RealD Inc. - FORM 10-Q - August 5, 2015

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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, 2015

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: 001-34818

RealD Inc.

(Exact name of registrant as specified in its charter)



Delaware		77-0620426
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 N. Crescent Drive, Suite 200 Beverly Hills, CA		90210
(Address of principal executive offices)		(Zip Code)

(310) 385-4000

(Registrant’s telephone number, including area code)

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 ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

On July 29, 2015, the registrant had 50,921,907 shares of common stock, par value $0.0001 per share, outstanding.

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RealD Inc.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED

June 30, 2015

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PART I – FINANCIAL INFORMATION
		Page
		Number

ITEM 1.	Financial statements	3

	Condensed consolidated balance sheets as of June 30, 2015 (unaudited) and March 31, 2015	3

	Condensed consolidated statements of operations (unaudited) for the three months ended June 30, 2015 and 2014	4

	Condensed consolidated statements of comprehensive income (unaudited) for the three months ended June 30, 2015 and 2014	5

	Condensed consolidated statements of cash flows (unaudited) for the three months ended June 30, 2015 and 2014	6

	Notes to condensed consolidated financial statements (unaudited)	7

ITEM 2.	Management’s discussion and analysis of financial condition and results of operations	18

ITEM 3.	Quantitative and qualitative disclosures about market risk	36

ITEM 4.	Controls and procedures	38

PART II – OTHER INFORMATION

ITEM 1.	Legal proceedings	41

ITEM 1A.	Risk factors	41

ITEM 2.	Unregistered sales of equity securities and use of proceeds	56

ITEM 3.	Defaults upon senior securities	57

ITEM 4.	Mine safety disclosures	57

ITEM 5.	Other information	57

ITEM 6.	Exhibits	58

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PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

RealD Inc.

Condensed Consolidated Balance Sheets

(in thousands, except per share data)



	June 30, 2015			March 31, 2015
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	63,042		$	60,333
Accounts receivable, net	53,017			26,748
Inventories, net	6,660			8,305
Deferred costs – eyewear	798			80
Prepaid expenses and other current assets	4,707			4,770
Total current assets	128,224			100,236
Property and equipment, net	19,785			20,599
Cinema systems, net	78,246			82,243
Goodwill	10,657			10,657
Other intangibles, net	4,494			4,817
Deferred income taxes	2,819			2,461
Other assets	8,334			8,631
Total assets	$	252,559		$	229,644
Liabilities and equity
Current liabilities:
Accounts payable	$	9,911		$	9,652
Accrued expenses and other liabilities	24,146			26,640
Deferred revenue	5,919			5,009
Income taxes payable	1,856			1,619
Deferred income taxes	2,942			2,583
Current portion of Credit Agreement	10,635			7,460
Total current liabilities	55,409			52,963
Credit Agreement, net of current portion	30,040			22,380
Deferred revenue, net of current portion	4,055			3,931
Other long-term liabilities	3,974			4,027
Total liabilities	93,478			83,301
Commitments and contingencies
Equity (deficit)
Common stock, $0.0001 par value, 200,000 shares authorized; 50,645 and 50,434 shares issued and outstanding at June 30, 2015 and March 31, 2015, respectively	377,217			371,689
Accumulated deficit	(219,617		)	(226,803		)
Accumulated other comprehensive income	1,984			1,960
Total RealD Inc. stockholders’ equity	159,584			146,846
Noncontrolling interest	(503		)	(503		)
Total equity	159,081			146,343
Total liabilities and equity	$	252,559		$	229,644

See accompanying notes to condensed consolidated financial statements

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RealD Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)



	Three months ended June 30
	2015			2014
Revenue:
License	$	37,134		$	35,813
Product and other	16,435			19,406
Total revenue	53,569			55,219
Cost of revenue:
License	10,154			10,848
Product and other	12,475			14,350
Total cost of revenue	22,629			25,198
Gross profit	30,940			30,021
Operating expenses:
Research and development	2,818			3,718
Selling and marketing	5,377			5,781
General and administrative	12,920			11,994
Total operating expenses	21,115			21,493
Operating income	9,825			8,528
Interest expense, net	(354		)	(472		)
Other income	347			160
Income before income taxes	9,818			8,216
Income tax expense	2,494			2,287
Net income	7,324			5,929
Net income attributable to noncontrolling interest	—			—
Net income attributable to RealD Inc. common stockholders	$	7,324		$	5,929

Earnings per common share:
Basic	$	0.14		$	0.12
Diluted	$	0.14		$	0.11
Shares used in computing earnings per common share:
Basic	50,794			49,671
Diluted	52,581			52,770

See accompanying notes to condensed consolidated financial statements

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RealD Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)



	Three months ended June 30
	2015		2014
Net income	$	7,324	$	5,929
Other comprehensive income, net of tax:
Foreign currency translation gains	24		262
Other comprehensive income, net of tax	24		262
Comprehensive income	$	7,348	$	6,191

See accompanying notes to condensed consolidated financial statements

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RealD Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Three months ended June 30
	2015			2014
Cash flows from operating activities
Net income	$	7,324		$	5,929
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	9,561			9,813
Deferred income tax	1			(1		)
Non-cash interest expense	92			38
Non-cash stock compensation	4,413			3,971
Non-cash bad debt expense	(860		)	118
Loss on disposal of property and equipment	—			9
Impairment of long-lived assets and related purchase commitments	389			1,016
Changes in operating assets and liabilities:	0			0
Accounts receivable	(25,409		)	(11,172		)
Inventories	1,645			1,212
Prepaid expenses and other current assets	65			1,320
Deferred costs - eyewear	(718		)	(564		)
Other assets	205			(2,283		)
Accounts payable	259			(468		)
Accrued expenses and other liabilities	(2,494		)	694
Other long-term liabilities	(53		)	(202		)
Income taxes receivable/payable	235			(454		)
Deferred revenue	1,034			(2,213		)
Net cash provided by (used in) operating activities	(4,311		)	6,763

Cash flows from investing activities
Purchases of property and equipment	(571		)	(2,895		)
Purchases of cinema systems and related components	(3,660		)	(5,187		)
Proceeds from sale of property and equipment	—			67
Net cash used in investing activities	(4,231		)	(8,015		)

Cash flows from financing activities
Proceeds from Credit Agreement	12,700			37,300
Repayments on Credit Agreement	(1,865		)	(36,250		)
Payments of debt issuance costs	—			(895		)
Proceeds from exercise of stock options	741			2,010
Proceeds from employee stock purchase plan	374			—
Repurchase of statutory withholdings of stock issued for restricted stock units	(138		)	(269		)
Net cash provided by financing activities	11,812			1,896
Effect of currency exchange rate changes on cash and cash equivalent	(561		)	262
Net increase in cash and cash equivalents	2,709			906
Cash and cash equivalents, beginning of period	60,333			28,800
Cash and cash equivalents, end of period	$	63,042		$	29,706

See accompanying notes to condensed consolidated financial statements

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RealD Inc.

Notes to condensed consolidated financial statements (unaudited)

1. Business and basis of presentation

RealD Inc. is a leading global licensor of 3D and other visual technologies. Except where specifically noted or the context otherwise requires, the use of terms such as the “Company” or “RealD” in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 refers to RealD Inc. and its subsidiaries.

The accompanying unaudited condensed consolidated financial statements as of June 30, 2015 and for the three months ended June 30, 2015 have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and include all adjustments (consisting of only normal recurring adjustments, unless otherwise indicated), necessary for a fair presentation of the Company’s condensed consolidated financial statements. Accordingly, certain information and footnote disclosure normally included in comprehensive financial statements have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of March 31, 2015 was derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP. Interim results are not necessarily indicative of results for any subsequent quarter, the full fiscal year or any future periods. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2015.

The condensed consolidated financial statements include the accounts of RealD, its wholly owned subsidiaries and its majority owned subsidiaries. RealD does not have any interests in variable interest entities. For consolidated subsidiaries that are not wholly owned but are majority owned, the subsidiaries’ assets, liabilities, and operating results are included in their entirety in the accompanying condensed consolidated financial statements. The noncontrolling interests in those assets, liabilities, and operations are reflected as non-controlling interest in the condensed consolidated balance sheets under equity and condensed consolidated statements of operations.

All significant intercompany balances and transactions have been eliminated in consolidation.

2. Summary of significant accounting policies

Accounting period

The Company’s fiscal year consists of four 3-month periods for a total of 12 calendar months and will end on March 31, 2016.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and applicable disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the financial statements relate to the following:


•	licensing revenue terms applied to the timing and number of motion picture exhibitor consumer admissions;


•	domestic eyewear product revenue terms applied to when the usage occurs and the amount of usage;


•	effects of allowances that are capitalized on the balance sheet and amortized to the applicable line item on the statement of operations as expense or contra revenue and earned customer incentives when customers do not timely report the activity that result in earned allowances and incentives;


•	customer contract terms on revenue and balance sheet items;


•	impairment testing of goodwill, intangible assets and tangible assets, including determination of relevant reporting units and long-lived asset groups;


•	useful lives of intangible assets and tangible assets;

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•	timing and amount recognized for performance-based compensation, including bonus, executive salary and executive restricted share units, based on projects of Company performance achievement;


•	the impact of potential future tax consequences of events that have been recognized in the Company’s financial statements;


•	valuation of accruals and allowances;


•	contingency assessments; and


•	assumptions used in the determination of the fair value of equity-based awards for stock-based compensation.

Earnings (loss) per share of common stock

Basic earnings per share of common stock is computed by dividing the net income (loss) attributable to RealD common stockholders for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income attributable to the Company’s common stockholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan and unvested restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method.

The calculation of the basic and diluted earnings per share of common stock for the three months ended June 30, 2015 and June 30, 2014 was as follows:



	Three months ended June 30
(in thousands, except per share data)	2015		2014
Numerator:
Net income	$	7,324	$	5,929
Net income attributable to noncontrolling interest	—		—
Net income attributable to RealD Inc. common stockholders	$	7,324	$	5,929
Denominator:
Weighted-average common shares outstanding (basic)	50,794		49,671
Effect of dilutive securities	1,787		3,099
Weighted-average common shares outstanding (diluted)	52,581		52,770
Earnings per common share:
Basic	$	0.14	$	0.12
Diluted	$	0.14	$	0.11

The weighted-average number of anti-dilutive shares excluded from the calculation of diluted earnings per common share for the three months ended June 30, 2015 and June 30, 2014 was as follows:



	Three months ended June 30
(in thousands)	2015	2014
Options, employee stock purchase plan, restricted stock units and performance stock units	8,926	9,394

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Accounts receivable, net

Accounts receivable, net, consists of trade receivables, value-added tax (“VAT”) receivables, other receivables and allowance for doubtful accounts and customer credits. The Company provides credit to its customers, who are primarily in the movie production and exhibition businesses. The Company provides for the estimated accounts receivable that will not be collected. These estimates are based on an analysis of historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in the customers’ payment terms and their economic condition. Collection of accounts receivable may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company’s overall credit risk. The allowance for doubtful accounts and customer credits totaled $5.1 million and $5.9 million as of June 30, 2015 and March 31, 2015, respectively.

Inventories and deferred costs-eyewear

Inventories and deferred costs-eyewear represent RealD eyewear and are substantially all finished goods. Inventories and deferred costs-eyewear are valued at the lower of cost (first-in, first-out method) or market value. At each balance sheet date, the Company evaluates ending inventories and deferred costs-eyewear for net realizable value. The Company also evaluates inventories for excess quantities and obsolescence. These evaluations include analyses of expected future average selling prices, projections of future demand and technology changes. In order to state inventories at the lower of cost or market, RealD maintains reserves against such inventories. If the Company’s analyses indicate that market is lower than cost, a write-down of inventories is recorded in cost of revenue in the period the loss is identified. As of June 30, 2015 and March 31, 2015, the inventory reserve as a result of the Company’s net realizable value analyses was $21 thousand and $0.1 million, respectively.

Domestically, the Company provides RealD eyewear free of charge to motion picture exhibitors and then receives a fee from the motion picture studios for the usage of RealD eyewear by the motion picture exhibitors’ consumers. Eyewear shipped from inventory is deferred on the shipment date and then amortized to cost of product revenue according to assumptions related to eyewear usage by consumers. Internationally, the motion picture exhibitors prepays the Company for RealD eyewear ordered. Inventory shipped is recognized to cost of product revenue according to transfer of title. Globally, the Company may provide limited amount of RealD eyewear to motion picture studios for marketing purposes. Inventory shipped is recognized to sales and marketing expense.

Impairment of long-lived assets

The Company reviews long-lived assets, such as property and equipment, cinema systems, digital projectors and intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

For the three months ended June 30, 2015 and June 30, 2014, impairment charges for all impaired RealD Cinema Systems charged to cost of revenue totaled $0.4 million and $1.0 million, respectively.

Revenue recognition

The Company derives substantially all of its revenue from the license of RealD Cinema Systems and the product sale or use of RealD eyewear. RealD evaluates revenue recognition for transactions using the criteria set forth by the Financial Accounting Standard Board ("FASB") Accounting Standards Codification ("ASC") Topic 840, Leases, and ASC Topic 605, Revenue Recognition. The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company records revenue net of estimated

allowances.

The Company assesses revenue arrangements to determine whether multiple deliverables of its products, services and technology exist. For deliverables in multiple-element arrangements, the guidance below is applied for separability and allocation. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met:

•The delivered item(s) has value to the client on a stand-alone basis; and

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•If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company.

If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each deliverable and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price. The following revenue policies are then applied to each unit of accounting, as applicable.

License revenue

License revenue, net of lease incentives and other allowances, is accounted for as an operating lease. License revenue is primarily derived under per-admission, percentage of box office, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated lease incentives, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside the Company’s control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and the Company has no more obligations to our customers specific to the contingent payment received. Certain of the Company’s license revenue from leasing RealD Cinema Systems is earned upon admission by the motion picture exhibitor’s consumers. The Company’s licensees, however, do not report and pay for such license revenue until after the admission has occurred, which may be received subsequent to the Company’s fiscal period end. The Company estimates and records domestic licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be made. The Company records its international licensing revenue based on actual amounts reported by motion picture exhibitors. The Company determines that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee’s admissions report. Revenue is deemed fixed or determinable upon receipt of a licensee’s admissions report or evidence of a RealD box office showing by licensee. The Company determines collectability based on an evaluation of the licensee’s recent payment history and evaluation of the respective customer’s credit-standing.

Product and other revenue

The Company recognizes product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of the Company’s product revenue from the usage of RealD eyewear is earned upon admission and usage by the motion picture exhibitor’s consumers. The Company’s customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received subsequent to the Company’s fiscal period end. Accordingly, the Company estimates and records such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made. Internationally, the motion picture exhibitors prepays for the RealD eyewear, which is deferred upon receipt of cash and earned upon shipping and transfer of title of the products. There are no estimates made in relation to international sales.

The Company recognizes other revenue, including service revenue, when the consideration is earned and realized or realizable. Ongoing service revenue is recognized on a straight-line basis over the longer of the contractual term or the expected period during which the specified services will be rendered.

Comprehensive income (loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). The only component of other comprehensive income or loss is unrealized foreign currency translation gains (losses). There were no reclassifications out of accumulated other comprehensive income during the three months ended June 30, 2015 and June 30, 2014.

Shipping and handling costs

Amounts billed to customers for shipping and handling costs are included in cost of revenue. RealD’s shipping and handling costs consists primarily of packaging and transportation charges and are recorded in cost of revenue. Shipping and handling costs recognized in cost of revenue were $3.0 million and $2.3 million for the three months ended June 30, 2015 and June 30, 2014, respectively.

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Research and development

Research and development (R&D) costs are expensed as incurred. Major components of R&D expense include salaries and benefits, depreciation for R&D assets, materials and supplies inclusive of prototypes, non-recurring engineering, payments to third parties for R&D, facilities and equipment that can only be used for a particular project and overhead allocations of various administrative and facilities costs related to R&D.

General and administrative costs

General and administrative costs principally consist of personnel costs related to our executive, legal, finance and human resources staff, professional fees including legal and accounting costs, occupancy costs, public company costs, bad debt expenses and gain and loss from disposition of assets. Additionally, general and administrative costs include sales, use, goods and services tax and value added tax (collectively, the "transaction taxes") as well as property taxes. For the Company's U.S. and some of its international cinema license and product revenue, the Company absorbs the majority of the transaction taxes. The transaction taxes recognized in general and administrative costs were $1.5 million and $1.4 million for the three months ended June 30, 2015 and June 30, 2014, respectively.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 Revenue from Contracts with Customers (Topic 606), effective for RealD starting April 1, 2017 (the first quarter of fiscal year 2018). Early application is not permitted. The new standard will be implemented retrospectively with the Company choosing to either restate prior periods or recognize the cumulative effect; the Company has not yet selected a transition method.

