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EX-32.1 - EX-32.1 - RLJ ENTERTAINMENT, INC.rlje-ex321_7.htm
EX-31.2 - EX-31.2 - RLJ ENTERTAINMENT, INC.rlje-ex312_8.htm
EX-31.1 - EX-31.1 - RLJ ENTERTAINMENT, INC.rlje-ex311_6.htm
EX-10.1 - EX-10.1 - RLJ ENTERTAINMENT, INC.rlje-ex101_218.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark one)

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

For the quarterly period ended June 30, 2016.

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

For the transition period from ________ to ________.

Commission File Number 001-35675

 

RLJ ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

45-4950432

(State or other jurisdiction of incorporation)

 

(IRS Employer Identification Number)

 

 

 

8515 Georgia Avenue, Suite 650
Silver Spring, Maryland

 

20910

(Address of principal executive offices)

 

(Zip Code)

 

(301) 608-2115

(Registrant’s telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x     NO o

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

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

 

Large accelerated filer   o

 

Accelerated filer   o

 

Non-accelerated filer   o

 

Smaller reporting company   x

 

(Do not check if a smaller reporting company)

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

Number of shares outstanding of the issuer’s common stock on August 9, 2016:  5,056,233

 

 


RLJ ENTERTAINMENT, INC.

INDEX TO FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements  (Unaudited)

4

 

 

 

 

 

 

 

(a)

Consolidated Balance Sheets — June 30, 2016 and December 31, 2015 (audited)

4

 

 

 

 

 

 

 

(b)

Consolidated Statements of Operations — Three and Six Months Ended June 30, 2016 and 2015

5

 

 

 

 

 

 

 

(c)

Consolidated Statements of Comprehensive Income (Loss) — Three and Six Months Ended June 30, 2016 and 2015  

6

 

 

 

 

 

 

 

(d)

Consolidated Statements of Changes in Shareholders’ Deficit — Six Months Ended June 30, 2016 and 2015

7

 

 

 

 

 

 

 

(e)

Consolidated Statements of Cash Flows — Six Months Ended June 30, 2016 and 2015 

8

 

 

 

 

 

 

 

(f)

Notes to Consolidated Financial Statements

9

 

 

 

 

Item 2.

 

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

29

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

40

 

 

 

 

Item 4.

 

Controls and Procedures

40

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

42

 

 

 

 

Item 1A.

 

Risk Factors

42

 

 

 

 

Item 6.

 

Exhibits

43

 

 

 

 

SIGNATURES

44

 

 

 

2


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016, includes forward-looking statements that involve risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Other than statements of historical fact, all statements made in this Quarterly Report are forward-looking, including, but not limited to, statements regarding industry prospects, future results of operations or financial position, and statements of our intent, belief and current expectations about our strategic direction, prospective and future results and condition. In some cases, forward-looking statements may be identified by words such as “will,” “should,” “could,” “may,” “might,” “expect,” “plan,” “possible,” “potential,” “predict,” “anticipate,” “believe,” “estimate,” “continue,” “future,” “intend,” “project” or similar words.

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

 

·

Our financial performance, including our ability to achieve improved results from operations and Adjusted EBITDA;

 

·

The effects of limited cash liquidity on operational performance;

 

·

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

 

·

Our ability to satisfy financial ratios;

 

·

Our ability to generate sufficient cash flows from operating activities;

 

·

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

 

·

Our ability to fund planned capital expenditures and development efforts;

 

·

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

 

·

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

 

·

Delays in the release of new titles or other content;

 

·

The effects of disruptions in our supply chain;

 

·

The loss of key personnel;

 

·

Our public securities’ limited liquidity and trading; or

 

·

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

All forward-looking statements should be evaluated with the understanding of inherent uncertainty. The inclusion of such forward-looking statements should not be regarded as a representation that contemplated future events, plans or expectations will be achieved. Unless otherwise required by law, we undertake no obligation to release publicly any updates or revisions to any such forward-looking statements that may reflect events or circumstances occurring after the date of this Quarterly Report. Important factors that could cause or contribute to such material differences include those discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K filed on April 15, 2016. You are cautioned not to place undue reliance on such forward-looking statements.

