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. Revenues
Note 3. Segment Information
Note 4. Equity Earnings of Affiliate
Note 5. Accounts Receivable
Note 6. Inventories
Note 7. Investments in Content
Note 8. Debt
Note 9. Redeemable Convertible Preferred Stock and Equity
Note 10. Stock Warrants
Note 11. Fair Value Measurements
Note 12. Net Loss per Common Share
Note 13. Statements of Cash Flows
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 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.Other Information
Item 6. Exhibits
EX-31.1 rlje-ex311_6.htm
EX-31.2 rlje-ex312_8.htm
EX-32.1 rlje-ex321_7.htm

RLJ Entertainment Earnings 2018-03-31

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_20180331.htm 10-Q rlje-10q_20180331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark one)

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

For the quarterly period ended March 31, 2018.

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      NO

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     NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

 

Accelerated filer  

Non-accelerated filer  

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Number of shares outstanding of the issuer’s common stock on May 3, 2018:  15,138,250

 

 

 


 

RLJ ENTERTAINMENT, INC.

INDEX TO FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements  (Unaudited)

 

 

 

 

 

 

 

 

(a)

Consolidated Balance Sheets — March 31, 2018 and December 31, 2017 (audited)

4

 

 

 

 

 

 

 

(b)

Consolidated Statements of Operations — Three Months Ended March 31, 2018 and 2017

5

 

 

 

 

 

 

 

(c)

Consolidated Statements of Comprehensive Loss — Three Months Ended March 31, 2018 and 2017  

6

 

 

 

 

 

 

 

(d)

Consolidated Statement of Changes in Shareholders’ Equity — Three Months Ended March 31, 2018

7

 

 

 

 

 

 

 

(e)

Consolidated Statements of Cash Flows — Three Months Ended March 31, 2018 and 2017 

8

 

 

 

 

 

 

 

(f)

Notes to Consolidated Financial Statements

9

 

 

 

 

Item 2.

 

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

24

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

 

Item 4.

 

Controls and Procedures

32

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

33

 

 

 

 

Item 1A.

 

Risk Factors

33

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

 

Item 5.

 

Other Information

33

 

 

 

 

Item 6.

 

Exhibits

33

 

 

 

 

SIGNATURES

34

 

 

 

2


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018, 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 improved Adjusted EBITDA (as defined in this Quarterly Report);

 

Our expectation that revenues and financial performance of our digital channels will continue to grow and have a positive effect on our liquidity, cash flows and operating results;

 

The effects of limited cash liquidity on operational performance;

 

Our obligations under the credit agreement;

 

Our ability to satisfy financial ratios;

 

Our ability to generate sufficient cash flows from operating activities;

 

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;

 

Our ability to realize anticipated synergies and other efficiencies in connection with the AMC transaction (as defined in this Quarterly Report);

 

Delays in the release of new titles or other content;

 

The effects of disruptions in our supply chain;

 

The loss of key personnel; or

 

Our public securities’ limited liquidity and trading.

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 16, 2018. 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, 2018 (unaudited) and December 31, 2017

 

 

 

March 31,

 

 

December 31,

 

(In thousands, except share data)

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

4,230

 

 

$

6,215

 

Accounts receivable, net

 

 

16,243

 

 

 

24,926

 

Inventories, net

 

 

4,307

 

 

 

4,448

 

Investments in content, net

 

 

76,553

 

 

 

70,483

 

Prepaid expenses and other assets

 

 

996

 

 

 

1,197

 

Property, equipment and improvements, net

 

 

1,106

 

 

 

1,185

 

Equity investment in affiliate

 

 

22,728

 

 

 

21,589

 

Other intangible assets, net

 

 

7,486

 

 

 

7,752

 

Goodwill

 

 

14,113

 

 

 

13,985

 

Total assets

 

$

147,762

 

 

$

151,780

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

11,719

 

 

$

16,707

 

Accrued royalties and distribution fees

 

 

48,500

 

 

 

47,414

 

Deferred revenue

 

 

3,303

 