The new Topic 606 does not apply to lease contracts within the scope of Topic 840 Leases. The primary objective of ASU 2014-09 is to provide guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Revenue recognition is anticipated to entail more judgment and more estimating than under the current guidance. ASU 2014-09 also changes Topic 360 Property, Plant and Equipment, Topic 350 Intangibles-Goodwill and Other and certain other U.S. GAAP. The Company has not yet determined the effects of Topic 606 and other ASU 2014-09 revisions on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory", which amended GAAP guidance was issued to simplify the measurement of inventory for all entities. The amendments apply to all inventory that is measured using first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost and net realizable value. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. ASU 2015-11 will be effective for the Company beginning in fiscal 2018. The Company elected not to early adopt and is currently evaluating the impact that the adoption of ASU 2015-11 may have on its consolidated financial statements.

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3. Cinema Systems and Property & Equipment

Tangible fixed assets consist of the following:



(in thousands)	June 30, 2015			March 31, 2015
RealD Cinema Systems	$	210,627		$	208,056
Leasehold improvements	17,061			16,974
Machinery and equipment	5,901			5,791
Furniture and fixtures	1,257			1,238
Computer equipment and software	10,959			10,581
Construction in process	261			565
Total	$	246,066		$	243,205
Less accumulated depreciation	(148,035		)	(140,363		)
Cinema Systems and Property & Equipment, net	$	98,031		$	102,842

Depreciation expense amounted to $9.2 million and $9.5 million for the three months ended June 30, 2015 and June 30, 2014, respectively.

4. Goodwill and other intangibles, net

Goodwill and other intangibles, net, consist of the following at:



	June 30, 2015				March 31, 2015
(in thousands)	Gross amount		Accumulated amortization		Gross amount		Accumulated amortization
Acquired developed technologies	$	9,324	$	4,830	$	9,324	$	4,507
Goodwill	10,657		—		10,657		—
Total	$	19,981	$	4,830	$	19,981	$	4,507

Amortization expense amounted to $0.3 million and $0.3 million for the three months ended June 30, 2015 and June 30, 2014, respectively.

At June 30, 2015, the remaining amortization expense is estimated to be as follows (in thousands):



Remainder of fiscal year 2016	$	980
Fiscal year 2017	1,300
Fiscal year 2018	1,287
Fiscal year 2019	306
Fiscal year 2020	129
Thereafter	492
Total	$	4,494

Intangibles are deemed to have finite lives and consist of acquired developed technologies (which are primarily patents) and are amortized over their estimated useful lives of 5 to 19 years (with a weighted average remaining amortization period of 4.3 years) using the straight-line method.

5. Fair value measurement

The Company’s derivative instruments are recorded at fair value in other current assets and other current liabilities in the condensed consolidated balance sheets. Changes in fair value are reported as a component of other income or loss on the Company’s condensed consolidated statements of operations. For all periods presented, none of the Company’s derivative instruments were designated as hedging instruments. The Company does not use foreign currency option or foreign exchange forward contracts for speculative or trading purposes.

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To estimate the fair value of the derivative instruments, the Company uses valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:


•	Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;


•	Level 2 - Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs;


•	Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.

The Company purchases foreign currency forward contracts, generally with maturities of twelve months or less, to reduce the volatility of cash flows primarily related to forcasted payments and expenses denominated in certain foreign currencies. As of June 30, 2015, RealD had outstanding forward contracts based on Great Britain Pound and Euro with notional amounts totaling $1.1 million. The fair value measurement of the derivative instruments was as follows:



(in thousands)
Fair value measurement as of June 30, 2015:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Derivatives:
Foreign currency forward contracts	$	—	$	136	$	—	$	136
Total assets	$	—	$	136	$	—	$	136

Liabilities:
Derivatives:
Foreign currency forward contracts	$	—	$	—	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—

As of March 31, 2015, the carrying amount of the Company’s foreign currency forward contracts was $0.4 million.

For the three months ended June 30, 2015, the net gain related to the change in fair value of the Company's foreign currency forward contracts was $0.3 million and classified as other income. For the three months ended June 30, 2014, the net gain related to the change in fair value of the Company’s foreign currency forward contracts was immaterial. Foreign currency master agreements typically allow the netting of receivables and payables.

The Company monitors its positions with, and the credit quality of, the financial institutions that are counterparties to its financial instruments and does not currently anticipate nonperformance by the counterparties.

6. Cost Reduction Plans

Over the past several quarters, the Company announced plans to reduce the overall costs of its global operations (the "Cost Reduction Plans"). The Cost Reduction Plans were primarily a response to the anticipated impact on the Company’s financial

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results and operations caused by changes in the 3D box office performance of certain motion pictures due to perceived changes in consumer preference and the fact that the Company’s 3D cinema business is maturing in many markets like the United States in which the Company expected equipment installations to continue to slow. As part of the Cost Reduction Plans, the Company reduced its staff, rescoped and made other changes to certain research and development projects, reduced certain non-personnel related general and administrative expenses and streamlined certain manufacturing operations. The Company further focused the expansion of its global cinema platform on emerging growth markets and higher performing motion picture exhibitors.

The Company accounts for the Cost Reduction Plans in accordance with the Accounting Standards Codification, including ASC 420, Exit or Disposal Cost Obligations, ASC 712, Compensation-Nonretirement Postemployment Benefits, ASC 840, Leases and ASC 360, Property, Plant and Equipment (Impairment or Disposal of Long-Lived Assets). As a result of the Cost Reduction Plans workforce reduction and commencement of the relocation of manufacturing, the Company incurred termination and other charges totaling approximately $6.1 million through March 31, 2015. Charges of $0.2 million have been incurred in the three months ended June 30, 2015. Therefore, the total charges were $6.3 million through June 30, 2015. The following table summarizes the charges resulting from the implementation of the Cost Reduction Plans during the three months ended June 30, 2015 and June 30, 2014 :



	Three months ended June 30
	2015							2014
(in thousands)	Personnel		Leasehold			Total		Personnel		Leasehold		Total
Cost of revenue	$	3	$	(3	)	$	—	$	—	$	71	$	71
Research and development	3		—			3		—		—		—
Selling and marketing	140		22			162		—		—		—
General and administrative	—		—			—		—		—		—
Total	$	146	$	19		$	165	$	—	$	71	$	71

The following table summarizes the activity resulting from the implementation of the Cost Reduction Plans within accrued expenses and other liabilities:



	Payments excluding non-cash impairment
(in thousands)	Personnel			Leasehold			Total
Cost reduction plan liabilities as of March 31, 2015	$	1,249		$	265		$	1,514
Charges	146			19			165
(Payments)	(196		)	(96		)	(292		)
Cost reduction plan liabilities as of June 30, 2015	$	1,199		$	188		$	1,387

Additionally, the Company leases office space for its headquarters and its operation / research and development facility that include approximately $5.4 million and $6.1 million, respectively, in leasehold improvements and other items classified as fixed assets (see Note 3 “Cinema Systems and Property & Equipment”). If the Company were to relocate either office, these fixed assets could become subject to an impairment assessment and contract termination costs or sublease loss could be incurred.

There is no guarantee that termination and implementation costs will not exceed the estimates, or that any net cost reduction will actually be achieved.

7. Borrowings

2014 Credit Agreement

On June 26, 2014, RealD entered into the Amended and Restated Credit Agreement (the “2014 Credit Agreement”), by and among the Company, as borrower, City National Bank (“City National”), as administrative agent and letter of credit issuer, the other agents from time to time party thereto and the lenders from time to time party thereto (the “Lenders”). The 2014 Credit Agreement amends and restates in its entirety that certain Credit Agreement, dated as of April 19, 2012, by and among the Company, City National and the agents and lenders from time to time party thereto, which had been most recently amended on October 16, 2013 (the "2012 Credit Agreement").

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Pursuant to the 2014 Credit Agreement, the Lenders thereunder will make available to RealD:

•

a revolving credit facility (including a letter of credit sub-facility) in a maximum amount not to exceed $50 million (the “Revolving Facility”), which matures on June 26, 2017. In addition, we may request up to an additional $25 million of commitments under the Revolving Facility (such that the maximum amount of all commitments under the Revolving Facility may not exceed $75 million), subject to the satisfaction of certain financial and other conditions and subject to obtaining such commitments; and


•	a delayed draw term loan facility in a maximum amount not to exceed $50 million (the “Term Loan Facility”), which matures on June 26, 2018. During the first quarter of fiscal year 2015 and fiscal year 2016, the Company borrowed $37.3 million and the remaining $12.7 million, respectively, under the Term Loan Facility.

Debt issuance costs related to the completion of the 2014 Credit Agreement totaled $0.9 million and were added to the $0.3 million deferred charge remaining on the 2012 Credit Agreement. All these issuance costs are being amortized over the contractual life of the Revolving Facility and recorded as interest expense.

The obligations under the 2014 Credit Agreement are fully and unconditionally guaranteed by the Company’s subsidiaries, ColorLink Inc., a Delaware corporation (“ColorLink”), Stereographics Corporation, a California corporation (“Stereographics”), and RealD DDMG Acquisition, LLC, a Delaware limited liability company (together with the Company, ColorLink and Stereographics, the “Loan Parties”). The obligations under the 2014 Credit Agreement are secured by a first priority security interest in substantially all of the Loan Parties’ tangible and intangible assets.

As of June 30, 2015, $50 million was available under the Revolving Facility and none was available under the Term Loan Facility after taking into account our borrowings under the Term Loan Facility during the first quarter of fiscal year 2015 and 2016 in the amount of $37.3 million and $12.7 million, respectively. As a result, as of June 30, 2015, the Company had $50 million of availability under the 2014 Credit Agreement.

As of June 30, 2015, there was no balance outstanding under the Revolving Facility. The term loan outstanding balance of $40.7 million at June 30, 2015 is to be repaid in 11 quarterly installments of $2.7 million through March 31, 2018 and the remaining $11.4 million principal on June 26, 2018. The current and non-current portions of the Credit Agreement due as of June 30, 2015 and March 31, 2015 were as follows:



	June 30, 2015		March 31, 2015
(in thousands)
Current portion of Credit Agreement	$	10,635	$	7,460
Credit Agreement, net of current portion	30,040		22,380
Total Credit Agreement	$	40,675	$	29,840

At June 30, 2015, the Company’s future minimum 2014 Credit Agreement obligations were as follows:



Fiscal year 2016	$	7,976
Fiscal year 2017	10,635
Fiscal year 2018	10,635
Fiscal year 2019	11,429
Total	$	40,675

Under the 2014 Credit Agreement, RealD’s business is subject to certain limitations, including limitations on the Company’s ability to incur additional debt, make certain investments or acquisitions, enter into certain merger and consolidation transactions, and sell its assets other than in the ordinary course of business. The Company is also required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. As of June 30, 2015, RealD was in compliance with all financial covenants in the 2014 Credit Agreement. If the Company fails to comply with any of the covenants or if any other event of default should occur, the Lenders could elect to prevent the Company from borrowing and declare the indebtedness to be immediately due and payable.

The 2014 Credit Agreement contains customary events of default applicable to the Company and/or its subsidiaries, including, among other things the occurrence of any change of control. If one or more events of default occurs and continues beyond any applicable cure period, City National may, with the consent of the Lenders holding a majority of the loans and

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commitments under the facilities, or will, at the request of such Lenders, terminate the commitments of the Lenders to make further loans and declare all of the obligations of the Loan Parties under the 2014 Credit Agreement to be immediately due and payable.

Loans outstanding under the 2014 Credit Agreement bear interest at the Company’s option at either the Eurodollar rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Eurocurrency rate for a one month Interest Period on such day plus 1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on the Company’s leverage ratio. Under the 2014 Credit Agreement, the Company is charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility was 0.375% of the unused commitment. Additionally, the Company is charged a letter of credit fee between 2.25% to 2.75%, depending on the Company’s leverage ratio, per year, with respect to the amount of each performance letter of credit issued under the 2014 Credit Agreement. The Company also pays customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the 2014 Credit Agreement. There were no letters of credit outstanding at June 30, 2015 or March 31, 2015.

As of June 30, 2015, there were $40.7 million in borrowings outstanding under the 2014 Credit Agreement which bore 2.44% weighted average interest. As of March 31, 2015, there were $29.8 million in borrowings outstanding under the 2014 Credit Agreement, which bore 2.44% weighted average interest. Interest expense related to our borrowings was $0.2 million and $0.2 million for the three months ended June 30, 2015 and June 30, 2014, respectively.

8. Commitments and contingencies

Indemnities and commitments

During the ordinary course of business, the Company makes certain indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities of certain customers and licensees of our technologies, and indemnities to the Company’s directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. The majority of these indemnities and commitments do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities and commitments in the accompanying condensed consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is reasonably probable and estimable.

The Company has entered into contracts with certain of its vendors. Future obligations under such contracts totaled $7.9 million at June 30, 2015 and include revolving 90-day supply commitments. Many of the contracts contain cancellation penalty provisions requiring payment of up to 20% of the unused contract.

Contingencies and assessments

The Company is subject to various contingencies and assessments arising in the course of its business, some of which relate to litigation, claims, professional services, customer credits and rebates, system upgrades and maintenances, property taxes, sales and use taxes and tax assessments for goods and services. The Company considers the likelihood of the loss or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss in determining loss contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to us to determine whether such accruals are necessary or the amounts accrued should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on the Company’s business, consolidated results of operations, financial condition or cash flows.

9. Share-based compensation

The Company accounts for share-based payment awards granted to employees and directors by recording compensation expense based on estimated fair values. The Company estimates the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. Share-based awards are attributed to expense using the

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straight-line method over the vesting period. The Company determines the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under ASC 718, Compensation — Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent the Company’s best estimates. The Company’s estimates of the fair values of stock options granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option modifications, estimates of forfeitures, and the related income tax impact.

Share-based compensation expense for all share-based arrangements for the three months ended June 30, 2015 and June 30, 2014 was as follows:



	Three months ended June 30
(in thousands)	2015		2014
Cost of revenue	$	308	$	191
Research and development	492		626
Selling and marketing	1,286		927
General and administrative	2,327		2,227
Total	$	4,413	$	3,971

Stock options granted generally vest over a four-year period, with 25% of the shares vesting after one year and monthly vesting thereafter. The options generally expire ten years from the date of grant. For the three months ended June 30, 2015, the Company granted 0.1 million stock options at a weighted average grant date fair value of $6.66 per share. For the three months ended June 30, 2015 and June 30, 2014, share-based compensation expense related to stock options and the Company’s employee stock purchase plan was $1.7 million and $2.6 million, respectively.

Certain of the Company’s management-level employees receive performance stock options, which gives the recipient the right to receive common stock that is contingent upon achievement of specified pre-established performance goals over the performance period, which is generally three years subject to the recipient’s continued service with the Company. The performance goals for the performance stock options are based on the measurement of the Company’s total stockholder return, on a percentile basis, compared to a comparable group of companies. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock options equal to or less than the number of performance stock options granted. In June 2013, the Company’s Chief Executive Officer’s fiscal year 2013 stock option grant was amended to retroactively change the vesting schedule of the stock option so that it now vests based upon the achievement of performance goals rather than based solely upon Mr. Lewis’ continued service with the Company. The performance goal is based on the measurement of the Company’s total stockholder return, on a percentile basis, compared to a comparable group of companies. The performance period for this performance stock option is between three and five years. For the three months ended June 30, 2015 and June 30, 2014, share based compensation expense related to performance stock options was $0.2 million and $0.2 million, respectively.

Certain of the Company’s management-level employees also receive performance stock units, which gives the recipient the right to receive common stock that is contingent upon achievement of specific pre-established performance goals over the performance period, which is generally two years subject to the recipient’s continued service with us. The performance goals are based on achieving certain levels of total licensing revenue over the performance period. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock units between 0% and 200% of the number of performance stock units granted. For the three months ended June 30, 2015, the Company granted 0.3 million performance stock units at a weighted average granted date fair value of $12.63 per performance stock unit. For the three months ended June 30, 2015 and June 30, 2014, share-based compensation expense related to performance stock units was $1.2 million and $0.1 million, respectively.

Certain of the Company’s employees, including certain management level employees, receive time-based restricted stock units. These restricted stock units vest over one to three years based upon a recipient’s continued service with us. For the three months ended June 30, 2015, the Company granted 12 thousand restricted stock units at a weighted average grant date fair value of $12.48 per restricted stock unit. For the three months ended June 30, 2015 and June 30, 2014, share-based compensation expense related to restricted stock units was $1.3 million and $1.2 million, respectively.

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10. Income taxes

The Company’s income tax expense for the three months ended June 30, 2015 and June 30, 2014 was $2.5 million and $2.3 million, respectively. The increase in income tax expense for the three months ended June 30, 2015 was due primarily to increased quarterly revenue in foreign jurisdictions where the Company is subject to foreign income taxes. The Company has net operating losses that may potentially be offset against future domestic earnings. The Company files federal income tax returns and income tax returns in various state and foreign jurisdictions. Due to the net operating loss carryforwards, the Company’s United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.

As of June 30, 2015, the Company has determined based on the weight of the available evidence, both positive and negative, to provide for a valuation allowance against substantially all of the net deferred tax assets. The current deferred tax assets not reserved for by the valuation allowance are those in foreign jurisdictions or amounts that may be carried back in future years. If there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, the Company will adjust all or a portion of the applicable valuation allowance in the period when such change occurs.