 

 

 

3


PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

RLJ ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2016 (unaudited) and December 31, 2015

 

 

 

June 30,

 

 

December 31,

 

(In thousands, except share data)

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

4,457

 

 

$

4,530

 

Accounts receivable, net

 

 

11,180

 

 

 

23,886

 

Inventories, net

 

 

7,029

 

 

 

8,325

 

Investments in content, net

 

 

59,213

 

 

 

60,407

 

Prepaid expenses and other assets

 

 

639

 

 

 

833

 

Property, equipment and improvements, net

 

 

1,686

 

 

 

1,815

 

Equity investment in affiliate

 

 

17,484

 

 

 

20,098

 

Other intangible assets, net

 

 

9,005

 

 

 

9,233

 

Goodwill

 

 

14,631

 

 

 

14,631

 

Assets of discontinued operations

 

 

2,397

 

 

 

6,870

 

Total assets

 

$

127,721

 

 

$

150,628

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

13,956

 

 

$

16,370

 

Accrued royalties and distribution fees

 

 

48,859

 

 

 

51,552

 

Deferred revenue

 

 

1,616

 

 

 

1,203

 

Debt, net of discounts and debt issuance costs

 

 

61,054

 

 

 

61,250

 

Deferred tax liability

 

 

1,839

 

 

 

1,839

 

Stock warrant and other derivative liabilities

 

 

12,861

 

 

 

10,678

 

Liabilities of discontinued operations

 

 

2,331

 

 

 

7,560

 

Total liabilities

 

 

142,516

 

 

 

150,452

 

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

   shares authorized; 31,046 shares issued and outstanding at June 30, 2016 and

   December 31, 2015; liquidation preference of $33,940 at June 30, 2016 and

   $32,617 at December 31, 2015

 

 

23,636

 

 

 

21,346

 

Shareholders' Deficit:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 250,000,000 shares authorized, 4,717,324

   shares issued and 4,711,091 shares outstanding at June 30, 2016; and

   4,717,324 shares issued and outstanding at December 31, 2015

 

 

5

 

 

 

5

 

Additional paid-in capital

 

 

83,747

 

 

 

85,400

 

Accumulated deficit

 

 

(119,163

)

 

 

(105,514

)

Accumulated other comprehensive loss

 

 

(3,020

)

 

 

(1,061

)

Treasury shares, at cost, 6,233 shares at June 30, 2016 and zero at

   December 31, 2015

 

 

 

 

 

 

Total shareholders' deficit

 

 

(38,431

)

 

 

(21,170

)

Total liabilities and shareholders' deficit

 

$

127,721

 

 

$

150,628

 

 

See accompanying notes to consolidated financial statements.

 

 

4


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three and Six Months Ended June 30, 2016 and 2015

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands, except share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

15,790

 

 

$

19,953

 

 

$

33,531

 

 

$

40,491

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Content amortization and royalties

 

 

6,725

 

 

 

11,646

 

 

 

15,070

 

 

 

23,364

 

Manufacturing and fulfillment

 

 

4,298

 

 

 

4,898

 

 

 

8,606

 

 

 

10,301

 

Total cost of sales

 

 

11,023

 

 

 

16,544

 

 

 

23,676

 

 

 

33,665

 

Gross profit

 

 

4,767

 

 

 

3,409

 

 

 

9,855

 

 

 

6,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

2,222

 

 

 

2,219

 

 

 

4,346

 

 

 

5,770

 

General and administrative expenses

 

 

4,650

 

 

 

4,076

 

 

 

9,495

 

 

 

9,144

 

Depreciation and amortization

 

 

645

 

 

 

763

 

 

 

1,269

 

 

 

1,304

 

Total operating expenses

 

 

7,517

 

 

 

7,058

 

 

 

15,110

 

 

 

16,218

 

LOSS FROM CONTINUING OPERATIONS

 

 

(2,750

)

 

 

(3,649

)

 

 

(5,255

)

 

 

(9,392

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

709

 

 

 

438

 

 

 

1,208

 

 

 

688

 

Interest expense, net

 

 

(2,190

)

 

 

(2,581

)

 

 

(4,395

)

 

 

(5,524

)

Change in fair value of stock warrants and other derivatives

 

 

5,993

 

 

 

7,140

 

 

 

(2,184

)

 

 

7,637

 

Other income (expense)

 

 

(757

)

 

 

161

 

 

 

(730

)

 