 

 

2,859

 

Debt, net of discounts and debt issuance costs

 

 

53,702

 

 

 

52,639

 

Deferred tax liability

 

 

3,043

 

 

 

2,933

 

Stock warrant and other derivative liabilities

 

 

16,652

 

 

 

13,685

 

Total liabilities

 

 

136,919

 

 

 

136,237

 

Commitments and contingencies (see Note 14)

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

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

   authorized; 31,046 shares issued; 15,198 shares outstanding at March 31, 2018

   and December 31, 2017; liquidation preference of $17,989 at March 31, 2018

   and $17,997 at December 31, 2017

 

 

19,398

 

 

 

19,563

 

Common stock, $0.001 par value, 250,000,000 shares authorized, 14,564,678

   shares issued and outstanding at March 31, 2018; and 14,071,423

   shares issued and outstanding at December 31, 2017

 

 

15

 

 

 

14

 

Additional paid-in capital

 

 

134,171

 

 

 

132,422

 

Accumulated deficit

 

 

(140,786

)

 

 

(133,514

)

Accumulated other comprehensive loss

 

 

(1,955

)

 

 

(2,942

)

Total shareholders' equity

 

 

10,843

 

 

 

15,543

 

Total liabilities and shareholders' equity

 

$

147,762

 

 

$

151,780

 

 

See accompanying notes to consolidated financial statements.

 

 

4


 

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended March 31, 2018 and 2017

 

 

 

Three Months Ended March 31,

 

(In thousands, except share data)

 

2018

 

 

2017

 

Revenues

 

$

18,582

 

 

$

13,887

 

Cost of sales

 

 

 

 

 

 

 

 

Content amortization and royalties

 

 

6,696

 

 

 

6,068

 

Manufacturing and fulfillment

 

 

3,086

 

 

 

3,052

 

Total cost of sales

 

 

9,782

 

 

 

9,120

 

Gross profit

 

 

8,800

 

 

 

4,767

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

4,265

 

 

 

2,284

 

General and administrative expenses

 

 

5,311

 

 

 

4,523

 

Depreciation and amortization

 

 

885

 

 

 

873

 

Total operating expenses

 

 

10,461

 

 

 

7,680

 

LOSS FROM OPERATIONS

 

 

(1,661

)

 

 

(2,913

)

 

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

784

 

 

 

551

 

Interest expense, net

 

 

(2,291

)

 

 

(1,886

)

Change in fair value of stock warrants and other derivatives

 

 

(2,967

)

 

 

(2,892

)

Gain on extinguishment of debt

 

 

 

 

 

895

 

Other (expense) income, net

 

 

(177

)

 

 

284

 

LOSS FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES

 

 

(6,312

)

 

 

(5,961

)

Provision for income taxes

 

 

(213

)

 

 

(161

)

NET LOSS

 

 

(6,525

)

 

 

(6,122

)

Accretion on preferred stock

 

 

(193

)

 

 

(377

)

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$

(6,718

)

 

$

(6,499

)

Net loss per common share attributable to common shareholders:

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share attributable to common shareholders

 

$

(0.46

)

 

$

(1.26

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

14,467

 

 

 

5,164

 

 

See accompanying notes to consolidated financial statements.

 

 

5


 

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

Three Months Ended March 31, 2018 and 2017

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2018

 

 

2017

 

Net loss

 

$

(6,525

)

 

$

(6,122

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation gain

 

 

987

 

 

 

52

 

Total comprehensive loss

 

$

(5,538

)

 

$

(6,070

)

 

See accompanying notes to consolidated financial statements.