11. Equity

A summary of the changes in total equity for the three months ended June 30, 2015 was as follows:



(in thousands)	RealD Inc. stockholders’ equity			Noncontrolling interest			Total equity
Balance, March 31, 2015	$	146,846		$	(503	)	$	146,343
Share-based compensation	4,413			—			4,413
Exercise of stock options	741			—			741
Purchase and distribution of stock under employee stock purchase plan	374			—			374
Repurchase of statutory withholdings of stock issued for restricted stock units	(138		)	—			(138		)
Comprehensive income:							—
Other comprehensive income, net of tax	24			—			24
Net income	7,324			—			7,324
Total comprehensive income	7,348			—			7,348
Balance, June 30, 2015	$	159,584		$	(503	)	$	159,081

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary note on forward-looking statements

The following discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “intends,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to: statements regarding the extent and timing of future licensing, products and services revenue levels and mix, expenses, margins, net income (loss) per diluted share, income taxes, tax benefits, acquisition costs and related amortization, and other measures of results of operations; our expectations regarding demand and acceptance for our technologies and our ability to successfully commercialize our technologies within a particular time frame, if at all; 3D motion picture releases and conversions scheduled for fiscal year 2016 ending March 31, 2016 and beyond, their commercial success and consumer preferences that, in recent periods, have trended in favor of 2D over 3D; our ability to increase the number of RealD-enabled screens in domestic and international markets and market share; our ability to supply our products to our customers on a timely basis; our relationships with exhibitor and studio partners and the business model for 3D eyewear in North America; any discussion regarding strategic alternatives; the progress, timing and amount of expenses associated with our research and development activities; market and industry growth opportunities and trends in the markets in which we operate, including in 3D content; our plans, strategies and expected opportunities; the deployment of and demand for our products and products incorporating our technologies; competitive pressures in domestic and international cinema markets impacting licensing and product revenues; and our ability to execute and achieve anticipated savings or other benefits from our cost reduction efforts. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including the risks set forth in the section entitled “Risk factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this filing. Forward-looking statements are based on the beliefs and assumptions of our management based on information currently available to management. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results.

Overview

We are a leading global licensor of 3D and other visual technologies. We have an extensive intellectual property portfolio that is and can be used in applications that enable a premium viewing experience in the theater, the home and elsewhere.

Currently, we have one reportable segment for financial reporting purposes. We derive substantially all of our revenue from our core business: the licensing of RealD Cinema Systems and the product sale of RealD eyewear to motion picture exhibitors to enable a premium viewing experience for 3D motion pictures and alternative 3D content in the theater.

Key business metrics

Our management regularly reviews a number of business metrics, including the following key metrics to evaluate our business, monitor the performance of our business model, identify trends affecting our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate forward-looking projections. The measures that we believe are the primary indicators of our quarterly and annual performance are as follows:

•

RealD box office. Estimated domestic box office on RealD-enabled screens represents the estimated 3D box office generated on RealD-enabled domestic screens. Estimated international box office on RealD-enabled screens is the estimated 3D box office generated on RealD-enabled international screens. RealD’s estimates of box office on RealD-enabled screens rely on box office tracking data. International box office reflects RealD’s estimates of international box office generated on RealD-enabled screens in 19 foreign countries where box office tracking is available. RealD estimates these countries represent approximately 85% of RealD’s international license revenues. The 19 foreign countries do not include China.


•	Number of 3D motion pictures. Total 3D motion pictures are the number of 3D motion pictures released domestically in North America during the relevant period.

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•

Number of screens. We refer to motion picture theater screens in the United States or Canada enabled with our RealD Cinema Systems as "domestic screens", motion picture theater screens in China enabled with our RealD Cinema Systems as "China screens" and motion picture theater screens outside the United States, Canada and China enabled with our RealD Cinema Systems as "rest of world screens" or "ROW screens".


•	Number of locations. We refer to motion picture exhibition complexes in the United States or Canada enabled with our RealD Cinema Systems as "domestic locations", motion picture exhibition complexes in China as "China locations" and motion picture exhibition complexes outside the United States, Canada and China as "rest of world locations" or "ROW locations".

•

Adjusted EBITDA. We use Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income (loss) plus expenses for interest, income taxes, depreciation, amortization, impairment and stock-based compensation plus net foreign exchange loss (gain) plus expenses comprising the non-U.S. GAAP categories "restructuring charges, severance costs and reserves" and "non-recurring expenses" as defined in our 2014 Credit Agreement. We do not consider the preceding adjustments to be indicative of our core operating performance. We consider our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations for that period. However, Adjusted EBITDA is not a recognized measurement under U.S. GAAP and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. For a reconciliation of Adjusted EBITDA to U.S. GAAP net income (loss) and for further discussion regarding Adjusted EBITDA, see "Non-U.S. GAAP discussion".

•

Free cash flow. We use free cash flow as a supplemental measure of our performance in liquidity. We define free cash flow as total cash provided by (used in) operating activities less cash used in purchases of property and equipment and cash used in purchases of cinema systems and related components. However, free cash flow is not a recognized measurement under U.S. GAAP, should not be used in a manner that inappropriately implies that the measure represents the residual cash flow available for discretionary expenditures, and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. For a reconciliation of and further discussion regarding free cash flow, see "Non-U.S. GAAP discussion".

The following table sets forth additional performance highlights of key business metrics for the periods presented (approximate numbers):



	Three months ended June 30
(approximate numbers, in millions)	2015		2014
Estimated box office on RealD screens (generated during the period)
Estimated box office on RealD domestic screens	$	458	$	387
Estimated box office on RealD international screens	384		400
Total estimated box office on RealD screens	$	842	$	787

	Three months ended June 30
(approximate numbers)	2015		2014
Number of 3D motion pictures (released domestically during period)	6		10

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	June 30, 2015	June 30, 2014
Number of RealD enabled screens (at period end)
Total domestic RealD enabled screens	13,650	13,450
Total China RealD-enabled screens	2,150	1,650
Total rest of world RealD-enabled screens	11,200	10,500
Total RealD enabled screens	27,000	25,600

Number of locations with RealD enabled screens (at period end)
Total domestic locations with RealD-enabled screens	3,000	3,000
Total China locations with RealD-enabled screens	350	250
Total rest of world locations with RealD-enabled screens	2,850	2,750
Total locations with RealD enabled screens	6,200	6,000

Performance highlights for Adjusted EBITDA are presented below under the caption “Non-U.S. GAAP discussion” below.

Opportunities, trends and factors affecting comparability

Almost all of our revenue is currently dependent upon both the number of 3D motion pictures released and the commercial success of those 3D motion pictures. We expect to continue to expand our business in the foreseeable future primarily through our sales and marketing efforts in China by building on the sales and operating presence we established in this market over the past several years.

Cinema

As of June 30, 2015, there were approximately 27,000 RealD-enabled screens worldwide as compared to approximately 25,600 RealD-enabled screens worldwide as of June 30, 2014, an increase period over period of 1,400 RealD-enabled screens or 5%. The majority of our increase in installed screens occurred in China, Latin America and Europe. Based on the slate announced by motion picture studios, we anticipate that approximately 30 3D motion pictures produced by domestic studios will be released worldwide in our fiscal year 2016, including Point Break and sequels and spin-offs to successful major motion picture franchises, such as The Avengers, Jurassic Park, Terminator, Hotel Transylvania, Paranormal Activity, Star Wars, The Nut Job, Kung Fu Panda and The Hunger Games.

Other technologies and research and development

We have made available certain of our technologies to consumer electronics manufacturers and content distributors to enable the delivery and viewing of 3D content.

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Results of operations

The following table sets forth our condensed consolidated statements of operations and other data for each of the periods indicated:



	Three months ended June 30
(in thousands)	2015			2014
Consolidated statements of operations data:
Revenue	$	53,569		$	55,219
Cost of revenue	22,629			25,198
Gross margin	30,940			30,021
Operating expenses:
Research and development	2,818			3,718
Selling and marketing	5,377			5,781
General and administrative	12,920			11,994
Total operating expenses	21,115			21,493
Operating income	9,825			8,528
Interest expense, net	(354		)	(472		)
Other income	347			160
Income before income taxes	9,818			8,216
Income tax expense	2,494			2,287
Net income	7,324			5,929
Net income attributable to noncontrolling interest	—			—
Net income attributable to RealD Inc. common stockholders	$	7,324		$	5,929
Other data:
Adjusted EBITDA (1)	$	24,571		$	23,399

(1) Adjusted EBITDA is not a recognized measurement under U.S. GAAP. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the comparable U.S. GAAP item, see “Non-U.S. GAAP discussion”.

Cost Reduction Plans

Over the past several quarters, we announced plans to reduce the overall costs of our global operations. The Cost Reduction Plans were primarily a response to the anticipated impact on our financial results and operations caused by changes in the 3D box office performance of certain motion pictures due to perceived changes in consumer preference and the fact that our 3D cinema business has matured in many markets like the United States in which we expected equipment installations to continue to slow. As part of the Cost Reduction Plans, we reduced our staff, rescoped and made other changes to certain research and development projects, reduced certain non-personnel related general and administrative expenses and streamlined certain manufacturing operations. We further focused the expansion of our global cinema platform on emerging growth markets and higher performing motion picture exhibitors.

We account for the Cost Reduction Plans in accordance with the Accounting Standards Codification, including ASC 420, Exit or Disposal Cost Obligations, ASC 712, Compensation-Nonretirement Postemployment Benefits, ASC 840, Leases and ASC 360, Property, Plant and Equipment (Impairment or Disposal of Long-Lived Assets). As a result of the Cost Reduction Plans' workforce reduction and commencement of the relocation of manufacturing, we incurred termination and other charges totaling approximately $6.1 million through March 31, 2015. Charges of $0.2 million have been incurred in the three months ended June 30, 2015. Therefore, the total charges were $6.3 million through June 30, 2015. The following table summarizes the charges resulting from the implementation of the Cost Reduction Plans during the three months ended June 30, 2015 and June 30, 2014:

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	Three months ended June 30
	2015							2014
(in thousands)	Personnel		Leasehold			Total		Personnel		Leasehold		Total
Cost of revenue	$	3	$	(3	)	$	—	$	—	$	71	$	71
Research and development	3		—			3		—		—		—
Selling and marketing	140		22			162		—		—		—
General and administrative	—		—			—		—		—		—
Total	$	146	$	19		$	165	$	—	$	71	$	71

The following table summarizes the activity resulting from the implementation of the Cost Reduction Plans within accrued expenses and other liabilities:



	Payments excluding non-cash impairment
(in thousands)	Personnel			Leasehold			Total
Cost reduction plan liabilities as of March 31, 2015	$	1,249		$	265		$	1,514
Charges	146			19			165
(Payments)	(196		)	(96		)	(292		)
Cost reduction plan liabilities as of June 30, 2015	$	1,199		$	188		$	1,387

On December 4, 2014, we announced additional operating expense savings and capital expenditure reductions projected for fiscal year 2016. There is no guarantee that any cost reduction will actually be achieved.

Additionally, we lease office space for our headquarters and our operations/research and development facility that include approximately $5.4 million and $6.1 million, respectively, in leasehold improvements and other items classified as fixed assets (see Note 3 “Cinema Systems and Property & Equipment”). If we relocated either office, these fixed assets could become subject to an impairment assessment and contract termination costs or sublease loss could be incurred.

Three months ended June 30, 2015 compared to three months ended June 30, 2014

Revenue



	Three months ended June 30
(in thousands)	2015				2014
Revenue:	Amount		% of Total		Amount		% of Total		Amount change			Percentage change
License revenue
Domestic	$	14,671	27	%	$	13,189	24	%	$	1,482		11	%
China	6,641		12	%	5,148		9	%	1,493			29	%
Rest of World	15,822		30	%	17,476		32	%	(1,654		)	(9	)%
International	$	22,463	42	%	$	22,624	41	%	$	(161	)	(1	)%
Total license revenue	$	37,134	69	%	$	35,813	65	%	$	1,321		4	%
Product and other revenue
Domestic	$	13,366	25	%	$	12,856	23	%	$	510		4	%
China	535		1	%	277		1	%	258			93	%
Rest of World	2,534		5	%	6,273		11	%	(3,739		)	(60	)%
International	$	3,069	6	%	$	6,550	12	%	$	(3,481	)	(53	)%
Total product and other revenue	$	16,435	31	%	$	19,406	35	%	$	(2,971	)	(15	)%
Total revenue	$	53,569	100	%	$	55,219	100	%	$	(1,650	)	(3	)%

Our total revenue for the three months ended June 30, 2015 decreased $1.7 million, or 3%, as compared to the three months ended June 30, 2014. The decrease was primarily due to lower rest of world eyewear revenue and rest of world license revenue resulting from the expiration of existing leasing revenue agreements with certain customers during the three months ended June 30, 2015. These decreases were largely offset by an increase in both domestic and China license revenue resulting from an increase in domestic box office performance and our continuous expansion into emerging markets, such as China,

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during the period. For the three months ended June 30, 2015, total license revenue in China revenue increased $1.5 million, or 29%, as compared to the three months ended June 30, 2014. For the three months ended June 30, 2015, license revenue from the largest customer in China comprised 61% of our license revenue in China, as compared to 57% for the three months ended June 30, 2014. Further, total China license revenue comprised approximately 30% of total international license revenue for the three months ended June 30, 2015 as compared to approximately 23% for the three months ended June 30, 2014. Our international markets comprised approximately 48% of total revenue for the three months ended June 30, 2015 as compared to approximately 53% for the three months ended June 30, 2014.

For the three months ended June 30, 2015, there were seven motion pictures that contributed greater than $1.0 million of admission-based fees to license revenue. License revenue for the three months ended June 30, 2015 includes admission-based fees related to the following motion pictures: Jurassic World ($8.8 million), Avengers: Age of Ultron ($8.3 million), Fast & Furious 7 ($3.4 million), San Andreas ($2.8 million), Mad Max: Fury Road ($2.5 million), Inside Out ($2.0 million) and Home ($1.3 million).

For the three months ended June 30, 2014, there were nine motion pictures which contributed greater than $1.0 million of admission-based fees to net license revenue. License revenue for the three months ended June 30, 2014 includes admission-based fees related to the following motion pictures: X-Men: Days of Future Past ($5.1 million), Amazing Spider-Man 2 ($4.6 million), Captain America 2: The Winter Soldier ($3.9 million), Godzilla ($3.5 million), Maleficent ($3.5 million), Rio 2 ($3.1 million), Transformers 4: Age of Extinction ($1.7 million), Edge of Tomorrow ($1.5 million) and How to Train Your Dragon 2 ($1.4 million).

License revenues comprised 69% of total revenues for the three months ended June 30, 2015 as compared to 65% for the three months ended June 30, 2014. International license revenues comprised of $22.5 million, or 60% of total license revenues and $22.6 million, or 63% of total license revenue for the three months ended June 30, 2015 and June 30, 2014, respectively.

The $3.0 million decrease in our product and other revenue during the three months ended June 30, 2015 as compared to the three months ended June 30, 2014, was primarily a result of a decrease in the volume of RealD eyewear consumed or sold to our rest of world markets and increased incentives provided to studios for domestic releases. This decrease in RealD eyewear volume internationally compared to the prior period resulted from the expiration of existing leasing revenue agreements with certain customers. International product revenues totaled $3.1 million, or 19%, of total product revenues and $6.6 million, or 34%, of total product revenues for the three months ended June 30, 2015 and June 30, 2014, respectively.

We expect our future revenue, particularly in our license business, will be driven by both the worldwide number of RealD-enabled screens and motion pictures released in 3D, as well as the related worldwide level of 3D admissions and box office performance of those films.

Cost of Revenue



	Three months ended June 30
	2015				2014
(in thousands)	Amount		% of Revenue		Amount		% of Revenue		Amount change			Amount change
Revenue:
License revenue	$	37,134	69	%	$	35,813	65	%	$	1,321		4	%
Product and other	16,435		31	%	19,406		35	%	(2,971		)	(15	)%
Total revenue	$	53,569	100	%	$	55,219	100	%	$	(1,650	)	(3	)%
Cost of revenue:
License	$	10,154	27	%	$	10,848	30	%	$	(694	)	(6	)%
Product and other	12,475		76	%	14,350		74	%	(1,875		)	(13	)%
Total cost of revenue	$	22,629	42	%	$	25,198	46	%	$	(2,569	)	(10	)%
Gross profit:
License	$	26,980	73	%	$	24,965	70	%	$	2,015		8	%
Product and other	3,960		24	%	5,056		26	%	(1,096		)	(22	)%
Total gross profit	$	30,940	58	%	$	30,021	54	%	$	919		3	%

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Both, the three months ended June 30, 2015 and the three months ended June 30, 2014 include expenses discussed under the caption “Cost Reduction Plans”.

For the three months ended June 30, 2015, our total cost of revenue decreased $2.6 million primarily due to lower averaged per pair cost of RealD eyewear and decreased volume of shipments. This decrease in cost of eyewear revenue also impacted total cost of revenue as a percentage of total revenue, which decreased to 42% for the three months ended June 30, 2015, as compared to 46% for the three months ended June 30, 2014.