 

(615

)

INCOME (LOSS) FROM CONTINUING OPERATIONS

   BEFORE PROVISION FOR INCOME TAXES

 

 

1,005

 

 

 

1,509

 

 

 

(11,356

)

 

 

(7,206

)

Provision for income taxes

 

 

 

 

 

(264

)

 

 

(41

)

 

 

(582

)

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

1,005

 

 

 

1,245

 

 

 

(11,397

)

 

 

(7,788

)

LOSS FROM DISCONTINUED OPERATIONS,

   NET OF INCOME TAXES

 

 

(1,179

)

 

 

(1,791

)

 

 

(2,252

)

 

 

(3,388

)

NET LOSS

 

$

(174

)

 

$

(546

)

 

$

(13,649

)

 

$

(11,176

)

 

See accompanying notes to consolidated financial statements.

 

 

5


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

Three and Six Months Ended June 30, 2016 and 2015

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(174

)

 

$

(546

)

 

$

(13,649

)

 

$

(11,176

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(1,400

)

 

 

1,012

 

 

 

(1,959

)

 

 

643

 

Total comprehensive income (loss)

 

$

(1,574

)

 

$

466

 

 

$

(15,608

)

 

$

(10,533

)

 

See accompanying notes to consolidated financial statements.

 

 

6


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(Unaudited)

Six Months Ended June 30, 2016 and 2015

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

(In thousands)

 

Shares

 

 

Par

Value

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income

 

 

Shares

 

 

At

Cost

 

 

Total

Equity

 

Balance at January 1, 2016

 

 

4,717

 

 

$

5

 

 

$

85,400

 

 

$

(105,514

)

 

$

(1,061

)

 

 

 

 

$

 

 

$

(21,170

)

Forfeiture of restricted common stock

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

Accretion on preferred stock

 

 

 

 

 

 

 

 

(2,290

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,290

)

Stock-based compensation

 

 

 

 

 

 

 

 

637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

637

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,959

)

 

 

 

 

 

 

 

 

(1,959

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,649

)

 

 

 

 

 

 

 

 

 

 

 

(13,649

)

Balance at June 30, 2016

 

 

4,711

 

 

$

5

 

 

$

83,747

 

 

$

(119,163

)

 

$

(3,020

)

 

 

6

 

 

$

 

 

$

(38,431

)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

(In thousands)

 

Shares

 

 

Par

Value

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Shares

 

 

At

Cost

 

 

Total

Equity

 

Balance at January 1, 2015

 

 

4,445

 

 

$

5

 

 

$

87,715

 

 

$

(50,534

)

 

$

(729

)

 

 

390

 

 

$

 

 

$

36,457

 

Issuance of restricted common stock for

   services

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

Forfeiture of restricted common stock

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

Forfeiture of founder shares

 

 

(146

)

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

437

 

 

 

 

 

 

 

Accretion of preferred stock dividends

 

 

 

 

 

 

 

 

(459

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(459

)

Stock-based compensation

 

 

 

 

 

 

 

 

154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

154

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

643

 

 

 

 

 

 

 

 

 

643

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,176

)

 

 

 

 

 

 

 

 

 

 

 

(11,176

)

Balance at June 30, 2015

 

 

4,293

 

 

$

4

 

 

$

87,411

 

 

$

(61,710

)

 

$

(86

)

 

 

833

 

 

$

 

 

$

25,619

 

 

See accompanying notes to consolidated financial statements.

 

 

7


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30, 2016 and 2015

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,649

)

 

$

(11,176

)

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

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

(1,208

)

 

 

(688

)

Content amortization and royalties

 

 

15,225

 

 

 

23,679

 

Depreciation and amortization

 

 

2,242

 

 

 

2,375

 

Foreign currency exchange (gain) loss

 

 

824

 

 

 

282

 

Fair value adjustment of stock warrant and other derivative liabilities

 

 

2,184

 

 

 

(7,637

)

Non-cash interest expense

 

 

1,030

 

 

 

2,035

 

Stock-based compensation expense

 

 

637

 

 

 

154

 

Dividends received from affiliate

 

 

1,701

 

 

 

1,729

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

13,126

 

 

 

7,255

 

Inventories, net

 

 

3,166

 

 

 

647

 

Investments in content, net

 

 

(17,061

)

 

 