 

 

6


 

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

(In thousands)

 

Preferred

Stock

 

 

Shares

 

 

Par

Value

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Comprehensive

Loss

 

 

Total

Equity

 

Balance at January 1, 2018

 

$

19,563

 

 

 

14,071

 

 

$

14

 

 

$

132,422

 

 

$

(133,514

)

 

$

(2,942

)

 

$

15,543

 

Adjustment to adopt new revenue standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(747

)

 

 

 

 

 

(747

)

Issuance of restricted common stock for

   services

 

 

 

 

 

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock to AMC for interest

 

 

 

 

 

418

 

 

 

1

 

 

 

1,253

 

 

 

 

 

 

 

 

 

1,254

 

Accretion on preferred stock

 

 

193

 

 

 

 

 

 

 

 

 

(193

)

 

 

 

 

 

 

 

 

 

Preferred stock dividends paid

 

 

(358

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(358

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

689

 

 

 

 

 

 

 

 

 

689

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

987

 

 

 

987

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,525

)

 

 

 

 

 

(6,525

)

Balance at March 31, 2018

 

$

19,398

 

 

 

14,564

 

 

$

15

 

 

$

134,171

 

 

$

(140,786

)

 

$

(1,955

)

 

$

10,843

 

 

See accompanying notes to consolidated financial statements.

 

 

7


 

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended March 31, 2018 and 2017

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(6,525

)

 

$

(6,122

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

(784

)

 

 

(551

)

Content amortization and royalties

 

 

6,696

 

 

 

6,068

 

Depreciation and amortization

 

 

885

 

 

 

873

 

Foreign currency exchange loss (gain)

 

 

7

 

 

 

(283

)

Fair value adjustment of stock warrant and other derivative liabilities

 

 

2,967

 

 

 

2,892

 

Non-cash interest expense

 

 

2,291

 

 

 

1,136

 

Gain on extinguishment of debt

 

 

 

 

 

(895

)

Stock-based compensation expense

 

 

689

 

 

 

154

 

Dividends received from affiliate

 

 

432

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

8,799

 

 

 

9,347

 

Inventories, net

 

 

194

 

 

 

273

 

Investments in content, net

 

 

(11,257

)

 

 

(13,774

)

Prepaid expenses and other assets

 

 

209

 

 

 

(316

)

Accounts payable and accrued liabilities

 

 

(5,046

)

 

 

(1,870

)

Deferred revenue

 

 

(613

)

 

 

46

 

Net cash used in operating activities

 

 

(1,056

)

 

 

(3,022

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(539

)

 

 

(287

)

Net cash used in investing activities

 

 

(539

)

 

 

(287

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds received from AMC to amend debt

 

 

 

 

 

8,000

 

Dividend payments to preferred stockholders

 

 

(358

)

 

 

 

Repayment of debt

 

 

 

 

 

(8,618

)

Payment of debt modification costs

 

 

 

 

 

(22

)

Net cash used in financing activities

 

 

(358

)

 

 

(640

)

Effect of exchange rate changes on cash

 

 

(32

)

 

 

96

 

NET DECREASE IN CASH:

 

 

(1,985

)

 

 

(3,853

)

Cash at beginning of period

 

 

6,215

 

 

 

7,834

 

Cash at end of period

 

$

4,230

 

 

$

3,981

 

 

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. (RLJE or the Company) 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 United Kingdom (or U.K.) subsidiaries RLJ Entertainment Ltd (or RLJE Ltd.), Acorn Media Enterprises Limited (or AME), and RLJE International Ltd (collectively, RLJE UK), as well as RLJ Entertainment Australia Pty Ltd (or RLJE Australia). 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 an additional location in Woodland Hills, California. We also have international offices in London, England and Sydney, Australia.

We are a premium digital channel company serving distinct audiences through our proprietary subscription-based video on demand (or SVOD) digital channels (or Digital Channels segment), Acorn TV and UMC or Urban Movie Channel. Acorn TV features high-quality British and International mysteries and dramas. UMC showcases superior black television programs and films including original series, drama, romance, comedy, thrillers, stage plays, documentaries and other exclusive content for African-American and urban audiences.