License cost of revenue for the three months ended June 30, 2015 decreased $0.7 million primarily due to reduced impairment expense related to returned or bad debt associated RealD Cinema Systems and lower depreciation and amortization expenses. Impairment expense totaling $0.4 million and $1.0 million, or 1% and 3% as a percentage of total license revenue, respectively, was included in license cost of revenue for the three months ended June 30, 2015 and June 30, 2014, respectively. Depreciation and amortization expense totaling $8.3 million and $8.5 million, or 22% and 24% as a percentage of total license revenue, respectively, was included in license cost of revenue for the three months ended June 30, 2015 and June 30, 2014, respectively.

Product and other gross profit decreased $1.1 million during the three months ended June 30, 2015, primarily as a result of decreased volume of shipments, increased incentives provided to studios for domestic releases and partially offset by optimizing eyewear product mix and decreases in cost of eyewear products. Product and other gross margin decreased to 24% for the three months ended June 30, 2015 as compared to 26% for the three months ended June 30, 2014.

Costs associated with our eyewear recycling program are expensed in the period incurred. Recycling costs totaled $1.0 million and $2.1 million for the three months ended June 30, 2015 and June 30, 2014, respectively. Recycling costs included the cost to transport RealD eyewear between theaters and the recycling production facility and costs to process the RealD eyewear for reuse. Due in part to dependence upon voluntary recycling of undamaged eyewear by consumers, the percentage usage of recycled eyewear may decrease in future periods resulting in lower gross profit and gross margin.

Our cost of revenue as a percentage of revenue, as well as our gross profit and gross margin, will be affected in the future by the relative mix of license and product revenue, the mix of domestic and international product revenues, the relative mix of products and any new revenue sources, impairment charges and the cost per unit of eyewear as well as the percentage usage of recycled eyewear. Our impairment charges in future periods may increase as a result of system upgrades and replacements as well as changes in product offerings and new technology.

Operating Expenses



	Three months ended June 30
(in thousands)	2015		2014		Amount change			Percentage change
Research and development	$	2,818	$	3,718	$	(900	)	(24	)%
Selling and marketing	5,377		5,781		(404		)	(7	)%
General and administrative	12,920		11,994		926			8	%
Total operating expenses	$	21,115	$	21,493	$	(378	)	(2	)%

Research and development. Our research and development expenses decreased due to $0.5 million lower personnel costs and $0.4 million lower non-recurring engineering and prototype expenses. The decrease in personnel costs relates to transfer of personnel to other functions within the Company. The decrease in non-recurring engineering and prototype expenses relates to reduced spending in consumer initiatives and cinema laser initiatives for the three months ended June 30, 2015 as compared to the same period in fiscal year 2015. We expect to continue to support research and development of visual technologies for new products and continued investment in our cinema business.

Selling and marketing. Our selling and marketing expenses decreased primarily due to $0.5 million lower incentive compensation resulting from updates in company performance objectives, $0.2 million lower online and other exhibition marketing and associated travel expenses and partially offset by $0.3 million higher stock based compensation expense. We expect to incur additional selling and marketing expenses, aside from personnel related costs, as we increase our international marketing efforts, particularly in Asia, Latin America and Russia, to build our business worldwide and market future 3D films.

General and administrative. Our general and administrative expenses increased primarily due to $1.8 million higher professional and outside service fees and partially offset by $1.0 million lower bad debt expense. The increase in outside

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services and professional service fees includes $1.4 million increase in legal fees associated with our global patent enforcement and $0.4 in million advisory fees related to our strategic alternatives process, partially offset by decreases in other professional fees. The decrease in bad debt expense resulted from settling previously reserved receivables with customers. We expect to incur increased legal expenses related to our global patent enforcement and our assessment of strategic alternatives.

Historical operating expenses are not necessarily indicative of future expenses for a changing business.

Other

Interest expense, net. Net interest expense was $0.4 million and $0.5 million for the three months ended June 30, 2015 and June 30, 2014, respectively. The decrease in net interest expense was primarily due to decreased weighted average interest rate period-over-period.

Other income (loss). Our other income for the three months ended June 30, 2015 was $0.3 million as compared to other income of $0.2 million for the three months ended June 30, 2014. Other income increased primarily due to foreign exchange transaction gains related to our operations from international territories.

Income tax. Our income tax expense for the three months ended June 30, 2015 was $2.5 million compared to $2.3 million for the three months ended June 30, 2014. The income tax expense increased period over period primarily due to increased quarterly revenue in foreign jurisdictions where the Company is subject to foreign income taxes.

We have net operating losses that may potentially offset taxable income in the future. We expect to incur an increasing amount of income tax expenses that relate primarily to federal and state income tax and international operations. We file federal income tax returns and income tax returns in various state and foreign jurisdictions. Due to the net operating loss carryforwards, our United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.

Seasonality and quarterly performance

Our operations are generally subject to seasonal trends based on the number of 3D motion pictures released and the box office of those 3D motion pictures. As is the case with other participants in the motion picture exhibition industry, we expect that our fiscal quarters during the summer period generally will tend to show stronger box office performance and higher revenues due to the summer movie-going season, when many of the largest grossing films in any given year are typically released. By comparison the quarter ending in March traditionally does not benefit from the same box office performance due to the number and nature of the motion pictures released in this seasonal period. We expect to experience seasonal fluctuations in results of operations as a result of these trends. Our quarterly financial results have fluctuated in the past and may continue to fluctuate in the future based on a number of other factors in addition to these seasonal trends, including delays in production or cancellations of 3D motion pictures or changes in release schedules, many of which are beyond our control. Factors that may cause our operating results to vary or fluctuate include those discussed in Part II, Item 1A below under the caption “Risk factors.”

Liquidity and capital resources

Our cash equivalents primarily consist of money market funds and other marketable securities that mature within three months from the date of purchase. The carrying amount of cash equivalents reasonably approximates fair value due to the short maturities of these instruments. The primary objective of our investment activities is preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. We do not enter into investments for trading or speculative purposes.

We believe that our cash, cash equivalents, potential cash flows from operations, and our availability under the 2014 Credit Agreement will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.

The following table sets forth our major sources and (uses) of cash for each period as set forth below.

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	Three months ended June 30
(in thousands)	2015			2014
Operating activities	$	(4,311	)	$	6,763
Investing activities	(4,231		)	(8,015		)
Financing activities	$	11,812		$	1,896

Cash flow from operating activities

Both the three months ended June 30, 2015 and the three months ended June 30, 2014 include payments discussed under the caption “Cost Reduction Plans”.

Net cash outflow from operating activities of $4.3 million during the three months ended June 30, 2015 resulted from net income adjusted for non-cash items and increases in accounts receivable, a decrease in accounts payable and accrued expenses and partially offset by decreases in inventory and increases in deferred revenue and customer deposits. The increase in accounts receivable was related to the timing of invoicing and customer collections. The decrease in accounts payable and accrued expenses was due to decreased business activities, resulting in reduced amounts due to vendors and compensation payable to employees. The increase in deferred revenue and customer deposits were due to addition of a sales contract that required an upfront deposit and partially offset by depletion of the existing fixed fee revenue contracts as we focus more on admission based revenue structure.

Operating activities provided cash inflow of $6.8 million during the three months ended June 30, 2014. The cash inflow primarily resulted from net income adjusted for non-cash items, partially offset by increases in accounts receivable. Increases in accounts receivable was related to collections timing and seasonal revenue.

Cash flow from investing activities

For both the three months ended June 30, 2015 and June 30, 2014, cash outflow for investing activities was primarily related to the purchase of component parts for our RealD Cinema Systems and other property, equipment and leasehold improvements. Capital expenditures were $4.2 million for the three months ended June 30, 2015 and $8.1 million for the three months ended June 30, 2014. We expect to continue to support the growth of our cinema business and existing sales base. Our future capital expenditures may fluctuate depending upon the pace of new system installation or upgrades.

Cash flow from financing activities

Net cash inflow from financing activities for three months ended June 30, 2015 resulted from $12.7 million in proceeds from the 2014 Credit Agreement, $1.1 million in proceeds from issuance of stock option exercises and employee stock purchases, which were partially offset by $1.9 million quarterly payment on the 2014 Credit Agreement.

Net cash inflow from financing activities for the three months ended June 30, 2014 primarily resulted from $37.3 million in proceeds from the 2014 Credit Agreement, $2.0 million in proceeds from issuance of stock option exercises and employee stock purchases, which were partially offset by $36.2 million payoff of the 2012 Credit Agreement, the $1.9 million quarterly payment on the 2014 Credit Agreement and the $0.9 million payment of the debt issuance cost related to the completion of the 2014 Credit Agreement.

As of June 30, 2015, there was $40.7 million in debt outstanding under the 2014 Credit Agreement and $50.0 million available to borrow under the 2014 Credit Agreement. In the future, we may continue to utilize commercial financing, lines of credit and term loans for general corporate purposes and stock repurchases.

For the three months ended June 30, 2015 and June 30, 2014, proceeds from employee stock option exercises and employee stock plan purchases were $1.1 million and $2.0 million, respectively. From time to time, we expect to receive cash from the exercise of employee stock options and warrants in our common stock. Proceeds from the exercise of employee stock options outstanding will vary from period to period based upon, among other factors, fluctuations in the market value of our common stock relative to the exercise price of such stock options and warrants.

2014 Credit Agreement

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On June 26, 2014, we entered into the Amended and Restated Credit Agreement (the "2014 Credit Agreement") with City National Bank ("City National"), as administrative agent and letter of credit issuer, the other agents and lenders (the "Lenders") from time to time party thereto. The 2014 Credit Agreement amends and restates in its entirety that certain Credit Agreement, dated as of April 19, 2012, with City National and the agents and lenders from time to time party thereto, as amended on October 16, 2013 (as amended, the "2012 Credit Agreement").

Pursuant to the 2014 Credit Agreement, the Lenders thereunder will make available to us:

•


•	a delayed draw term loan facility in a maximum amount not to exceed $50 million (the “Term Loan Facility”), which matures on June 26, 2018. During the first quarter of fiscal year 2015, we borrowed $37.3 million under the Term Loan Facility and during the first quarter of fiscal year 2016, we borrowed the remaining $12.7 million under the Term Loan Facility.

Loans outstanding under the 2014 Credit Agreement bear interest at our option at either the Euro currency rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Euro currency rate for a one month Interest Period on such day plus 1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on our leverage ratio. Under the 2014 Credit Agreement, we are charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility was 0.375% of the unused commitment. Additionally, we are charged a letter of credit fee of between 2.25% to 2.75%, depending on our leverage ratio, per year, with respect to the amount of each performance letter of credit issued under the 2014 Credit Agreement. We also pay customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the 2014 Credit Agreement. There were no letters of credit outstanding at June 30, 2015 and March 31, 2015.

The obligations under the 2014 Credit Agreement are fully and unconditionally guaranteed by our subsidiaries, ColorLink Inc., a Delaware corporation (“ColorLink”), Stereographics Corporation, a California corporation (“Stereographics”), and RealD DDMG Acquisition, LLC, a Delaware limited liability company (together with RealD, ColorLink and Stereographics, the “Loan Parties”). The obligations under the 2014 Credit Agreement are secured by a first priority security interest in substantially all of the Loan Parties’ tangible and intangible assets.

As of June 30, 2015, $50 million was available under the Revolving Facility and none was available under the Term Loan Facility, totaling $50 million of availability under the 2014 Credit Agreement.

Under the 2014 Credit Agreement, our business is subject to certain limitations, including limitations on our ability to incur additional debt, make certain investments or acquisitions, enter into certain merger and consolidation transactions and sell our assets other than in the ordinary course of business. We will also be required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. As of June 30, 2015, we were in compliance with all financial covenants in the Credit Agreement. If we fail to comply with any of the covenants or if any other event of default, as defined in the 2014 Credit Agreement, should occur, the bank lenders could elect to prevent us from borrowing and declare the indebtedness to be immediately due and payable.

As of June 30, 2015, there was no balance outstanding under the Revolving Facility. The outstanding balance of $40.7 million on the Term Loan Facility at June 30, 2015 is to be repaid in 11 quarterly installments of $2.7 million through March 31, 2018 and the remaining $11.4 million principal on June 26, 2018. As of June 30, 2015, our primary sources of liquidity were our cash and cash equivalents of $63 million and the $50 million in funds available under the 2014 Credit Agreement.

Stock repurchase activity

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On April 20, 2012, we announced that our board of directors had approved an authorization to repurchase up to $50 million of RealD common stock. On December 14, 2012, our board of directors approved a $25 million increase in our stock repurchase plan, increasing the $50 million repurchase plan announced on April 20, 2012 to $75 million. The number of shares to be repurchased and the timing of any potential repurchases will depend on factors such as our stock price, economic and market conditions, uses of capital, and corporate and regulatory requirements. Repurchases of common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when we might otherwise be precluded from doing so under insider trading laws, and a variety of other methods, including open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The repurchase program may be suspended or discontinued at any time.

Pursuant to the stock repurchase plan authorized by our board of directors, we have repurchased a total of 6,599,726 shares of common stock at an average price per share, including sales commissions, of $10.30 for an aggregate cost of $67.9 million inception to date. For the three months ended June 30, 2015, there were no stock repurchases.

Off-balance sheet arrangements

We had no off-balance sheet arrangements as of June 30, 2015. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries.

Non-U.S. GAAP discussion

In addition to our U.S. GAAP results, we present Adjusted EBITDA and free cash flow as a supplemental measure of our performance. However, Adjusted EBITDA and free cash flow are not recognized measurements under U.S. GAAP. We define Adjusted EBITDA as net income (loss) plus expenses for interest, income taxes, depreciation, amortization, impairment and stock-based compensation plus net foreign exchange loss (gain) plus expenses under our Credit Agreement for the non- U.S. GAAP categories "restructuring charges, severance costs and reserves"and "non-recurring expenses". We do not consider the preceding adjustments to be indicative of our core operating performance. We define free cash flow as total cash provided by (used in) operating activities less cash used in purchases of property and equipment and cash used in purchases of cinema systems and related components. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations and our liquidity in that period. Non-U.S. GAAP adjustments to our results prepared in accordance with U.S. GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA and free cash flow should not be construed as an inference that our future results will be unaffected by unusual, infrequent or non-recurring items.

Adjusted EBITDA

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Set forth below is a reconciliation of Adjusted EBITDA to net income for the three months ended June 30, 2015 and June 30, 2014:



	Three months ended June 30
(in thousands)	2015			2014
Net income	$	7,324		$	5,929
Add (deduct):
Interest expense, net	354			472
Income tax expense	2,494			2,287
Depreciation and amortization	9,561			9,813
Other (income) (1)	(347		)	(160		)
Share-based compensation expense (2)	4,413			3,971
Impairment of assets and intangibles (3)	389			1,016
Cost reduction plan (4)	165			71
Non-recurring expenses (5)	218			—
Adjusted EBITDA (6)	$	24,571		$	23,399


(1)	Includes gains and losses from foreign currency exchange and foreign currency forward contracts.


(2)	Represents share-based compensation expense of nonstatutory and incentive stock options, restricted stock units and performance stock units, and employee stock purchase plan to employees, non-employees, officers and directors.


(3)	Represents impairment of long-lived assets, such as fixed assets, theatrical equipment and related purchase commitments and identifiable intangibles.


(4)	Expenses comprising the non-U.S. GAAP category “restructuring charges, severance costs and reserves” as defined in our 2014 Credit Agreement (also see the “Cost Reduction Plans” caption above).


(5)	Expenses under our Credit Agreement for the non-U.S. GAAP category "non-recurring costs and expenses". In fiscal quarter ended June 30, 2015, these expenses represent advisory fees related to our strategic alternatives process.


(6)	Adjusted EBITDA is not a recognized measurement under U.S. GAAP. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the comparable U.S. GAAP item, see the entirety of this “Non-U.S. GAAP discussion”.

We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA in developing our internal budgets, forecasts and strategic plans, in analyzing the effectiveness of our business strategies, in evaluating potential acquisitions, in making compensation decisions and in communications with our board of directors concerning our financial performance. Adjusted EBITDA also aligns with the similarly titled definition in the 2014 Credit Agreement and is used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments. Adjusted EBITDA has limitations as an analytical tool which includes, among others, the following:


•	Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;


•	Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;


•	Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;


•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

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•	non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;


•	Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and


•	other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplement. Our condensed consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with U.S. GAAP.

Free cash flow

The following tab sets forth our major sources and (uses) of cash per U.S. GAAP for each period as set forth below:



	Three months ended June 30
(in thousands)	2015			2014
Operating activities	$	(4,311	)	$	6,763
Investing activities	(4,231		)	(8,015		)
Financing activities	$	11,812		$	1,896

We define Non-U.S. GAAP free cash flow as total cash provided by (used in) operating activities less cash used in purchases of property and equipment and cash used in purchases of cinema systems and related components. Set forth below is a reconciliation of free cash flow to cash provided by (used in) operating activities, the comparable U.S. GAAP, for the following periods indicated:



	Three months ended June 30
(in thousands)	2015			2014
Net cash provided by (used in) operating activities	$	(4,311	)	$	6,763
Purchases of property and equipment	(571		)	(2,895		)
Purchases of cinema systems and related components	(3,660		)	(5,187		)
Total free cash flow	$	(8,542	)	$	(1,319	)

We present free cash flow because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by evaluating our liquidity and capital resources. In addition, we use free cash flow in developing our internal budgets, forecasts and strategic plans, in analyzing the effectiveness of our business strategies, in evaluating potential acquisitions, in making compensation decisions and in communications with our board of directors concerning our financial performance. However, free cash flow is not a recognized measurement under U.S. GAAP, should not be used in a manner that inappropriately implies that the measure represents the residual cash flow available for discretionary expenditures, and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP.