(18,052

)

Prepaid expenses and other assets

 

 

1,117

 

 

 

(720

)

Accounts payable and accrued liabilities

 

 

(7,049

)

 

 

(7,844

)

Deferred revenue

 

 

(214

)

 

 

(991

)

Net cash provided by (used in) operating activities

 

 

2,071

 

 

 

(8,952

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(743

)

 

 

(878

)

Net cash used in investing activities

 

 

(743

)

 

 

(878

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of preferred stock and warrants

 

 

 

 

 

22,500

 

Repayment of senior debt

 

 

(1,225

)

 

 

(11,225

)

Payment of preferred stock and warrant issuance costs

 

 

 

 

 

(744

)

Payment of senior debt modification costs

 

 

 

 

 

(450

)

Net cash (used in) provided by financing activities

 

 

(1,225

)

 

 

10,081

 

Effect of exchange rate changes on cash

 

 

(176

)

 

 

319

 

NET (DECREASE) INCREASE IN CASH:

 

 

(73

)

 

 

570

 

Cash at beginning of period

 

 

4,530

 

 

 

6,662

 

Cash at end of period

 

$

4,457

 

 

$

7,232

 

 

See accompanying notes to consolidated financial statements.

 

 

8


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

RLJ Entertainment, Inc. (or RLJE) is a global entertainment company with a direct presence in North America, the United Kingdom (or U.K.) and Australia with strategic sublicense and distribution relationships covering Europe, Asia and Latin America.  RLJE was incorporated in Nevada in April 2012.  On October 3, 2012, we completed the business combination of RLJE, Image Entertainment, Inc. (or Image) and Acorn Media Group, Inc. (or Acorn Media), which is referred to herein as the “Business Combination.”  Acorn Media includes its subsidiaries RLJE International Ltd (or RLJE U.K.), RLJ Entertainment Australia Pty Ltd. (or RLJE Australia) and RLJ Entertainment Ltd (or RLJE Ltd.).  In February 2012, Acorn Media acquired a 64% ownership of Agatha Christie Limited (or ACL).  References to Image include its wholly-owned subsidiary Image/Madacy Home Entertainment, LLC.  “We,” “our” or “us” refers to RLJE and its subsidiaries unless otherwise noted.  Our principal executive offices are located in Silver Spring, Maryland, with additional locations in Woodland Hills, California and Stillwater, Minnesota. We also have offices internationally in London, England and Sydney, Australia.

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

 

·

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

 

·

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

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

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

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

On June 24, 2016, we entered into a licensing agreement with Universal Screen Arts (or Universal) whereby Universal took over our Acorn U.S. catalog/ecommerce business becoming the official, exclusive, direct-to-consumer seller of Acorn product in the U.S. During the quarter, we also ceased electronic email distribution of our Acacia catalogs. As a result of these actions, we have classified the U.S. catalog/ecommerce business as discontinued operations.  

RLJE’s management views the operations of the Company based on these three distinctive reporting segments: (1) IP Licensing, (2) Wholesale and (3) Direct-to-Consumer.  Operations and net assets that are not associated with any of these stated segments are reported as “Corporate” when disclosing and discussing segment information.  The IP Licensing segment includes intellectual property rights that we own or create and then sublicense for exploitation worldwide.  Our Wholesale and Direct-to-Consumer segments consist of the acquisition, content enhancement and worldwide exploitation of exclusive content in various formats, including broadcast (which includes cable and satellite), DVD, Blu-ray, digital, video-on-demand (or VOD), SVOD, downloading and sublicensing.  The Wholesale segment exploits content through third-party vendors, while the Direct-to-Consumer segment exploits the same content via digitally streaming channels.  

Basis of Presentation

Unaudited Interim Financial Statements

The consolidated financial information presented in the accompanying unaudited interim consolidated financial statements as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 has been prepared in accordance with accounting

9


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

principles generally accepted in the United States (or U.S. GAAP) and with the Securities and Exchange Commission’s (or SEC) instructions for interim financial reporting instructions for the Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements.

In management’s opinion, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Due to the seasonal nature of our business, with a disproportionate amount of sales occurring in the fourth quarter and other factors, including our content release schedule, interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying unaudited financial information should, therefore, be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K filed on April 15, 2016 (or 2015 Form 10-K). Note 2, Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2015 Form 10-K contains a summary of our significant accounting policies. As of June 30, 2016, we have made no material changes to our significant accounting policies disclosed in our 2015 Form 10-K.