We also exclusively control, co-produce, and own a large library of content primarily consisting of British mysteries and dramas, independent feature films and urban content. In addition to supporting our Digital Channels segment, we monetize our library through intellectual property (or IP) rights that we own, produce, and then exploit worldwide (our IP Licensing segment) and through distribution operations across all available wholesale windows of exploitation (our Wholesale Distribution segment). Our IP Licensing segment consists of our investment in ACL and owned intellectual property that is either owned or created by us and licensed for exploitation worldwide. Our Wholesale Distribution segment consists of worldwide exploitation of exclusive content in various formats through third party media and retail outlets in the United States of America (or U.S.), Canada, U.K. and Australia. We work closely with our wholesale partners to outline and implement release and promotional campaigns customized to the different audiences we serve and the program genres we exploit.

Basis of Presentation

Unaudited Interim Financial Statements

The consolidated financial information presented in the accompanying unaudited interim consolidated financial statements as of March 31, 2018 and for the three months ended March 31, 2018 and 2017 has been prepared in accordance with accounting principles generally accepted in the United States (or US GAAP) and with the Securities and Exchange Commission’s (or SEC) instructions for interim financial reporting 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 US GAAP for complete financial statements.

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 March 16, 2018 (or 2017 Form 10-K). Note 2, Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2017 Form 10-K contains a summary of our significant accounting policies. As of March 31, 2018, we have made no material changes to our significant accounting policies disclosed in our 2017 Form 10-K, except for the adoption of the new revenue recognition standard.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (or FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (ASC) Topic 606. Subsequent to the issuance of the May 2014 guidance, several clarifications and updates have been issued by the FASB on this topic, the most recent of which was issued in December 2016. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. We adopted Topic 606 as of January 1, 2018 using the modified retrospective method. See Note 2, Revenues, for further details.

9


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required by lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of the pending adoption of this new standard on our financial statements and we have yet to determine the overall impact this ASU is expected to have. The likely impact will be one of presentation only on our consolidated balance sheets. Our leases currently consist of operating leases with varying expiration dates through 2022 and our future minimum lease commitments before sub-lease income total $4.3 million as of March 31, 2018.

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.

Fair Value of Financial Instruments

The carrying amount of our financial instruments, which principally include cash, trade receivables, 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 its fair value as it bears interest at market rates of interest after taking into consideration its debt discount. Our recurring fair value measurements of stock warrants and other derivative liabilities and our non-recurring fair value measurements of investments in content are disclosed in Note 11, Fair Value Measurements.

Earnings (Loss) per Common Share

Basic earnings (loss) per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the combination of dilutive common share equivalents and the weighted-average shares outstanding during the period. For the periods reporting a net loss, diluted loss per share is equivalent to basic loss per share, as inclusion of common share equivalents would be anti-dilutive.

Liquidity

At March 31, 2018, our cash balance was $4.2 million. For the three months ended March 31, 2018, we recognized a net loss of $6.5 million and we used $1.1 million of cash for operating activities. At March 31, 2018, we had $53.7 million of term debt outstanding (see Note 8, 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. We continue to have past-due vendor payables. These past-due payables are largely a result of 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. Additionally, we must maintain a certain level of expenditures for marketing to support subscriber growth and for the acquisition of new content that allows us to generate revenues and margins sufficient to meet our obligations.

10


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

Growth of our Digital Channels segment has the potential to improve our liquidity. We continue to realize significant growth in our Digital Channels segment. Our Digital Channels segment revenues increased 45.4% to $8.7 million during the three months ended March 31, 2018 as compared to the same period in 2017 (see Note 3, Segment Information).

We believe that our current cash at March 31, 2018, and cash generated from operations will be sufficient to meet our forecasted requirements for operating liquidity, capital expenditure and debt repayments (none until 2020) for at least one year from the date of issuance of these consolidated financial statements. 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 or agreeing with vendors on revised payment terms. We define Adjusted EBITDA as earnings before income tax, depreciation and amortization, non-cash royalty expense, interest expense, non-cash exchange gains and losses on intercompany accounts, goodwill impairments, restructuring costs, change in fair value of stock warrants and other derivatives, stock-based compensation, basis-difference amortization in equity earnings of affiliate and dividends received from affiliate in excess of equity earnings of affiliate.