Critical accounting policies and estimates

This discussion is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, estimates and judgments are evaluated, including those related to revenue recognition, revenue deductions, product returns, fair value of our common stock, share-based compensation, inventories, definite lived asset impairments, goodwill impairment and income taxes. These estimates and judgments are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates.

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We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the financial statements relate to the following:


•	licensing revenue terms applied to the timing and number of motion picture exhibitor consumer admissions;


•	domestic eyewear product revenue terms applied to when the usage occurs and the amount of usage;


•	effects of allowances that are capitalized on the balance sheet and amortized to the applicable line item on the statement of operations as expense or contra revenue and earned customer incentives when customers do not timely report the activity that results in earned allowance and incentives;


•	impairment testing of goodwill, intangible assets and tangible assets, including determination of relevant reporting units and long-lived asset groups;


•	useful lives of intangible assets and tangible assets;


•	timing and amount recognized for performance-based compensation, including bonus and certain restricted share units, based on projections of our performance achievement;


•	the impact of potential future tax consequences of events that have been recognized in our financial statements;


•	valuation of accruals and allowances;


•	contingency assessments; and


•	assumptions used in the determination of the fair value of equity-based awards for stock-based compensation.

Revenue recognition

We derive substantially all of our revenue from the license of RealD Cinema Systems and the product sale of RealD eyewear. We evaluate revenue recognition for transactions using the criteria set forth by the Financial Accounting Standard Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases, and ASC Topic 605, Revenue Recognition. The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. We record revenue net of estimated lease incentives and other allowances.

We assess revenue arrangements to determine whether multiple deliverables of its products, services and technology exist. For deliverables in multiple-element arrangements, the guidance below is applied for separability and allocation. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met:

•The delivered item(s) has value to the client on a stand-alone basis; and

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accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price. The following revenue policies are then applied to each unit of accounting, as applicable.

License revenue. License revenue, net of lease incentives and other allowances, is accounted for as an operating lease. License revenue is primarily derived under per-admission, percentage of box office, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated lease incentives, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside our control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and we have fulfilled our obligations specific to the contingent payment received. Certain of our license revenue from leasing RealD Cinema Systems is earned upon admission by the motion picture exhibitor’s consumers. Our licensees, however, do not report and pay for such license revenue until after the admission has occurred, which may be received subsequent to our fiscal period end. We estimate and record domestic licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be made. We record our international licensing revenue based on actual amounts reported by motion picture exhibitors. We determine that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee’s admissions report. Revenue is deemed fixed or determinable upon receipt of a licensee’s admissions report or evidence of a RealD box office showing by licensee. We determine collectability based on an evaluation of the licensee’s recent payment history and evaluation of the respective customer’s credit-standing.

Product and other revenue. We recognize product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of our product revenue from the sale of RealD eyewear is earned upon admission and usage by the motion picture exhibitor’s consumers. Our customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received subsequent to our fiscal period end. Accordingly, we estimate and record such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made. Internationally, the motion picture exhibitors prepay for RealD eyewear, which is deferred upon receipt of cash and earned upon shipping and transfer of title of the products. There are not estimates made in relation to international sales.

We recognize other revenue, including service revenue, when the consideration is earned and realized or realizable. Ongoing service revenue is recognized on a straight-line basis over the longer of the contractual term or the expected period during which the specified services will be rendered.

Share-based compensation

We account for share-based awards granted to employees and directors by recording compensation expense based on estimated fair values. We estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. We determine the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under ASC 718, Compensation—Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. Our estimates of the fair values of share-based awards granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, modifications, estimates of forfeitures, and the related income tax impact.

Share-based compensation expense for all share-based arrangements for the three months ended June 30, 2015 and June 30, 2014 was as follows:



	Three months ended June 30
(in thousands)	2015		2014
Share-based compensation
Cost of revenue	$	308	$	191
Research and development	492		626
Selling and marketing	1,286		927
General and administrative	2,327		2,227
Total	$	4,413	$	3,971

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Stock options granted generally vest over a four-year period, with 25% of the shares vesting after one year and monthly vesting thereafter. The options generally expire ten years from the date of grant. For the three months ended June 30, 2015, we granted 0.1 million stock options at a weighted average grant date fair value of $6.66 per share. For the three months ended June 30, 2015 and June 30, 2014, share-based compensation expense related to stock options and our employee stock purchase plan was $1.7 million and $2.6 million, respectively.

Certain of our management-level employees receive performance stock options, which gives the recipient the right to receive common stock that is contingent upon achievement of specified pre-established performance goals over the performance period, which is generally three years subject to the recipient’s continued service with us. The performance goals for the performance stock options are based on the measurement of our total stockholder return, on a percentile basis, compared to a comparable group of companies. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock options equal to or less than the number of performance stock options granted. In June 2013, our Chief Executive Officer’s fiscal year 2013 stock option grant was amended to retroactively change the vesting schedule of the stock option so that it now vests based upon the achievement of performance goals rather than based solely upon Mr. Lewis’ continued service with us. The performance goal is based on the measurement of our total stockholder return, on a percentile basis, compared to a comparable group of companies. The performance period for this performance stock option is between three and five years. For the three months ended June 30, 2015 and June 30, 2014, share based compensation expense related to performance stock options was $0.2 million and $0.2 million, respectively.

Certain of our management-level employees also receive performance stock units, which gives the recipient the right to receive common stock that is contingent upon achievement of specific pre-established performance goals over the performance period, which is generally two years subject to the recipient’s continued service with us. The performance goals are based on achieving certain levels of total licensing revenue over the performance period. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock units between 0% and 200% of the number of performance stock units granted. For the three months ended June 30, 2015 and June 30, 2014, share-based compensation expense related to performance stock units was $1.2 million and $0.1 million, respectively.

Certain of our employees, including certain management level employees, receive time-based restricted stock units. These restricted stock units vest over one to three years based upon a recipient’s continued service with us. For the three months ended June 30, 2015, the Company granted 12 thousand restricted stock units at a weighted average grant date fair value of $12.48 per restricted stock unit. For the three months ended June 30, 2015 and June 30, 2014, share-based compensation expense related to restricted stock units was $1.3 million and $1.2 million, respectively.

Inventories and deferred costs-eyewear

Inventories and deferred costs-eyewear represent RealD eyewear and are substantially all finished goods. Inventories and deferred costs-eyewear are valued at the lower of cost (first-in, first-out method) or market value. At each balance sheet date, we evaluate ending inventories and deferred costs-eyewear for net realizable value. We also evaluate inventories for excess quantities and obsolescence. These evaluations include analysis of expected future average selling prices, projections of future demand and technology changes. In order to state inventories at the lower of cost or market, we maintain reserves against such inventories. If our analysis indicates that market is lower than cost, a write-down of inventories is recorded in cost of revenue in the period the loss is identified. As of June 30, 2015 and March 31, 2015, the inventory reserve as a result of the Company’s net realizable value analyses was $21 thousand and $0.1 million, respectively.

Domestically, we provide RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of RealD eyewear by the motion picture exhibitors’ consumers. Eyewear shipped from inventory is deferred on the shipment date and then amortized to cost of product revenue according to assumptions related to eyewear usage by consumers. Internationally, the motion picture exhibitors prepay us for RealD eyewear ordered. Inventory shipped is recognized as cost of product revenue according to transfer of title. Globally, we may provide a limited amount of RealD eyewear to motion picture studios for marketing purposes. Inventory shipped is recognized as sales and marketing expense.

Impairment of long-lived assets

We review long-lived assets, such as property and equipment, cinema systems, digital projectors and intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or

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cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

For the three months ended June 30, 2015 and June 30, 2014, impairment charges for all impaired RealD Cinema Systems charged to cost of revenue totaled $0.4 million and $1.0 million, respectively.

Deferred tax asset valuation and tax exposures

As of June 30, 2015, we have determined based on the weight of the available evidence, both positive and negative, to provide for a valuation allowance against substantially all of the net deferred tax assets. The current deferred tax assets not reserved for by the valuation allowance are those in foreign jurisdictions or amounts that may be carried back in future years. If there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, we will adjust all or a portion of the applicable valuation allowance in the period when such change occurs.

We are subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, we adjust tax expense to reflect our ongoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results.

Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, the valuation allowance against our deferred tax assets and uncertainty in income tax positions. Our financial position and results of operations may be materially impacted if actual results significantly differ from these estimates or the estimates are adjusted in future periods.

Contingencies and assessments

We are subject to various contingencies and assessments arising in the course of our business, some of which relate to litigation, claims, professional services, customer credits and rebates, system upgrades and maintenances, property taxes, sales and use taxes and tax assessments for goods and services. We consider the likelihood of the loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss, contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals are necessary or the accrued amounts should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on our business, consolidated results of operations, financial condition or cash flows.

Research and development

General and administrative costs

General and administrative costs principally consist of personnel costs related to our executive, legal, finance and human resources staff, professional fees including legal and accounting costs, occupancy costs, public company costs, bad debt expenses and gain and loss from disposition of assets. Additionally, general and administrative costs include sales, use, goods and services tax and value added tax (collectively, the "transaction taxes") as well as property taxes. For our U.S. and some of our international cinema license and product revenue, we absorb the majority of the transaction taxes. The transaction taxes recognized in general and administrative costs were $1.5 million and $1.4 million for the three months ended June 30, 2015 and June 30, 2014, respectively.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)", effective for RealD starting April 1, 2017 (the first quarter of fiscal year 2018). Early application is not permitted. The new standard will be implemented retrospectively with us choosing to either restate prior periods or recognize the cumulative effect; we have not yet selected a transition method.

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The new Topic 606 does not apply to lease contracts within the scope of Topic 840 Leases. The primary objective of ASU 2014-09 is to provide guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Revenue recognition is anticipated to entail more judgment and more estimating than under the current guidance. ASU 2014-09 also changes Topic 360 Property, Plant and Equipment, Topic 350 Intangibles-Goodwill and Other and certain other U.S. GAAP. We have not yet determined the effects of Topic 606 and other ASU 2014-09 revisions on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory", which amended GAAP guidance was issued to simplify the measurement of inventory for all entities. The amendments apply to all inventory that is measured using first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost and net realizable value. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. ASU 2015-11 will be effective for us beginning in fiscal 2018. We elected not to early adopt and is currently evaluating the impact that the adoption of ASU 2015-11 may have on our consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have operations both within the United States and internationally and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks as well as changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by collecting in advance and setting credit limits, as we deem appropriate. In addition, our investment strategy currently has been to invest in financial instruments that are highly liquid, readily convertible into cash and which mature within three months from the date of purchase. We also enter into foreign exchange derivative hedging transactions as part of our risk management program. For accounting purposes, we do not designate any of our derivative instruments as hedges and we do not use derivatives for speculating trading purposes and are not a party to leveraged derivatives.

Interest rate risk

We are exposed to market risk related to changes in interest rates.

Our investments are considered cash equivalents and primarily consist of money market funds. At June 30, 2015, we had cash and cash equivalents of $63.0 million. The carrying amount of cash equivalents reasonably approximates fair value due to the short maturities of these instruments. The primary objective of our investment activities is preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, however, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and therefore, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe our cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits.

Loans outstanding under the 2014 Credit Agreement bear interest at our option at either the Euro currency rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Euro currency rate for a one month Interest Period on such day plus (1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on the Company’s leverage ratio. Under the 2014 Credit Agreement, we are charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility is 0.375% of the unused commitment. Changes in interest rates do not affect operating results or cash flows on our fixed rate borrowings but would impact our variable rate borrowings. As of June 30, 2015, we had $40.7 million in borrowings outstanding under the 2014 Credit Agreement which bore 2.44% weighted average interest.

Foreign currency risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. Our historical revenue has generally been denominated in U.S. dollars, and in recent years, a significant portion of our current revenue has been denominated in U.S. dollars, Chinese yuan, Euro and British pound sterling; however, we expect an increasing portion of our future revenue and operating expenses to be denominated in currencies other than the aforementioned currencies, primarily the Canadian dollar, Latin American currencies, Russian ruble, Japanese yen and Hong Kong dollar. Our operating expenses are generally denominated in the currencies of the countries where our operations are located, primarily the United States and United Kingdom. Increases and decreases in our international revenue from movements in foreign exchange rates are partially offset by the corresponding increases or decreases in our international operating expenses. To further reduce our net exposure to foreign exchange rate fluctuations on our results of operations, we have entered into foreign currency forward contracts.

As of June 30, 2015, we had outstanding forward contracts based on Great Britain Pound and Euro with notional amounts totaling $1.1 million. We do not designate any of our forward contracts as hedges for accounting purposes. For the three months

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ended June 30, 2015, the net gain related to the change in fair value of the Company's foreign currency forward contracts was $0.3 million. For the three months ended June 30, 2014, the net gain (loss) related to the change in fair value of the Company’s foreign currency forward contracts was immaterial. Foreign currency master agreements typically allow the netting of receivables and payables.

As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. As our international operations grow, we expect to conduct more of our business in currencies other than the U.S. dollar, thereby increasing risks associated with fluctuation in currency rates. Currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. As our exposure to currency risks grows, we will continue to reassess our risk management.

Inflation risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Counterparty risk

Our financial statements, including derivatives, are subject to counterparty credit risk, which we consider as part of the overall fair value measurement. We attempt to mitigate this risk through credit monitoring procedures.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Subject to the limitations noted above, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were not effective to meet the objective for which they were designed and operate at the reasonable assurance level as a result of the un-remediated material weakness identified during the audit for the fiscal year ended March 31, 2015.

As described in Item 9A in our Annual Report on Form 10K for the fiscal year ended March 31, 2015, the material weakness in the control environment was a result of our failure to:


•	Maintain a sufficient complement of personnel with appropriate levels of accounting knowledge, experience and training commensurate with the nature and complexity of our business and contract activity;


•	Design and maintain adequate procedures or controls over the accurate recording, presentation and disclosure of revenue and related costs of our non-standard contracts and transactions;


•	Sufficiently monitor our contract terms, customer activities and the related accounting impact;


•	Maintain adequate communications between our sales and finance departments to discuss ongoing exhibitor/ licensee activity that has a financial statement impact; and


•	Maintain adequate review and approval of procedures to check that technical accounting guidance is followed and applied to the elimination of intercompany accounts on a cumulative basis.

This material weakness in internal controls resulted in the untimely identification of errors in the accounting for various transactions in prior periods.

Remediation of Material Weakness in Internal Control over Financial Reporting

Our management is committed to remediating the material weakness. We have initiated a plan to address the identified deficiencies and to enhance our overall financial control environment. We believe the material weakness in the control environment described above was a result of our failure to:


•	maintain sufficient personnel with appropriate levels of accounting knowledge, experience and training commensurate with the nature and complexity of our business and contract activity;


•	design and maintain adequate procedures or controls over the accurate recording, presentation and disclosure of revenue and related costs of our non-standard contracts and transactions;


•	sufficiently monitor our contract terms, customer activities and the related accounting impact;

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•	maintain adequate communications between our sales and finance departments to discuss ongoing exhibitor/ licensee activity that has a financial statement impact; and


•	maintain adequate review and approval of procedures to check that technical accounting guidance is followed and applied to the elimination of intercompany accounts on a cumulative basis.

We have taken, and are continuing to take, the following steps to remediate such deficiencies:


•	hire more finance and accounting personnel with technical accounting expertise to increase bandwidth for review by accounting management;


•	commence a comprehensive risk assessment process to assess risks and identify, design, implement and re-evaluate our control activities to address the risks identified, including implementation of monitoring controls related to the design and operating effectiveness of control activities;


•	review customer contracts to identify, document and monitor customer-specific terms in order to ensure that the financial statements reflect, on a timely basis, the accounting consequences of such provisions, and implement processes to capture information from our sales and finance departments in order to make reasonable estimates of accruals;


•	establish procedures to reconcile, validate and review intercompany balances on a cumulative basis, and in a timely manner;


•	evaluate our training programs and develop additional training programs to ensure proper training of our finance and accounting personnel world-wide;


•	strengthen our policies and procedures and determine guidelines for documentation of controls throughout our domestic and international locations for consistency of design and operations; and


•	upgrade our manual systems to automated and enhance existing automated systems.

We will not consider the material weakness remediated until our controls are operational for a sufficient period of time, tested and management concludes that these controls are operating effectively. We believe that the foregoing actions will support the improvement of our internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

Other than matters discussed in this Item 4, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights, commercial, employment and other matters. Our management believes that losses in excess of the amounts accrued arising from such lawsuits are remote, but that litigation is necessarily uncertain and there is the potential for a material adverse effect on our financial statements if one or more matters are resolved in a particular period in an amount in excess of that anticipated by management.