Reverse Stock Split

We filed an amendment to our Amended and Restated Articles of Incorporation to effect a one-for-three reverse common stock split, which was effective June 24, 2016. We implemented the reverse stock split to maintain compliance with the listing requirements of the NASDAQ Capital Market. There can be no assurance that the reverse stock split will have the desired effect of raising the closing bid price of the common stock to meet the minimum bid requirement. All share numbers and per-share amounts, including net income (loss) per common share, presented in our consolidated financial statements and notes reflect the one-for-three reverse stock split applied on a retroactive basis. In addition, we retroactively reclassified total par value of $9,000 from common stock to additional paid-in capital.

Fair Value of Financial Instruments

The carrying amount of our financial instruments, which principally include cash, accounts receivable, accounts payable and accrued expenses, approximates fair value due to the relative short maturity of such instruments. The carrying amount of our debt under our senior credit agreement approximates fair value as the debt bears market rates of interest. The carrying amount of our subordinated debt, which includes accrued interest, is $1.3 million more than its fair value of $8.3 million as a result of its reduced interest rate from 12.0% to 1.5% for two years beginning January 1, 2015. The fair value of subordinated debt was determined by discounting future interest and principal payments by an estimated market rate of interest of 12.0%. This fair value assessment of our subordinated debt is a level 3 measurement as provided by Accounting Standards Codification (or ASC) 820, “Fair Value Measurements and Disclosures.”

Reclassifications and Adoption of Accounting Pronouncement

During the second quarter of 2016, we reclassified our U.S. catalog/ecommerce business assets, liabilities and operating results and presented them separately as discontinued operations in our consolidated balance sheets and statements of operations. We made this reclassification retroactively for all periods presented. As necessary, our footnote disclosures were updated to reflect this reclassification.

Certain amounts reported previously in our consolidated financial statements have been reclassified or adjusted to be comparable with the classifications used for our 2016 consolidated financial statements. We are now reporting technology infrastructure costs associated with delivering our subscription-based SVOD channels within cost of sales as manufacturing and fulfillment. For the six months ended June 30, 2015, we reclassified $0.9 million of these costs from selling expenses to cost of sales in our consolidated statement of operations. For the three months ended June 30, 2015, we reclassified $0.4 million of these costs from selling expenses to cost of sales.

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

10


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

Principles of Consolidation

The operations of ACL are subject to oversight by ACL’s Board of Directors. The investment in ACL is accounted for using the equity method of accounting given the voting control of the Board of Directors by the minority shareholder. We have included our share of ACL’s operating results as a separate line item in our consolidated financial statements.

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

Income (Loss) per Common Share

Basic income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Dilutive income per share is computed using the combination of dilutive common share equivalents and the weighted‑average shares outstanding during the period. For the periods reporting net income from continuing operations after adjusting for accretion on preferred stock, we present our income per share separately for our restricted and unrestricted common stock using the two-class method per ASC 260, Earnings Per Share. Our unvested restricted shares of common stock are presented separately as they participate in non-forfeitable dividends prior to vesting. For the periods reporting a net loss from continuing operations after adjusting for accretion on preferred stock, all reported net losses are allocated to our unrestricted common stock and the reported diluted loss per share is equivalent to the basic loss per share, as inclusion of common share equivalents would be anti-dilutive.

Liquidity

For the six months ended June 30, 2016 and 2015, we recognized a net loss of $13.6 million and $11.2 million, respectively, and we generated $2.1 million of cash from operating activities during the six months ended June 30, 2016. At June 30, 2016, our cash balance was $4.5 million. At June 30, 2016, we had $61.1 million of term debt outstanding (see Note 7, Debt). We continue to experience liquidity constraints as we have several competing demands on our available cash and cash that may be generated from operations. (1) We continue to have significant past-due vendor payables. These past-due payables are largely a result of significant past-due vendor payables acquired in 2012 when purchasing Image. As we work to catch up on the acquired past-due payables, we have fallen behind on other payables. We continue to work with our vendors to make payment arrangements that are agreeable with them and that give us flexibility in terms of when payments will be made. (2) We are forecasting that we may need to make an accelerated principal payment, which may be significant, on our senior debt during the fourth quarter of 2016 in order to meet our bank covenants.  This is because our bank covenants become more restrictive during the fourth quarter of 2016. For example, our senior debt‑to‑Adjusted EBITDA ratio goes from 3.64 : 1.00 currently to 2.67 : 1.00. For us to meet these more restrictive bank covenants, we will need to improve our Adjusted EBITDA and/or pay down our senior debt balance. (3) We must maintain a certain level of content spend necessary to acquire new content that allows us to generate the revenues and margins necessary to meet our obligations.

