 

Total assets for each segment primarily include accounts receivable, inventory and investments in content. The Corporate segment primarily includes assets not fully allocated to any other segment including consolidated cash accounts, certain prepaid assets and fixed assets used across all segments.

Total assets by segment are as follows:

 

 

 

March 31,

 

 

December 31,

 

(In thousands)

 

2016

 

 

2015

 

IP Licensing

 

$

22,694

 

 

$

22,707

 

Wholesale

 

 

98,195

 

 

 

112,066

 

Direct-to-Consumer

 

 

9,239

 

 

 

10,514

 

Corporate

 

 

5,665

 

 

 

5,341

 

 

 

$

135,793

 

 

$

150,628

 

 

 

NOTE 3. EQUITY EARNINGS OF AFFILIATE

In February 2012, Acorn Media 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 a variety of short story collections, more than 80 novels, 19 plays and a film library of over 100 made-for-television films.

We account for our 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.

As of the Business Combination, our 64% share of the difference between ACL’s fair value and the amount of underlying equity in ACL’s net assets was approximately $18.7 million. This step-up basis difference is primarily attributable to the fair value of ACL’s copyrights, which expire in 2046. We are amortizing the basis difference through 2046 using the straight-line method. Basis difference amortization is recorded against our share of ACL’s net income in our consolidated statements of operations; however this amortization is not included within ACL’s financial statements.

12


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

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

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2016

 

 

2015

 

Revenues

 

$

7,337

 

 

$

2,088

 

Film cost amortization

 

 

(4,793

)

 

 

(517

)

General, administrative and other expenses

 

 

(1,116

)

 

 

(792

)

Income from operations

 

$

1,428

 

 

$

779

 

Net income

 

$

1,143

 

 

$

602

 

 

ACL's functional currency is the British Pound Sterling (GBP). Amounts have been translated from GBP 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 sale of physical content (DVDs) to retailers and wholesale distributors who ship to mass retail, (2) direct-to-consumer, e-commerce, catalog and download-to-own sales and (3) video content we license to broadcast, cable/satellite providers and digital subscription platforms like Netflix and Amazon. Our accounts receivable typically trends with retail seasonality.

 

 

 

March 31,

 

 

December 31,

 

(In thousands)

 

2016

 

 

2015

 

Wholesale

 

$

15,365

 

 

$

30,663

 

IP Licensing

 

 

 

 

 

 

Direct-to-Consumer

 

 

1,427

 

 

 

1,271

 

Accounts receivable before allowances and reserves

 

 

16,792

 

 

 

31,934

 

Less: reserve for returns

 

 

(3,745

)

 

 

(6,677

)

Less: allowance for doubtful accounts

 

 

(408

)

 

 

(260

)

Accounts receivable, net

 

$

12,639

 

 

$

24,997

 

 

Wholesale receivables are primarily billed and collected by our U.S. distribution facilitation partner. Each month, our distribution partner preliminarily settles 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 payables and receivables between us and our distribution partner. Amounts vary and tend to be seasonal following our sales activity. As of March 31, 2016, our distribution partner owed us $2.5 million for receivables settled at quarter end; and as of December 31, 2015, our distribution partner owed us $0.8 million for receivables settled as of year-end.

The wholesale receivables are reported net of amounts we owe to our distribution partner as these amounts are offset against each other when settling receivables in accordance with the contract. As of March 31, 2016 and December 31, 2015, the net wholesale receivables with our distribution partner were $0.6 million and $11.1 million, respectively, which is included in accounts receivable.

Our Direct-to-Consumer receivable represents amounts due to us from our merchant bank related to our credit card transactions processed as of period end.

 

 

13


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

NOTE 5. INVENTORIES

Inventories are summarized as follows:

 

 

 

March 31,

 

 

December 31,

 

(In thousands)

 

2016

 

 

2015

 

Packaged discs

 

$

7,668

 

 

$

7,778

 

Packaging materials

 

 

602

 

 

 

753

 

Other merchandise (1)

 

 

997

 

 

 

2,211

 

Inventories, net

 

$

9,267

 

 

$

10,742

 

 

 

(1)

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

For each reporting period, we review the value of inventories on hand to estimate the recoverability through future sales. Values in excess of anticipated future sales are booked as obsolescence reserve.  Our obsolescence reserve was $11.4 million as of March 31, 2016 and $11.4 million as of December 31, 2015. We reduce our inventories with adjustments for lower of cost or market valuation, shrinkage, excess quantities and obsolescence.  During the three months ended March 31, 2016 and 2015, we recorded impairment charges of $0.3 million and $0.7 million, respectively.  These charges are included in cost of sales as manufacturing and fulfillment cost.

 

 

NOTE 6. INVESTMENTS IN CONTENT

 

 

 

March 31,

 

 

December 31,

 

(In thousands)

 

2016

 

 

2015

 

Released

 

$

56,616

 

 

$

53,378

 

Completed, not released

 

 

2,249

 

 

 

5,936

 

In-production

 

 

847

 

 

 

1,093

 

Investments in content, net

 

$

59,712

 

 

$

60,407

 

 

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 March 31, 2016 and 2015, impairment charges were $0.3 million and $0.5 million, respectively. These charges are included in the cost of sales as part of content amortization and royalties.

In determining the fair value of content for impairments (Note 10, Fair Value Measurements), we employ a discounted cash flows (DCF) methodology. 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:

 

 

 

Maturity

 

Interest

 

March 31,

 

 

December 31,

 

(In thousands)

 

Date

 

Rate