In March 2014, we filed separate patent lawsuits in the United States District Court for the Central District of California against MasterImage 3D, Inc., et al. ("MasterImage"), for its MI-Horizon 3D products, and against Volfoni Inc., et al. ("Volfoni"), for its SmartCrystal Diamond product. These lawsuits contend that MasterImage and Volfoni are infringing on RealD XL Cinema System intellectual property rights with their respective products. In June 2014, we dismissed the lawsuit against Volfoni without prejudice after Volfoni made specific representations and warranties that it had not sold or distributed and is not selling or distributing its SmartCrystal product in the United States.

In November 2014, we filed a complaint with the United States International Trade Commission ("ITC") and the ITC instituted an investigation under Section 337 of the Tariff Act of 1930 into MasterImage’s allegedly infringing imports into the United States. RealD has requested that the ITC issue an Exclusion Order to bar importation of those MasterImage products and the key components inside those products. We have also sought a Cease and Desist Order to bar further sales and other domestic commercial activities of infringing MasterImage products and key components that have already been imported. The investigation is ongoing before the ITC, and RealD expects the evidentiary hearing to commence in September 2015. Pending the ITC action, RealD and MasterImage have mutually agreed to stay the concurrent proceedings in the US District Court without prejudice.

In May 2015, the Company filed a lawsuit with the Paris First Instance Court against MasterImage 3D PLC, Kinepolis Group and Kinepolis Le Chateau Du Cinema, for infringement of RealD's European patent related to the RealD XL Cinema System 3D cinema projection technology. The action is pending.

Our competitors have filed petitions seeking re-examinations and other challenges to our patents and patent applications in the United States, Europe, Australia, China, Japan and Russia. The Company is vigorously defending against these challenges.

ITEM 1A. RISK FACTORS

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business, results of operations, financial condition and/or liquidity. If any of these events or the following risks actually occur, our business, operating results and financial condition could be materially adversely affected, and you could lose all or part of your investment. We have marked with an asterisk (*) those risk factors that reflect changes from the risk factors included in Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2015, filed with the Securities and Exchange Commission on June 11, 2015.

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Risks relating to our business and our industry

If motion pictures that can be viewed with RealD Cinema Systems are not made or are not commercially successful, our revenue will decline.

Almost all of our revenue is currently dependent upon both the number of 3D motion pictures released and the commercial success of those 3D motion pictures. Although we have produced alternative content in 3D, such as the production of Carmen in 3D with London’s Royal Opera House, we are not actively developing 3D motion pictures or our own 3D content, and therefore, we rely on motion picture studios to produce and release 3D motion pictures compatible with our RealD Cinema Systems. There is no guarantee that the number of 3D motion pictures being released will remain at current levels or increase or that motion picture studios will continue to produce 3D motion pictures at all. Motion picture studios may refrain from producing and releasing 3D motion pictures for any number of reasons, including their lack of commercial success, changes in consumer preferences, the lower-cost to produce 2D motion pictures or the availability of other entertainment options. The commercial success of a 3D motion picture depends on a number of factors that are outside of our control, including whether it achieves critical acclaim, timing of the release, cost, marketing efforts and promotional support for the release. In the past, consumer interest in 3D motion pictures was episodic and motion picture studios tended to use 3D motion pictures as a gimmick rather than as an artistic tool to enhance the viewing experience. Consumer preferences have recently trended toward viewing motion pictures in 2D rather than 3D resulting in weaker box office performance. Weaker box office performance of 3D motion pictures may result in motion picture studios producing fewer 3D motion pictures or motion picture exhibitors may reduce the frequency in which they show motion pictures in 3D or may decide not to show 3D motion pictures at peak movie-going hours. Poor box office performance of 3D motion pictures, disruption or reduction in 3D motion picture production or conversion of 2D motion pictures into 3D motion pictures, changes in release schedules, the inability to see 3D motion pictures at peak hours, cancellations of motion picture releases in 3D versions, a reduction in marketing efforts for 3D motion pictures by motion picture studios or a lack of consumer demand for 3D motion pictures could result in lower 3D motion picture attendance, which would substantially reduce our revenue, which declined in fiscal year 2015 compared to fiscal year 2014. Moreover, films can be subject to delays in production or changes in release schedule, and the slippage of a film’s release date from one accounting period to another could adversely affect our financial condition, results of operations and business.

If motion picture exhibitors do not continue to use our RealD Cinema Systems, negotiate renewals of their licensing agreements for substantially lesser fees or renew with substantial concessions, or if they experience financial difficulties, our growth and results of operations could be adversely affected.

Our primary licensees in the motion picture industry are motion picture exhibitors. Our license agreements with motion picture exhibitors do not obligate these licensees to deploy a specific number of our RealD Cinema Systems. We cannot predict whether any of our existing motion picture exhibitor licensees will continue to perform under their license agreements with us, whether we or any of our existing motion picture exhibitor licensees may now or in the future be in breach of those agreements or whether our existing motion picture exhibitor licensees will renew their license agreements with us at the end of their term. If our existing motion picture exhibitor licensees do not renew their license agreements with us, negotiate renewals of their license agreements for substantially lesser license fees or with substantial concessions, or seek to take advantage of incentive offered related to securing renewals of existing contracts, our revenue would decline, which would adversely affect our business and results of operations. In addition, if motion picture exhibitors reduce or eliminate the number of 3D motion pictures that are exhibited in theaters, then our revenue could be materially and adversely affected, and motion picture studios may not produce and release 3D motion pictures, which could also adversely affect our financial condition, results of operations and business.

In addition, license revenue from Wanda (including AMC), Cinemark and Regal collectively comprised approximately 31% of our gross license revenue in the year ended March 31, 2015, 33% in the year ended March 31, 2014 and 22% in the year ended March 31, 2013. If any of these motion picture exhibitors were to experience financial difficulties, they may be unable to pay us amounts due in a timely fashion or at all, which could substantially reduce our cash flow and materially and adversely impact our financial condition and results of operations. For example, in order to attract more movie-goers, these motion picture exhibitors recently renovated certain of their theaters and installed larger chairs, which not only led to reduced seating capacity, but also resulted in higher ticket prices. If the motion picture exhibitors are unable to attract more movie-goers who are willing to pay higher ticket prices, they could experience financial difficulties, which in turn could adversely affect our financial condition, results of operations and business.

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A deterioration in our relationships with the major motion picture studios could adversely affect our business and results of operations.

The six major motion picture studios accounted for approximately 78% of domestic box office revenue and eight of the top 10 grossing 3D motion pictures in calendar year 2014. Such 3D motion pictures are also released internationally. In addition, for our domestic operations, these major motion picture studios pay us a per use fee for our RealD eyewear. To the extent that our relationship with any of these major motion picture studios deteriorates or any of these studios stop making motion pictures that can be viewed at RealD-enabled theater screens, refuse to co-brand with us, stop using or paying for the use of or reduce the amounts paid for our RealD eyewear in domestic and certain international markets, our costs could increase and our revenue could decline, which would adversely affect our business and results of operations.

Additionally, if consumers' demand for 3D motion pictures declines, then motion picture studios may reduce marketing the 3D aspect of 3D motion pictures which could reduce box office performance of 3D motion pictures and our revenue could be adversely affected.

If the deployment of our RealD Cinema Systems is delayed or not realized, our future prospects could be limited and our business could be adversely affected.

We have license agreements with motion picture exhibitors that give us the right, subject to certain exceptions, to deploy our RealD Cinema Systems if a location under contract is already equipped with our systems. Under the terms of these agreements, the motion picture exhibitor licensees may choose to install additional 3D digital projector systems. However, our license agreements do not obligate our licensees to deploy a specific number of our RealD Cinema Systems. Numerous factors beyond our control could influence when and whether our RealD Cinema Systems will be deployed, including motion picture exhibitors’ ability to fund capital expenditures, or their decision to delay or abandon the conversion of their theaters to digital projection or reduce the number of 3D motion pictures exhibited in their theaters, and our ability to secure adequate supplies of components comprising our RealD Cinema System in any given period. If motion picture exhibitors delay, postpone or decide not to deploy RealD Cinema Systems at the number of screens they have announced, or we are unable to deploy our RealD Cinema Systems in a timely manner, our future prospects could be limited and our business could be adversely affected.

We have a history of net losses and may suffer losses in the future.

While we were profitable in the fiscal year ended March 23, 2012, we incurred net losses in our fiscal years ended 2015, 2014, 2013, 2011, and 2010. Our revenues declined in our fiscal year 2015 as compared to the prior year. If we cannot return to sustainable revenue growth and profitability, our financial condition will deteriorate, and we may be unable to achieve our business objectives.

We may not achieve anticipated cost savings from the implementation of our cost reduction plans and may experience difficulties, delays and unexpected costs in continuing our cost reduction efforts.

We implemented our cost reduction plans to reduce the overall costs of our global operations, and we are seeking further efficiencies in our cost structure, including actively evaluating alternatives for certain of our research and development efforts. Moreover, we announced in December 2014 additional operating expense savings and capital expenditure reductions projected for fiscal year 2016. We may encounter difficulties, delays and unexpected costs in connection with such efforts. Our ability to achieve anticipated savings is dependent upon various business developments, such as the state of development of, and prospects for, our new technologies, some of which are beyond our control. If we are unable to achieve the anticipated savings or benefits to our business in the expected time frame or other unforeseen events occur, our business and results of operations may be adversely affected.

In addition, part of our cost reduction efforts may involve an involuntary reduction in force. For our cost reduction efforts to be successful while at the same time building a framework for future growth, we must continue to execute and deliver on our core business initiatives around the world with fewer human resources and intellectual capital. This will include managing complexities associated with a geographically diverse organization. We must also attract, retain and motivate key employees, including highly qualified management, scientific, manufacturing and sales and marketing personnel who are critical to our business. We may not be able to attract, retain or motivate qualified employees in the future and our inability to do so may adversely affect our business.

We have not yet finalized our cost reduction plan for fiscal year 2016 and there is no guarantee that any net cost reduction will actually be achieved. There may also be other risks associated with our cost reduction efforts and we cannot guarantee that

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we will be able to successfully manage these or other risks. If we fail to execute on our initiatives, such failure could result in a material adverse effect on our business and results of operations.

There can be no assurance that the strategic alternative process will result in pursuing or completing a particular transaction.

In the fourth quarter of our fiscal year ended March 31, 2015, we announced that we had engaged Moelis & Company LLC as our financial advisor to assist in our evaluation of potential strategic alternatives. There can be no assurance that the evaluation of potential strategic alternatives will result in either pursuing or completing a particular transaction. We also may not accurately assess the risks and uncertainties associated with engaging in a strategic alternative, and the anticipated benefits from pursuing any such alternative may not materialize. In addition, undertaking a strategic process could divert management’s time and focus from operating our business, potentially have adverse effects on our existing business relationships and our key employees.

We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

In connection with the preparation of our interim financial statements for the quarter ended December 31, 2014, our management team and independent registered public accounting firm identified certain deficiencies in our internal controls that, when aggregated, were determined to be a material weakness in our internal control over financial reporting. We have initiated a remediation plan to enhance our control procedures for the identified deficiencies, but will not consider the material weakness remediated until our controls are operational for a sufficient period of time, tested and management concludes that these controls are operating effectively. Prior to such time, there remains risk that the transitional controls on which we currently rely will fail to be sufficiently effective, which could result in a material misstatement of our financial position or results of operations and require a restatement of our financial statements.

If we are unable to establish appropriate internal controls, we may not have adequate, accurate or timely financial information, we may be subject to litigation and we may be unable to meet our reporting obligations or comply with the requirements of the SEC or the Sarbanes-Oxley Act of 2002, which could result in the imposition of sanctions, including the inability of registered broker dealers to make a market in our common shares, or investigation by regulatory authorities. Any such action or other negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory requirements or by disclosure of an accounting, reporting or control issue could adversely affect the trading price of our securities. Further and continued determinations that there are significant deficiencies or material weaknesses in the effectiveness of our internal controls could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures to comply with applicable requirements.

Any inability to protect our intellectual property rights could reduce the value of our 3D and other visual technologies and our brands, which could adversely affect our financial condition, results of operations and business.*

Our business is dependent upon our patents, trademarks, trade secrets, copyrights and other intellectual property rights. Effective intellectual property rights protection, however, may not be available under the laws of every country in which we and our licensees operate, such as China. For example, we believe competitors may be introducing cinema systems similar to our RealD Cinema Systems that potentially infringe on our intellectual property rights in China, Russia and other territories to unfairly compete against us. While we are actively engaged in the enforcement and protection of our intellectual property rights, the efforts we have taken may not be sufficient or we may not prevail. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, protecting our intellectual property rights is costly and time consuming. It may not be practicable or cost effective for us to fully protect our intellectual property rights in some countries or jurisdictions. If we are unable to successfully identify and stop unauthorized use of our intellectual property, we could lose potential revenue and experience increased operational and enforcement costs, which could adversely affect our financial condition, results of operations and business.

It is possible that some of our 3D and other visual technologies may not be protectable by patents. In addition, given the costs of obtaining patent protection, we may choose not to protect particular innovations that later turn out to be important. Even where we do have patent protection, the scope of such protection may be insufficient to prevent third parties from designing around our particular patent claims or otherwise avoiding infringement. Furthermore, there is always the possibility that an issued patent may later be found to be invalid or unenforceable, or a competitor may attempt to engineer around our issued patent. Additionally, patents only offer a limited term of protection. Moreover, the intellectual property we maintain as trade secrets could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from those trade secrets.

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Any failure to maintain the security of information relating to our customers, employees, licensees and suppliers, whether as a result of cybersecurity attacks or otherwise, could expose us to litigation, government enforcement actions and costly response measures, and could disrupt our operations and harm our reputation.

In connection with the sales and marketing of our products and our entering into licensing arrangements with motion picture exhibitors, we may from time to time transmit confidential information. We also have access to, collect or maintain private or confidential information regarding our customers, employees, licensees and suppliers, as well as our business. We have procedures in place to safeguard such data and information and as a result of those procedures, to our knowledge, computer hackers have been unable to gain access to the information stored in our information systems. However, cyber-attacks are rapidly evolving and becoming increasingly sophisticated. It is possible that computer hackers and others might compromise our security measures or those that we do business with in the future and obtain the personal information of our customers, employees, licensees and suppliers or our business information. A security breach of any kind could expose us to risks of data loss, litigation, government enforcement actions and costly response measures, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation which could cause us to lose market share and have an adverse effect on our results of operations.

We may in the future be subject to intellectual property rights disputes that are costly to defend, could require us to pay damages and could limit our ability to use particular 3D and other visual technologies in the future.

We may be exposed to, or threatened with, future litigation or any other disputes by other parties alleging that our 3D and other visual technologies infringe their intellectual property rights. Any intellectual property disputes, regardless of their merit, could be time consuming, expensive to litigate or settle and could divert management resources and attention. An adverse determination in any intellectual property dispute could require us to pay damages and/or stop using our 3D and other visual technologies, trademarks, copyrighted works and other material found to be in violation of another party’s rights and could prevent us from licensing our 3D and other visual technologies to others. In order to avoid these restrictions and resolve the dispute, we may have to pay for a license. This license may not be available on reasonable terms, could require us to pay significant license fees and may significantly increase our operating expenses. A license also may not be available to us at all. As a result, we may be required to use and/or develop non-infringing alternatives, which could require significant effort and expense, or which may not be possible. If we cannot obtain a license or develop alternatives for any infringing aspects of our business, we may be forced to limit our 3D and other visual technologies and may be unable to compete effectively. In certain instances, we have contractually agreed to provide indemnification to licensees relating to our intellectual property. This may require us to defend or hold harmless motion picture exhibitors, manufacturers or other licensees. We have from time to time corresponded with one or more third parties regarding patent enforcement issues and in-bound and out-bound patent licensing opportunities. In addition, from time to time we may be engaged in disputes regarding the licensing of our intellectual property rights, including matters related to our license fee rates and other terms of our licensing arrangements. These types of disputes can be asserted by our licensees or prospective licensees or by other third parties as part of negotiations with us or in private actions seeking monetary damages or injunctive relief or in regulatory actions. Requests for monetary and injunctive remedies asserted in claims like these could be material and could have a significant impact on our business. Any disputes with our licensees, potential licensees or other third parties could materially and adversely affect our business, results of operations and prospects.

Our reliance on certain significant suppliers for the raw materials used in our RealD Cinema Systems subjects us to risks which could adversely affect our business.

We rely on certain significant suppliers for the raw materials used in our RealD Cinema Systems, which are critical to our

operations. Our business could be negatively impacted by any financial instability, including insolvency, or any quality or reliability issues with our suppliers’ products, including any undetected or latent defects. In addition, our dependence on these suppliers subjects us to the possible risks of shortages, interruptions and price fluctuations. If any of our suppliers are unable to fulfill their obligations to us, or if we are unable to find replacement suppliers in the event of a supply shortage or disruption, we could incur higher costs to secure adequate supplies and risk using lesser quality products, either of which could materially harm our business. Possible shortages or interruptions in the supply of raw materials caused by the inability of our suppliers to obtain credit in a tightened credit market or other conditions beyond our control could adversely affect the availability, quality and cost of the supply used in our RealD Cinema Systems. Any inability on our part to effectively manage supply chain risk could increase our costs and limit the availability of raw materials that are critical to our operation.