We have taken actions to improve our operating results and Adjusted EBITDA in 2016 by exiting certain non-core operations that have been generating losses. During December 2015, we approved and started implementing a plan to close our Acacia catalog operations and electronically distributed the last catalogs during May 2016. Further, on June 24, 2016, we entered into a licensing agreement to outsource the U.S. Acorn catalog/ecommerce business to Universal (see our Discontinued Operations disclosure below).  We are also evaluating our options in terms of raising additional capital by issuing equity securities, convertible notes or a combination of both, as well as refinancing our existing senior debt. There can be no assurances that we will be able to secure additional capital or be able to refinance our senior debt. While our ability to meet our commitments is not dependent upon these efforts, if we were to complete one of these transactions, it would help to address our liquidity risk. We believe that our current financial position combined with our 2016 forecasted operational results and management efforts will be sufficient to meet our commitments. However, there can be no assurances that we will be successful in realizing improved results from operations including improved adjusted EBITDA, generating sufficient cash flows from operations necessary to meet our future covenant requirements, or agreeing with vendors revised payment terms.

11


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

Discontinued Operations

During December 2015, we committed to a plan to stop circulating our Acacia catalogs and to liquidate the catalog’s inventory. The last Acacia print catalogs were circulated in January 2016 and electronic email distribution continued through May 2016. On June 24, 2016, we entered into a licensing agreement to outsource our U.S. Acorn catalog and ecommerce business to Universal. We anticipate that Universal will start selling Acorn video content by September 2016.

Under the licensing agreement, Universal became the official, exclusive, direct-to-consumer seller of U.S. Acorn product. As such, Universal received the rights to the Acorn catalog and related website for an 18-month period, subject to certain automatic renewals. To facilitate the transfer of the catalog to Universal, we granted Universal access to the catalog’s customer list and the Acorn brand.  Going forward, we will also endeavor to provide Universal with an exclusivity period for new Acorn releases. Universal is responsible for all costs associated with their efforts.  On an annual basis, Universal will purchase from us a minimum of $1.2 million of inventory (Acorn video content) at pricing that is consistent with wholesale pricing. However, we have agreed to a one-time transfer of certain existing inventory to Universal at cost.  Further, we have been given meaningful consultation rights regarding sales prices listed in the catalog of Acorn content. As of June 30, 2016, no inventory amounts have been sold to Universal.

In addition to purchasing inventory from us, Universal will also make a royalty payment to us for the various rights we have licensed. The royalty payment is not expected to be material. Further, all customer and marketing data obtained during the license period shall be jointly owned by both companies.

We consider the outsourcing of the U.S. Acorn catalog to be a major strategic shift in our business. Future revenues and gross margins will decrease. However, operating profits will increase as we have historically incurred significant selling expenses that will be eliminated. Upon circulating the last Acacia catalog and entering into the licensing agreement with Universal during the quarter ended June 30, 2016, we classified the U.S. catalog/ecommerce business (Acacia and U.S. Acorn catalogs) as discontinued operations. Prior to being classified as discontinued operations, these operations were included in the Direct-to-Consumer reporting segment. Going forward, our Direct-to-Consumer segment will consist of our proprietary subscription channels, which are Acorn TV, UMC and Acacia TV; and our U.K. direct-to-consumer Acorn catalog, which is immaterial.