NOTE 2. REVENUES

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

We recorded a net increase to opening accumulated deficit of $0.7 million as of January 1, 2018 due to the cumulative impact to revenues and cost of sales of adopting Topic 606, with the impact primarily related to renewals for licensing agreements within our Wholesale Distribution segment. Under the new standard, renewals are a separate deliverable for which revenue should generally be deferred and recognized when the renewal period begins. Under the prior standards, renewals were generally recognized as revenue when entering into an amendment.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of Topic 606, Revenue — Revenue from Contracts with Customers were as follows:

 

(In thousands)

 

Balance at

 

 

 

 

 

 

Balance at

 

Liabilities and Shareholders' Equity

 

December 31,

2017

 

 

Adjustment Due toTopic 606

 

 

January 1,

2018

 

Accrued royalties and distribution fees

 

$

47,414

 

 

$

(310

)

 

$

47,104

 

Deferred revenue

 

 

2,859

 

 

 

1,057

 

 

 

3,916

 

Accumulated deficit

 

 

(133,514

)

 

 

(747

)

 

 

(134,261

)

 

The impact of adoption on our current period statement of operations was as follows:

 

(In thousands)

 

Three Months Ended March 31, 2018

 

Statement of Operations

 

As

Reported

 

 

Balances

Without Adoption of

Topic 606

 

 

Effect of Change

 

Revenues

 

$

18,582

 

 

$

17,911

 

 

$

671

 

Content amortization and royalties

 

 

6,696

 

 

 

6,358

 

 

 

338

 

 

Within our Wholesale Distribution segment, we estimate certain non-physical revenues each reporting period and we adjust our estimate when additional information becomes available, which includes the receipt of actual statements from our wholesalers. For the three months ended March 31, 2018 and 2017, we recognized an increase in revenues of $0.2 million and $0.1 million, respectively, as actual information received exceeded our prior period estimates.

11


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

Digital Channels segment revenues are recognized over time as subscription services are delivered. Wholesale Distribution segment revenues are generally recognized at a point in time when a sales transaction is completed. As of March 31, 2018, our deferred revenue of $3.3 million comprised of prepaid subscriptions within our Digital Channels segment of $2.8 million, payments received within our Wholesale Distribution segment of $0.1 million for content not yet delivered or available due to certain restrictions, and $0.4 million for the license of our tradenames. Deferred revenue will be recognized over time as revenue upon delivery of subscription services or content, or upon the removal of restrictions whereby the wholesaler will be free to exploit the delivered content. Deferred revenue associated with the tradename license will be recognized in equal monthly amounts over the license term beginning in April 2018 through March 2020. We estimate that all deferred revenue amounts that are not associated with the tradename license will be recognized as revenue within the next 12 months.

Upon adoption of the new revenue standards, we also made certain other reclassifications within our consolidated balance sheet, which pertained to sales of DVD and Blu-rays that are within our Wholesale Distribution segment, as follows:

 

We estimate a certain amount of inventory that will be received when processing sales returns. This amount of inventory to be received had been included within our inventory balance. This amount is now included within prepaid expenses and other assets. As of December 31, 2017, the inventory balance reclassified was $0.5 million.

 

We have reclassified our sales return reserve from accounts receivable to accounts payable and accrued liabilities. Our sales return reserve as of December 31, 2017 was $4.2 million.

Included in our accounts payable and other accrued liabilities are accruals for both sales returns and market development funds that total $3.8 million and $6.8 million as of March 31, 2018 and December 31, 2017, respectively. These accruals require the exercise of judgement and affect the reported revenues and net earnings. In determining these accruals, we analyze historical returns, pricing and other credit data; current economic trends; and changes in customer demand and acceptance of our products, including reorder activity. Based on this information, we determine our best estimates, which we believe is fair value, and accrue a percentage of each dollar of product sales where the customer has the right to either return the product and receive a credit or reduce their purchase price. Actual returns and reductions could differ from our estimates.

 

NOTE 3. SEGMENT INFORMATION

In accordance with the requirements of ASC 280 “Segment Reporting,” selected financial information regarding our reportable business segments, Digital Channels, IP Licensing and Wholesale Distribution, is presented below. Our reportable segments are determined based on the distinct nature of their operations. Each segment is a strategic business unit that is managed separately and either exploits our content over a different business model (subscription based vs. transactional) or acquires content differently. Our Digital Channels segment includes the subscription-based sale of film and television content directly and through third-party distribution to consumers through our digital channels, Acorn TV and UMC. Our IP Licensing segment includes intellectual property (or content) that we own, produce and then license for exploitation worldwide. The IP Licensing segment also includes our investment in ACL. Our Wholesale Distribution segment consists of the acquisition and worldwide exploitation of exclusive content in various formats, including digital (download-to-rent and electronic sell-through, or EST), television video on demand (VOD) through cable and satellite, broadcast, streaming, and DVD and Blu-ray through third party media and retail outlets. Our Wholesale Distribution segment also includes our U.K. mail-order catalog and ecommerce businesses.

Management currently evaluates segment performance based primarily on revenues and operating income (loss), 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 our 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.

12


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

Operating costs and expenses exclude costs related to depreciation and amortization which are separately presented in the tables below.

The tables below summarize the segment contribution for the three months ended March 31, 2018 and 2017.

 

 

 

Three Months Ended March 31, 2018

 

(In thousands)

 

Digital

Channels

 

 

IP Licensing

 

 

Wholesale

Distribution

 

 

Corporate

 

 

Total

 

Revenues

 

$

8,673

 

 

$

19

 

 

$

9,890

 

 

$

 

 

$

18,582

 

Operating costs and expenses

 

 

(5,915

)

 

 

(118

)

 

 

(9,683

)

 

 

(3,642

)

 

 

(19,358

)

Depreciation and amortization

 

 

(363

)

 

 

(33

)

 

 

(392

)

 

 

(97

)

 

 

(885

)

Share in ACL earnings

 

 

 

 

 

784

 

 

 

 

 

 

 

 

 

784

 

Segment contribution income (loss)

 

$

2,395

 

 

$

652

 

 

$

(185

)

 

$

(3,739

)

 

$

(877

)

 

 

 

Three Months Ended March 31, 2017

 

(In thousands)

 

Digital

Channels

 

 

IP Licensing

 

 

Wholesale

Distribution

 

 

Corporate

 

 

Total

 

Revenues

 

$

5,965

 

 

$

2

 

 

$

7,920

 

 

$

 

 

$

13,887

 

Operating costs and expenses

 

 

(3,114

)

 

 

(93

)

 

 

(9,556

)

 

 

(3,164

)

 

 

(15,927

)

Depreciation and amortization

 

 

(203

)

 

 

(32

)

 

 

(493

)

 

 

(145

)

 

 

(873

)

Share in ACL earnings

 

 

 

 

 

551

 

 

 

 

 

 

 

 

 

551

 

Segment contribution income (loss)

 

$

2,648

 

 

$

428

 

 

$

(2,129

)

 

$

(3,309

)

 

$

(2,362

)

 

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

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2018

 

 

2017

 

Total segment contribution loss

 

$

(877

)

 

$

(2,362

)

Interest expense, net

 

 

(2,291

)

 

 

(1,886

)

Change in fair value of stock warrants and other

   derivatives

 

 

(2,967

)

 

 

(2,892

)

Gain on extinguishment of debt

 

 

 

 

 

895

 

Other (expense) income

 

 

(177

)

 

 

284

 

Loss from operations before provision

   for income taxes

 

$

(6,312

)

 

$

(5,961

)

 

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)

 

2018

 

 

2017

 

Digital Channels

 

$

15,339

 

 

$

11,148

 

IP Licensing

 

 

27,528

 

 

 

23,981

 

Wholesale Distribution

 

 

99,648

 

 

 

109,178

 

Corporate

 

 

5,247

 

 

 

7,473

 

Total Assets

 

$

147,762

 

 

$

151,780

 

 

 

13


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

NOTE 4. 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.

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

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2018

 

 

2017

 

Revenues

 

$

3,140

 

 

$

3,860

 

Film cost amortization

 

 

 

 

 

(1,732

)

General, administrative and other expenses

 

 

(1,358

)

 

 

(841

)

Income from operations

 

$

1,782

 

 

$

1,287

 

Net income

 

$

1,420

 

 

$

1,026

 

 

ACL's functional currency is the British Pound Sterling (the Pound). Amounts have been translated from the Pound to U.S. dollar using the average exchange rate for the periods presented.

 

 

NOTE 5. ACCOUNTS RECEIVABLE

Accounts receivable for our Digital Channels segment are primarily derived from subscription revenues, which are processed by merchant banks or our channel partners such as Amazon that have not cleared our bank as of period end. Accounts receivable for our Wholesale Distribution segment are primarily derived from (1) video content we license to broadcast, cable/satellite providers and digital subscription platforms like Netflix, and (2) the sale of physical content to retailers and wholesale distributors and U.K. ecommerce and catalog sales. Our accounts receivable typically trends with retail seasonality.

 

 

 

March 31,

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

Digital Channels

 

$

3,165

 

 

$

2,864

 

Wholesale Distribution

 

 

13,149

 

 

 

22,133

 

Accounts receivable before allowances and reserves

 

 

16,314

 

 

 

24,997

 

Less: allowance for doubtful accounts

 

 

(71

)

 

 

(71

)

Accounts receivable, net

 

$

16,243

 

 

$

24,926

 

 

Wholesale Distribution receivables are partially billed and collected by our U.S. distribution facilitation partner, SPHE. Each quarter, SPHE preliminarily settles their portion of 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 SPHE. Amounts vary and tend to be seasonal following our sales activity. As of March 31, 2018, SPHE owed us $0.8 million for receivables settled at quarter end. As of December 31, 2017, we owed SPHE $4.1 million for receivables settled as of year‑end. The Wholesale Distribution receivables are reported net of amounts owed to SPHE as these amounts are offset against each other when settling.

14


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

As of March 31, 2018, the net Wholesale Distribution payables with SPHE were $0.5 million, which is included in accounts payable and accrued liabilities. As of December 31, 2017, the net Wholesale Distribution receivables with SPHE were $4.3 million, which is included in accounts receivable.

 

 

NOTE 6. INVENTORIES

Inventories are summarized as follows:

 

 

 

March 31,

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

Packaged discs

 

$

3,534

 

 

$

3,652

 

Packaging materials

 

 

582

 

 

 

611

 

Other merchandise

 

 

191

 

 

 

185

 

Inventories, net

 

$

4,307

 

 

$

4,448

 

 

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 $9.5 million as of March 31, 2018 and $10.2 million as of December 31, 2017. 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, 2018, we recorded no impairment charges. During the three months ended March 31, 2017, we recorded impairment charges of $0.4 million. These charges are included in cost of sales as manufacturing and fulfillment cost.

 

 

NOTE 7. INVESTMENTS IN CONTENT

 

 

 

March 31,

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

Released

 

$

63,337

 

 

$

60,660

 

Completed, not released

 

 

8,246

 

 

 

3,773

 

In-production

 

 

4,970

 

 

 

6,050

 

Investments in content, net

 

$

76,553

 

 

$

70,483

 

 

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. Impairment charges for the three months ended March 31, 2018 and 2017, were $0.3 million in each period. Impairment charges are included in cost of sales as part of content amortization and royalties.

In determining the fair value of content for impairments (Note 11, Fair Value Measurements), we employ a discounted cash flow (or DCF) methodology. 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 type of content.

 

 

15


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

NOTE 8. DEBT

Debt consists of the following:

 

 

 

Maturity

 

Interest

 

 

March 31,

 

 

December 31,

 

(In thousands)

 

Date

 

Rate

 

 

2018

 

 

2017

 

Senior secured term notes

   with AMC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tranche A Loan

 

Beginning June 30, 2020

 

7.0%

 

 

$