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Our RealD Cinema Systems and other visual technologies are generally designed for use with third-party technologies and hardware, and if we are unable to maintain the ability of our RealD Cinema Systems and other visual technologies to work with these third-party technologies and hardware, our business and operating results could be adversely affected.

Our RealD Cinema Systems and other visual technologies are generally designed for use with third-party technologies and hardware, such as Christie and Barco projectors, Doremi servers, Harkness Hall screens and Sony Electronics 4K SXRD® digital cinema projectors. Third-party technologies and hardware may be modified, re-engineered or removed altogether from the marketplace. In addition, third-party technologies used to interact with our 3D and other visual technologies can change without prior notice to us, which could result in increased costs or our inability to provide our 3D and other visual technologies to our licensees. If we are unable to maintain the ability of our 3D and other visual technologies to work with these third-party technologies and hardware, our business and operating results could be adversely affected.

If we are unable to maintain our brand and reputation for providing high quality 3D and other visual technologies, our business, results of operations and prospects could be materially harmed.

Our business, results of operations and prospects depend, in part, on maintaining and strengthening our brand and reputation for providing high quality 3D and other visual technologies. If problems with our 3D and other visual technologies cause motion picture exhibitors or other licensees to experience operational disruption or failure or delays in the delivery of their products and services to their customers, our brand and reputation could be diminished. Maintaining and strengthening our brand and reputation may be particularly challenging if we enter business segments in which we have limited experience. If we fail to promote and maintain our brand and reputation successfully, our business, results of operations and prospects could be materially harmed.

Competition from other providers of 3D technologies to the motion picture industry could adversely affect our business.

The motion picture industry is highly competitive, particularly among providers of 3D technologies. Our primary competitors include Dolby, Sony, IMAX, MasterImage and Xpand. In addition, other companies, including motion picture exhibitors and studios and smaller competitors in international markets, may develop their own 3D technologies in the future. Consumers may also perceive the quality of 3D technologies delivered by some of our competitors to be equivalent or superior to our 3D technologies. In addition, some of our current or future competitors may enjoy competitive advantages, such as greater financial, technical, marketing and other resources, greater market share and name recognition, ability to develop and be the first to introduce new 3D technologies successfully to the market or more experience or advantages in the business segments in which we compete that will allow them to offer lower prices or higher quality technologies, products or services. If we do not successfully compete with these providers of 3D technologies, we could continue to lose market share and our business could be adversely affected. In addition, competition could force us to decrease prices and cause our margins to decline, which could adversely affect our business. Pricing pressures in both domestic and international motion picture exhibitor markets continue, and no assurance can be given that our margins in future periods will increase.

The introduction of new 3D and other visual technologies and changes in the way that our competitors operate could harm our business. If we fail to keep up with rapidly changing 3D and other visual technologies or the growth of new and existing opportunities, our 3D and other visual technologies could become less competitive or obsolete.*

Due to technological advances and changing consumer tastes, numerous companies have developed, and are expected to continue to develop, new 3D and other visual technologies that may compete directly with or render our 3D and other visual technologies less competitive or obsolete. We believe that original equipment manufacturers may be working to develop laser-based projection technologies, which may compete with, be incompatible with or render our RealD Cinema Systems obsolete. Competitors may develop alternative 3D and other visual technologies that are more attractive to consumers, content producers and distributors, motion picture exhibitors and others, or more cost effective than our technologies, and compete with or render our 3D and other visual technologies less competitive or obsolete. As a result of this competition, we could lose market share, which could harm our business and operating results. If we are unable to develop and effectively market new 3D and other visual technologies that adequately or competitively address the needs of these changing industries, our business, results of operations and prospects could be materially and adversely affected.

In addition, we face competition from companies that enjoy competitive advantages in the industries in which we operate for our research and development projects. Our competitors have greater financial resources than we do, more developed and distribution channels and relationships with manufacturers, and technologies that may be better suited to bring these products to market. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, products, technologies or standards in 3D and other visual technologies and may offer consumers superior technology or lower

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prices which may reduce the demand for visual display devices using our 3D and other visual technologies. As a result, we may not be able to compete successfully in the industries in which we operate for our research and development projects.

If our 3D and other visual technologies fail to be widely adopted by or are not compatible with the needs of our licensees, our business prospects could be limited and our operating results could be adversely affected.

Our licensees depend upon our 3D and other visual technologies being compatible with a wide variety of motion picture and other systems, products and infrastructure. We make significant efforts to design our 3D and other visual technologies to address capability, quality and cost considerations so that they either meet or, where possible, exceed the needs of our licensees. To have our 3D and other visual technologies widely adopted, we must convince a broad spectrum of professional organizations worldwide, as well as motion picture studios and exhibitors and other industry participants, to adopt them, and to ensure that our 3D and other visual technologies are compatible with their systems, products and infrastructure.

If our 3D and other visual technologies are not widely adopted or retained or if we fail to conform our 3D and other visual technologies to the expectations of, or standards set by, industry participants, they may not be compatible with other products and our business, operating results and prospects could be adversely affected. We expect that meeting and maintaining the needs of our licensees for compatibility with them will be significant to our business in the future. In addition, the market for broadcast technologies has traditionally been heavily regulated by governments or other regulatory bodies, and we expect this to continue to be the case in the future. If our 3D and other visual technologies are not compatible with the broadcasting infrastructure or governmental or regulatory requirements in particular geographic areas, our ability to compete in these markets could be adversely affected.

Other forms of entertainment may be more attractive to consumers than those using our 3D and other visual technologies, which could harm our growth and operating results.

We face competition for consumer attention from other forms of entertainment that may drive down motion picture box office and license revenue from motion picture exhibitors. We compete with a number of alternative motion picture distribution channels, such as cable, satellite, broadcast, packaged media and the Internet and business models in these areas continue to evolve rapidly. There are also other forms of entertainment competing for consumers’ leisure time and disposable income such as concerts, amusement parks, sporting events and, from time to time, other major events like the Olympic Games or the World Cup. A significant increase in the popularity of these motion picture channels and competing forms of entertainment could reduce the demand for theatrical exhibition of 3D motion pictures, including those viewed with our RealD Cinema Systems, or the use of 3D-enabled consumer electronics devices, any of which would have an adverse effect on our business and operating results.

We have a limited operating history in several of the industries in which we operate for our research and development projects, which makes it difficult to predict our future prospects and financial performance.*

We have a limited operating history in several of the industries in which we operate for our research and development projects. As such, the potential for future success for our research and development projects will depend on the challenges, uncertainties, expenses and difficulties encountered by us and we cannot predict whether and when any of such projects will be commercially available in the near future or at all. In addition, our research and development projects must be considered in light of our strategic plan to focus on our core business: the innovation and licensing of 3D and other visual technologies for the theater. In connection with this strategic plan, we are actively evaluating alternatives for refocusing and restructuring our research and development efforts through partnering or other means by which we can commercialize these technologies while keeping low or further reducing our cost structure. However, we cannot assure you that any strategic alternative, if identified, evaluated and consummated, will be beneficial to our business or provide greater value to our stockholders.

Our level of indebtedness reduces our financial flexibility and could impede our ability to operate.*

We are highly leveraged. As of June 30, 2015, our total indebtedness was approximately $40.7 million. Our high degree of leverage could have important consequences, including the following: (i) we may not generate sufficient cash flow from operations to service and repay our debt and related obligations and have sufficient funds left over to achieve or sustain profitability in our operations; (ii) we may be unable to meet our working capital and capital expenditure needs in order to compete successfully in our industry, particularly if we increase our debt obligations under our secured credit facility; (iii) we may be limited in our ability to obtain additional financing in the future, including obtaining additional commitments from our revolving credit facility; (iv) we are at a competitive disadvantage to lesser leveraged competitors; (v) we may be limited in our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and (vi) we may be vulnerable to general adverse economic and industry conditions, including changes in interest rates.

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We may borrow additional amounts under our credit facilities to fund various growth initiatives, including accelerated research and product development, acquisitions, capital expenditures and stock repurchases. As of June 30, 2015, $50 million was available under our revolving credit facility, which matures on June 26, 2017, and none was available under our term loan facility, which matures on June 26, 2018.

Our credit facilities require us to pay a variable rate of interest, which will increase or decrease based on variations in certain financial indexes, and fluctuations in interest rates can significantly decrease our profits. We do not have any hedge or similar contracts in place that would protect us against changes in interest rates. There is no assurance that we will be able to refinance our outstanding indebtedness, or if refinancing is available, that it can be obtained on terms we can afford. For more information regarding our credit facilities, see “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources.”

Our credit facilities impose, and the terms of any future indebtedness may impose, significant operating, financial and other restrictions on us and our subsidiaries.

Restrictions imposed by our credit facilities will limit or prohibit, among other things, our ability to:

•incur additional debt;

•make certain investments or acquisitions;

•enter into certain merger and consolidation transactions; and

•sell our assets other than in the ordinary course of business.

We are also required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. If we fail to comply with any of the covenants or if any other event of default, as defined in our credit facilities, should occur, the lenders could elect to prevent us from borrowing and declare the indebtedness to be immediately due and payable.

These restrictions could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities. A breach of any of these restrictions, including breach of financial covenants, could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and fees, to be immediately due and payable and proceed against any collateral securing that indebtedness, which will constitute substantially all of our assets.

Our operating results may fluctuate from quarter to quarter, which may be different from analysts’ expectations and adversely affect our stock price.

Our operating results may fluctuate from quarter to quarter. Factors that have affected our operating results in the past, and are likely to affect our operating results in the future, include, among other things:


•	the timing of when a 3D motion picture is released which tends to be based on specific consumer entertainment dynamics, which results in seasonal patterns, with the largest number of motion pictures being released in summer and early winter;


•	the attendance at 3D versions of motion picture releases;


•	the rate of installations of new RealD Cinema Systems, which we expect to decrease with the passage of time;

•

the timing of capital expenditures and expenses, including depreciation expense of our RealD Cinema Systems deployed at a motion picture exhibitor’s premises (we expect capital expenditures to decrease, and depreciation expense to increase, as our RealD Cinema Systems business matures), digital projector depreciation expenses, RealD eyewear costs (including shipping, handling and recycling costs), field service and support costs, and occupancy costs, which may increase significantly, even in quarters when we do not experience a similar growth in revenue;


•	the timing and accuracy of license fee reports which often include positive or negative corrective or retroactive license fees that cover extended periods of time;

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•	rates of growth in installation of our RealD Cinema Systems overseas, especially in China, Russia and other emerging economies;


•	management of our expenses as we continue to focus on our core strategy, conduct a strategic process and implement our cost reduction plans; and


•	competitive and pricing pressures that vary from market-to-market and place-to-place.

In addition, variances in our operating results from analysts’ expectations could adversely affect our stock price. See also “Management’s discussion and analysis of financial condition and results of operations—Seasonality and quarterly performance.”

We face a number of challenges with respect to the maturity of the domestic digital cinema market, and if motion picture exhibitors do not continue converting analog theaters to digital outside of the United States or the pace of conversion slows, our future prospects could be limited and our business could be adversely affected.

Our RealD Cinema Systems only work in theaters equipped with digital cinema projection systems, which enable 3D motion pictures to be delivered, stored and projected electronically, and our systems are not compatible with analog motion picture projectors. Motion picture exhibitors have been converting projectors from analog to digital cinema over the last several years, giving us the opportunity to deploy our RealD Cinema Systems. After motion picture exhibitors convert their projectors to digital cinema, they must install a polarization preserving screen and our RealD Cinema System to display motion pictures in RealD 3D. The conversion by motion picture exhibitors of their projectors and screens from analog to digital cinema requires significant expense. As of December 31, 2013, approximately 93% of domestic theater screens had converted to digital and approximately 78% of the international theater screens had been converted. We face a number of challenges with respect to the maturity of the domestic digital cinema market, including that the demand for new digital cinema screens has decreased significantly. Future growth in the domestic digital cinema market will depend on a number of factors, including the construction of new theaters, exhibitors choosing to deploy our RealD Cinema Systems versus competing or alternative technologies and our ability to maintain competitive pricing. In addition, if the market for digital cinema overseas develops more slowly than expected, or if the motion picture exhibitors we have agreements with delay or abandon the conversion of their theaters from analog theaters to digital, our ability to grow our revenue and our business could be adversely affected. While DCIP and Cinedigm financing provided funding for the digital conversion of domestic theater screens operated by many of our licensees, there has not yet been a similar effort to organize digital conversion in certain geographies outside North America. If the pace of digital conversion outside of the United States does not follow that which occurred inside the United States, our revenue may not grow or may decline, and our business could be adversely affected.

We have incurred and may in the future incur asset impairment charges.

An asset impairment charge may result from the occurrence of unexpected adverse events or management decisions that impact our estimates of expected cash flows generated from our long-lived assets. We review our long-lived assets for impairment, when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We may be required to recognize asset impairment charges in the future as a result of system upgrades and replacements, reductions in demand for specific technologies, a weak economic environment, challenging market conditions, events related to particular customers or asset type, or as a result of asset or portfolio sale decisions by management.

Additionally, in connection with our cost reduction plans, we intend to relocate our headquarters in Beverly Hills, California, and our operations/research and development facility in Boulder, Colorado, and therefore expect to incur material impairments on leasehold improvements in the future.

We face risks from doing business internationally that could harm our business, financial condition and results of operations.

We are dependent on international business for a significant portion of our total revenue. International gross revenue accounted for approximately 57% in fiscal 2015, 52% in fiscal 2014 and 50% in fiscal 2013. We expect that our international business will continue to represent a significant portion of our total revenue for the foreseeable future. This future revenue will depend to a large extent on the continued use and expansion of our 3D and other visual technologies in the motion picture industry worldwide. As a result, our business is subject to certain risks inherent in international business operations, many of which are beyond our control. These risks include:

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•	competitive and pricing pressures that vary from market-to-market and place-to-place;


•	fluctuating foreign exchange rates and systems;


•	laws and policies affecting trade, investment and taxes, including laws and policies relating to customs, duties, the repatriation of funds and withholding taxes and changes in these laws and our compliance with the foregoing;


•	changes in local regulatory requirements, including restrictions on content;


•	differing cultural tastes and attitudes;


•	differing degrees of protection for intellectual property;


•	the need to adapt our business model to local requirements;


•	difficulties in staffing and managing foreign and geographically dispersed operations;


•	imposition of differing labor laws and standards;


•	the instability of foreign economies and governments; and


•	political instability, natural disaster, war or acts of terrorism.

Events or developments related to these and other risks associated with our international business operations could adversely affect our revenue from such operations, which could have a material and adverse effect on our business, financial condition and results of operations.

Our RealD eyewear may, in the future, be regulated by the Food and Drug Administration, or FDA, or by other state or foreign governmental or regulatory agencies, which could increase our costs and materially and adversely impact our profitability.

Currently, polarized 3D eyewear, including our RealD eyewear, is not regulated by the FDA, or by state or foreign governmental and regulatory agencies. However, certain eyewear, such as non-prescription reading glasses and sunglasses, are considered to be medical devices by the FDA and are subject to regulations imposed by the FDA and various state and foreign governmental and regulatory agencies. With the rising popularity of polarized 3D eyewear, there has been an increasing level of public scrutiny examining its potential health risks. Polarized 3D eyewear, including our RealD eyewear, may at some point be subject to federal, state or foreign regulations that could potentially restrict how our RealD eyewear is produced, used or marketed, and the cost of complying with those regulations may adversely affect our profitability.

If 3D viewing with active or passive eyewear is found to cause health risks or consumers believe that it does, demand for the 3D viewing experience may decrease or we may become subject to liability, any of which could adversely affect our results of operations, financial condition, business and prospects.

Research conducted by institutions unrelated to us has suggested that 3D viewing with active or passive eyewear may cause vision fatigue, eye strain, discomfort, headaches, motion sickness, dizziness, nausea, epileptic seizures, strokes, disorientation, perceptual after-effects, decreased postural stability or other health risks in some consumers. If these potential health risks are substantiated or consumers believe in their validity, demand for the 3D viewing experience in the theater, the home and elsewhere may decline. As a result, major motion picture studios and other content producers and distributors may refrain from developing 3D content, motion picture exhibitors may reduce the number of 3D-enabled screens (including RealD-enabled screens) they currently deploy or plan to deploy, or they may reduce the number of 3D motion pictures exhibited in their theaters, which would adversely affect our results of operations, financial condition and prospects. A decline in consumer demand may also lead to the reduction or abandonment of 3D products, which could adversely affect our prospects and financial condition.

In addition, if health risks associated with our RealD eyewear materialize, we may become subject to governmental regulation or product liability claims, including claims for personal injury. Successful assertion against us of one or a series of large claims could materially harm our business. Also, if our RealD eyewear is found to be defective, we may be required to recall it, which may result in substantial expense and adverse publicity that could adversely impact our sales, operating results and reputation. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded under

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the terms of the policy, which could adversely affect our financial condition. In addition, we may also be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage in the future, which could materially and adversely affect our results of operations, financial condition and business. Even meritless product liability claims could be expensive to resolve and may divert our management’s attention.

Our agreements with motion picture studios domestically and motion picture exhibitors internationally require us to manage the supply chain of our RealD eyewear, and any interruption to the supply chain for our RealD eyewear components could adversely affect our results of operations, financial condition, business and prospects.

Our RealD eyewear is an integral part of our RealD Cinema Systems. We have entered into non-exclusive agreements with several manufacturers to produce RealD eyewear. We manage manufacturing, distribution and recycling of RealD eyewear for motion picture studios and exhibitors worldwide. Domestically, we generally provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors’ customers. Most international motion picture exhibitors and some domestic motion picture exhibitors purchase RealD eyewear directly from us and sell them to consumers as part of their admission or as a concession item. Any interruption in the supply of RealD eyewear from manufacturers, increase in shipping costs, logistics or recycling interruption, other disruption to our global supply chain or competitive pricing pressures could adversely affect our results of operations, financial condition, business and prospects. For example, in connection with major 3D motion picture releases and increased consumer demand, we have in the past exhausted our inventory of RealD eyewear and incurred increased shipping costs to accelerate delivery of new inventory.

Our RealD 3D eyewear business model in North America and a limited number of countries internationally relies on financial support from motion picture studios for the RealD eyewear that are provided to theater customers, and the uncertainty and any potential dispute between motion picture studios and exhibitors could adversely affect our results of operations, financial condition, business and prospects.

Our RealD eyewear is an integral part of our RealD Cinema Systems. In North America, we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors’ customers. In certain territories, motion picture studios provide financial support directly to theater operators for the RealD eyewear that are used by their customers. Elsewhere, motion picture exhibitors purchase RealD eyewear directly from us and sell them to customers as part of their admission or as a concession. While we support multiple business models for our RealD eyewear around the world, the uncertainty and any potential dispute between motion picture studios and exhibitors over the eyewear business model, whether domestically or internationally, could adversely affect our results of operations, financial condition, business and prospects. In addition, we expect that profitability in our RealD eyewear business may not be sustainable, as motion picture studios with whom we do business seek to recover our cost savings and efficiencies in the form of reduced prices for eyewear.

Economic conditions beyond our control could reduce consumer demand for motion pictures and consumer electronics using our 3D and other visual technologies and, as a result, could materially and adversely affect our business, revenue and growth prospects.

Difficult economic conditions and recessionary periods may lead to a decrease indiscretionary consumer spending or consumer preference for lower-cost 2D motion pictures, resulting in lower motion picture box office revenue. In the event of declining box office revenue, motion picture studios may be less willing to release 3D motion pictures and motion picture exhibitors may be less willing to license our RealD Cinema Systems or exhibit 3D motion pictures. Further, a decrease in discretionary consumer spending may adversely affect future demand for consumer electronics products that may use our 3D and other visual technologies and consumer electronics manufacturers may decide to not adopt, limit, delay or cease their use of our 3D and other visual technologies, any of which could cause our business, revenue and growth prospects to suffer.

The loss of members of our management could substantially disrupt our business operations.

Our success depends to a significant degree upon the continued contribution by members of our management . A limited number of individuals have primary responsibility for managing our business, including our relationships with motion picture studios and exhibitors. The loss of members of our management, including Michael V. Lewis, our Chairman and Chief Executive Officer, or the loss of key employees in our accounting or R&D departments or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could impair our ability to sustain and grow our business and could substantially disrupt our business operations. In addition, because we operate in a highly competitive industry, our hiring of qualified executives, scientists, engineers or other personnel may cause us or those persons to be subject to lawsuits alleging misappropriation of trade secrets, improper solicitation of employees, breach of contract or other claims.

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Our ability to use our net operating loss carryforwards to offset future taxable income could be subject to certain limitations if our ownership has changed or will change by more than 50%, which could potentially result in increased future tax liability.*

While currently subject to a full valuation allowance for purposes of preparing our consolidated financial statements (see the discussion under the heading “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates—Deferred tax asset valuation and tax exposures”), we intend to use our U.S. net operating loss carryforwards to reduce any future U.S. corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. In that event, our ability to use our net operating loss carryforwards could be adversely affected. To the extent our use of net operating loss carryforwards is significantly limited under the rules of Section 382 (as a result of our IPO or otherwise), our income could be subject to U.S. corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

Furthermore, we operate both in the United States and in certain jurisdictions outside the United States. Our non-U.S. operations may in the future generate taxable income that is subject to income or other taxes in the jurisdictions in which those operations are conducted. As of June 30, 2015, we had foreign tax credit carryforwards of approximately $18.8 million for federal income tax purposes that begin to expire in the year 2019. Each jurisdiction in which we operate may have its own limitations on our ability to utilize such foreign tax credit carryforwards generated in that jurisdiction. Also, we generally cannot utilize net operating loss carryforwards or tax credits generated in one jurisdiction to reduce our liability for taxes in any other jurisdiction. Accordingly, we may be subject to tax liabilities in certain jurisdictions in which we operate notwithstanding the existence of net operating loss carryforwards or tax credits in other jurisdictions.

Our future growth largely depends on gaining increased market share in China and other emerging economies, and we

face risks in conducting business in these emerging economies.

Our future growth largely depends on gaining increased market share in China and other emerging economies. China is the Company's largest and fastest growing market opportunity. As of March 31, 2015, our RealD Cinema Systems were deployed and operated in approximately 2,050 cinema screens in China, with an additional approximately 1,031 screens under contract within this market. We believe that our sales of products and services in China and other emerging economies will expand in the future to the extent that the use of digital technologies increases in these countries, including in movies and theaters, and as consumers there continue to become more affluent. Our inability to penetrate the Chinese market, in particular, may adversely impact our global market share and growth opportunities. We face many risks associated with operating in China and these other emerging economies, in large part due to limited recognition and enforcement of contractual and intellectual property rights. As a result, we may experience difficulties in enforcing our intellectual property rights in these emerging economies, where intellectual property rights are more difficult to enforce as compared to the United States, Hong Kong, Japan and Europe. We believe that it is critical that we strengthen existing relationships and develop new relationships with entertainment industry participants worldwide to increase our ability to enforce our intellectual property and contractual rights without relying solely on the legal systems in the countries in which we operate. If we are unable to develop, maintain, and strengthen these relationships, our revenue from these countries could be adversely affected.

We face risks associated with international trade and currency exchange.

We maintain sales, marketing and business operations in foreign countries. Consequently, we are exposed to exchange rate fluctuations associated with the local currencies of our foreign business operations, including the Chinese yuan, Russian ruble and Brazilian real. Revenue from our foreign business operations in transactions denominated in local currencies are significant. While we may also derive revenue from our foreign business operations in transactions denominated in U.S. dollars, a substantial portion of our costs from our foreign operations are denominated in the currency of that foreign location. Consequently, exchange rate fluctuations between the U.S. dollar and other currencies could have a material impact on our profitability. In addition, foreign governments may restrict transfers of cash out of the country and control exchange rates. There can be no assurance that we will be able to repatriate our earnings, and at exchange rates that are beneficial to us, which could have a material adverse effect on our business and results of operations.

We have incurred, and may continue to incur, increased costs and demands on our management as a result of

complying with the laws and regulations affecting public companies.

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We have incurred, and may continue to incur, increased costs and demands on our management as a result of complying with the laws and regulations affecting public companies. Upon becoming a public company in July 2010, we began incurring additional general and administrative expenses to comply with the SEC reporting requirements, the listing standards of the New York Stock Exchange, or NYSE, the provisions of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The increased costs associated with operating a public company may negatively affect our operating results and divert our management’s attention from other business concerns.

Changes in accounting may affect our reported earnings and operating income.

U.S. GAAP and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of the Company’s business, such as revenue recognition, film accounting, accounting for pensions and other postretirement benefits, accounting for income taxes, and treatment of goodwill or long lived assets, are highly complex and involve many subjective judgments. Changes in these rules, their interpretation, management’s estimates, or changes in the Company’s products or business could significantly change its reported future earnings and operating income and could add significant volatility to those measures, without a comparable underlying change in cash flow from operations.

Beginning in the first quarter of fiscal year 2014, we modified our definition of Adjusted EBITDA to align with the Adjusted EBITDA definition under our expanded credit facility. As a result, we no longer add back sales and use tax and property tax to calculate Adjusted EBITDA for financial reporting purposes. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the most comparable U.S. GAAP item, see “Non-U.S. GAAP discussion”.

Risks related to owning our common stock

The price of our common stock may fluctuate significantly and you could lose all or part of your investment as a result.*

Shares of our common stock were sold in our IPO in July 2010 at a price of $16.00 per share, and, as of June 30, 2015, our common stock has subsequently traded as high as $35.60 and as low as $6.41. An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares or at all. The market price of our common stock could fluctuate significantly for various reasons, including those factors listed in “—Risks related to our business and our industry” and the following:


•	our quarterly or annual earnings or those of our competitors;


•	the public’s reaction to press releases or other public announcements by us or third parties, including our filings with the SEC;


•	changes in earnings estimates or recommendations by research analysts who track our common stock or the stock of our competitors;


•	investor perceptions or the investment opportunity associated with our common stock relative to other investment;


•	new laws or regulations or new interpretations of laws or regulations applicable to our business;


•	changes in accounting standards, policies, guidance, interpretations or principles;


•	changes in general conditions in the domestic and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;


•	litigation involving our Company or investigations or audits by regulators into the operations of our Company or our competitors;


•	strategic action by our competitors; and


•	sales of common stock by our directors, executive officers and significant stockholders.

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In addition, the stock market in general, and the market for technology and media companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources even if such litigation is without merit and regardless of the outcome of such litigation.

Sales of outstanding shares of our common stock (or shares of our common stock issued upon exercise of stock options) into the market in the future could cause the market price of our stock to drop significantly, even if our business is doing well.*

As of June 30, 2015, we had 50,644,541 shares of common stock outstanding which are freely tradable, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume, manner of sale, notice and availability of public information provisions of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. Our co-founders and certain other pre-IPO stockholders also have registration rights which enable them to cause us to register for sale shares held by them in the public markets. If our existing security holders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline.

In addition, as of June 30, 2015, there were 15,422,411 shares underlying options and restricted stock that were issued and outstanding and we have an aggregate of 5,327,151 shares of common stock reserved for future issuance under our equity incentive plan and employee stock purchase plan. These shares will become eligible for sale in the public market to the extent permitted by the provisions of various option and warrant agreements, maintenance of applicable registration statements and Rules 144 and 701 under the Securities Act. If additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our stock could decline and it might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

Our business could be negatively affected by the actions of activist stockholders, and activist activities could impact the market price of our stock.*

Certain activist stockholders have expressed opposition to the Company’s strategic plan and their intent to take actions designed to prevent full implementation of our strategic plan. Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could also interfere with our ability to execute our strategic plan. The perceived uncertainties as to our future direction and financial performance may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners.

Certain activist stockholders have made strategic proposals, suggestions or requested changes concerning the Company's strategy and operations. We cannot predict, and no assurances can be given, as to the outcome or timing of these matters. Our business could be negatively affected because of the actions of activist stockholders, we may be subject to litigation and our stock price may experience periods of increased volatility as a result.

Our co-founders, directors, executive officers and principal stockholders have substantial control over us and could delay or prevent a change in corporate control.

As of March 31, 2015, our directors and executive officers, together with their affiliates, beneficially owned approximately 14% of our outstanding common stock, including approximately 13% beneficially owned by Michael V. Lewis, our Chairman and Chief Executive Officer.

These stockholders, acting together, have the ability to control, or have significant influence over, the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have the ability to control, or have significant

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influence over, the management and affairs of our Company. Accordingly, this concentration of ownership might harm the market price of our common stock by:


•	delaying, deferring or preventing a change in corporate control;


•	impeding a merger, consolidation, takeover or other business combination involving us; or


•	discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

As a public company, we are required to assess our internal control over financial reporting on an annual basis, and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.*

As a public company, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we need to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on and our independent registered public accounting firm to attest to the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In the quarter ended December 31, 2014, our testing, or the subsequent testing by our independent registered public accounting firm, revealed several deficiencies in our internal control over financial reporting that, when aggregated, led us to determine that we have a material weakness in our internal control over financial reporting. For more information, see the risk factor in this section entitled “We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.” We have begun the process to remediate these deficiencies, but this material weakness has not yet been remedied.

Our compliance with Section 404 requires that we expend significant management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we may be unable to conclude that our internal control over financial reporting is effective. Any failure to develop or maintain effective controls or any difficulties encountered in our implementation of our internal control over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially cause the market price of our common stock to decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be issued to satisfy our obligations under our equity incentive plans, shares that may be issued in connection with our acquisition of other companies, assets or technology, or shares of our authorized but unissued preferred stock. Issuances of common stock or preferred voting stock could reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, likely could result in your interest in us being subject to the prior rights of holders of that preferred stock. In addition, any future issuance of capital stock by us will dilute your economic interest in us.

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.*

We do not expect to pay dividends on shares of our common stock in the foreseeable future, and we intend to use cash generated from operations to continue to grow our business. Consequently, your only opportunity to achieve a positive return on your investment in us will be if the market price of our common stock appreciates.

If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our business or if they downgrade our stock, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. We do not control these analysts. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

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Provisions in our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a change of control of our Company or changes in our management and, therefore, may depress the trading price of our stock.

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our stock by acting to discourage, delay or prevent a change of control of our Company or changes in our management that some of the stockholders of our Company may deem advantageous. Some of these provisions:


•	authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;


•	provide for a classified board of directors (three classes) where only one-third of our board of directors is up for re-election at the annual stockholders meeting each year;


•	provide that stockholders may only remove directors for cause;


•	provide that stockholders may only remove directors prior to the expiration of their term upon a supermajority vote of at least 80% of our outstanding common stock;


•	provide that any vacancy on our board of directors, including a vacancy resulting from an increase in the size of the board, may only be filled by the affirmative vote of a majority of our directors then in office, even if less than a quorum;


•	provide that a special meeting of stockholders may only be called by our board of directors or by our chief executive officer;


•	provide that action by written consent of the stockholders may be taken only if the board of directors first approves such action; provided that, notwithstanding the foregoing, we will hold an annual meeting of stockholders in accordance with NYSE rules, for so long as our shares are listed on NYSE, and as otherwise required by the bylaws;


•	provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and


•	establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

We may also adopt a “poison pill” stockholder rights plan at any time in response to a potentially hostile bid or for any or no reason due to our available “blank check” preferred stock. Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On April 20, 2012, we announced that our board of directors had approved an authorization to repurchase up to $50.0 million of RealD common stock. On December 17, 2012, our board approved a $25 million increase in our stock repurchase plan, increasing the $50 million repurchase plan announced on April 20, 2012 to $75 million. The number of shares to be repurchased and the timing of any potential repurchases will depend on factors such as the Company’s stock price, economic and market conditions, alternative uses of capital, and corporate and regulatory requirements. Repurchases of common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when RealD might otherwise be precluded from doing so under insider trading laws, and a variety of other methods, including open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The repurchase program may be suspended or discontinued at any time.

Pursuant to our stock repurchase plan authorized by our board of directors, we have repurchased a total of 6,599,726 shares of common stock at an average price per share of $10.30, including sales commissions, for an aggregate cost of $67.9 million inception to date. For the three months ended June 30, 2015, there were no stock repurchases.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURE

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The following exhibits are attached hereto and filed herewith:

EXHIBIT INDEX

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

SEC File

No.

Exhibit

Filing Date

Filed

Herewith

3.1

Amended and Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on July 15, 2010.

10-Q

001-34818

3.1

July 29, 2011

3.2

Amended and Restated Bylaws as became effective on July 15, 2010.

10-Q

001-34818

3.2

July 29, 2011

3.3

Amended and Restated Bylaws as amended and restated July 14, 2015.

8-K

001-34818

3.1

July 14, 2015

4.1

Specimen of common stock certificate.

S-1/A

333-165988

4.1

May 26, 2010

4.2

Amended and Restated Investors’ Rights Agreement, dated December 24, 2007, by and among the registrant, the founders and the investors named therein.

S-1/A

333-165988

4.2

May 26, 2010

4.3

Amendment and Agreement to Amended and Restated Investors’ Rights Agreement, dated June 11, 2010, by and among the registrant and the other signatories thereto.

S-1/A

333-165988

4.6

June 29, 2010

4.4

Side letter, dated June 25, 2010, to Amended and Restated Investors’ Rights Agreement, as amended.

S-1/A

333-165988

4.8

June 29, 2010

31.1

Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document.

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101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	RealD Inc.

	By:	/s/ Andrew A. Skarupa
		Andrew A. Skarupa
		Chief Financial Officer
		(Principal Financial Officer)

Date: August 5, 2015

Large accelerated filer

Accelerated filer

Non-accelerated filer

o (Do not check if a smaller reporting company)

Smaller reporting company