Major classes of line items constituting loss from discontinued operations, net of income taxes are:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

2,078

 

 

$

4,160

 

 

$

7,143

 

 

$

9,738

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty expense

 

 

(49

)

 

 

(146

)

 

 

(155

)

 

 

(315

)

Manufacturing and fulfillment

 

 

(1,657

)

 

 

(2,519

)

 

 

(5,691

)

 

 

(5,884

)

Selling expenses

 

 

(716

)

 

 

(2,425

)

 

 

(2,213

)

 

 

(4,995

)

General and administrative expenses

 

 

(174

)

 

 

(414

)

 

 

(364

)

 

 

(861

)

Depreciation and amortization

 

 

(661

)

 

 

(447

)

 

 

(972

)

 

 

(1,071

)

Loss before provision for income taxes

 

 

(1,179

)

 

 

(1,791

)

 

 

(2,252

)

 

 

(3,388

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

$

(1,179

)

 

$

(1,791

)

 

$

(2,252

)

 

$

(3,388

)

 

As of June 30, 2016, no gain or loss has been recognized from the disposal of U.S. catalog/ecommerce assets other than gross profit from the sale of inventory. As we liquidate the catalogs’ inventories, gross margins have decreased, but inventories continue to be sold at a profit. There are no income taxes allocable to the discontinued operations as the discontinued operations reside in the U.S. for which there is no tax provision as a result of the overall U.S. operating loss for tax purposes.

12


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

Carrying amounts of major classes of assets and liabilities included as part of discontinued operations are:

 

 

 

June 30,

 

 

December 31,

 

(In thousands)

 

2016

 

 

2015

 

Accounts receivable, net

 

$

424

 

 

$

1,111

 

Inventories, net

 

 

408

 

 

$

2,417

 

Prepaid expenses and other assets

 

 

192

 

 

 

1,136

 

Property, equipment and improvements, net

 

 

203

 

 

 

670

 

Other intangible assets, net

 

 

1,170

 

 

 

1,536

 

Total assets of discontinued operations

 

$

2,397

 

 

$

6,870

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

2,260

 

 

$

6,863

 

Deferred revenue

 

 

71

 

 

 

697

 

Total liabilities of discontinued operations

 

$

2,331

 

 

$

7,560

 

 

During the quarter ended June 30, 2016, we assessed the remaining useful lives of property, equipment and improvements and other intangible assets held by the discontinued operations. As a result, we recorded accelerated depreciation and amortization of $0.3 million. Because Universal is licensing our customer list, for which we retained a shared ownership, we made no changes as to how we are amortizing our other intangible assets.

On June 28, 2016, we provided lay-off notices to our U.S. catalog/ecommerce business employees and recorded a severance charge of $0.1 million. To receive their severance benefits, a number of employees are required to provide services through August 31, 2016. For those employees, we will accrue additional severance of $0.2 million during the quarter ending September 30, 2016.

By September 2016, we will have vacated our office space in Minnesota. Our lease in Minnesota requires us to make average monthly payments of $12,500 through June 2022.  We have begun discussions with our landlord regarding early termination of the lease and we have started to look for a sublease tenant. Depending on how those efforts develop, we may need to provide an expense pertaining to our future lease obligation and leasehold improvements once we vacate the facility in the third quarter of 2016.

Operating and investing cash flows of the discontinued operations are as follows:

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,252

)

 

$

(3,388

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Royalty expense

 

155

 

 

315

 

Depreciation and amortization

 

 

972

 

 

 

1,071

 

Stock-based compensation expense

 

 

27

 

 

 

7

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

687

 

 

 

138

 

Inventories, net

 

 

2,009

 

 

 

(205

)

Prepaid expenses and other assets

 

 

944

 

 

 

(317

)

Accounts payable and accrued liabilities

 

 

(4,758

)

 

 

(2,824

)

Deferred revenue

 

 

(626

)

 

 

351

 

Net cash used in operating activities

 

$

(2,842

)

 

$

(4,852

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(139

)

 

$

(549

)

Net cash used in investing activities

 

$

(139

)

 

$

(549

)

 

13


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

By classifying our U.S. catalog/ecommerce business as discontinued operations our reported revenues from continuing operations and the per-share amounts were impacted as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands, except share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues – from continuing operations – as reported

 

$

15,790

 

 

$

19,953

 

 

$

33,531

 

 

$

40,491

 

Revenues – discontinued operations

 

 

2,078

 

 

 

4,160

 

 

 

7,143

 

 

 

9,738

 

Revenues – without discontinued operations classification

 

$

17,868

 

 

$

24,113

 

 

$

40,674

 

 

$

50,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Revenues per Common Share - Unrestricted and

   Restricted: