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EX-32.1 - EX-32.1 - RLJ ENTERTAINMENT, INC.rlje-ex321_6.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_7.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark one)

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

For the quarterly period ended September 30, 2016.

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

For the transition period from ________ to ________.

Commission File Number 001-35675

 

RLJ ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

45-4950432

(State or other jurisdiction of incorporation)

 

(IRS Employer Identification Number)

 

 

 

8515 Georgia Avenue, Suite 650
Silver Spring, Maryland

 

20910

(Address of principal executive offices)

 

(Zip Code)

 

(301) 608-2115

(Registrant’s telephone number, including area code)

 

None

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

 

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

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

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

 

Large accelerated filer  

 

Accelerated filer  

 

Non-accelerated filer  

 

Smaller reporting company  

 

(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      No

Number of shares outstanding of the issuer’s common stock on November 8, 2016:  5,240,085

 

 


RLJ ENTERTAINMENT, INC.

INDEX TO FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements  (Unaudited)

4

 

 

 

 

 

 

 

(a)

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

4

 

 

 

 

 

 

 

(b)

Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2016 and 2015

5

 

 

 

 

 

 

 

(c)

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

6

 

 

 

 

 

 

 

(d)

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

7

 

 

 

 

 

 

 

(e)

Consolidated Statements of Cash Flows — Nine Months Ended September 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

30

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

43

 

 

 

 

Item 4.

 

Controls and Procedures

43

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

45

 

 

 

 

Item 1A.

 

Risk Factors

45

 

 

 

 

Item 6.

 

Exhibits

46

 

 

 

 

SIGNATURES

47

 

 

 

2


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended September 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, which we define as earnings before income tax, depreciation, amortization, adjusted for cash investment in content, interest expense, loss on extinguishment of debt, goodwill impairments, severance costs, costs to modify debt, change in fair value of stock, warrants and other derivatives, stock-based compensation, basis-difference amortization in equity earnings of affiliate, non-cash foreign currency exchange loss (gain) and loss from discontinued operations;

 

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; or

 

Our public securities’ limited liquidity and trading.

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

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

 

 

 

September 30,

 

 

December 31,

 

(In thousands, except share data)

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

1,474

 

 

$

4,530

 

Accounts receivable, net

 

 

11,263

 

 

 

23,886

 

Inventories, net

 

 

6,546

 

 

 

8,325

 

Investments in content, net

 

 

66,573

 

 

 

60,407

 

Prepaid expenses and other assets

 

 

1,127

 

 

 

833

 

Property, equipment and improvements, net

 

 

1,546

 

 

 

1,815

 

Equity investment in affiliate

 

 

18,148

 

 

 

20,098

 

Other intangible assets, net

 

 

9,602

 

 

 

9,233

 

Goodwill

 

 

14,631

 

 

 

14,631

 

Assets of discontinued operations

 

 

299

 

 

 

6,870

 

Total assets

 

$

131,209

 

 

$

150,628

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

13,736

 

 

$

16,370

 

Accrued royalties and distribution fees

 

 

56,480

 

 

 

51,552

 

Deferred revenue

 

 

1,864

 

 

 

1,203

 

Debt, net of discounts and debt issuance costs

 

 

60,662

 

 

 

61,250

 

Deferred tax liability

 

 

1,839

 

 

 

1,839

 

Stock warrant and other derivative liabilities

 

 

13,788

 

 

 

10,678

 

Liabilities of discontinued operations

 

 

1,423

 

 

 

7,560

 

Total liabilities

 

 

149,792

 

 

 

150,452

 

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

   authorized; 31,046 shares issued and 30,198 outstanding at September 30, 2016 and

   31,046 shares issued and outstanding December 31, 2015; liquidation preference

   of $33,684 at September 30, 2016 and $32,617 at December 31, 2015

 

 

24,173

 

 

 

21,346

 

Shareholders' Deficit:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 250,000,000 shares authorized, 5,240,085

   shares issued and outstanding at September 30, 2016; and

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

 

 

5

 

 

 

5

 

Additional paid-in capital

 

 

83,791

 

 

 

85,400

 

Accumulated deficit

 

 

(123,123

)

 

 

(105,514

)

Accumulated other comprehensive loss

 

 

(3,429

)

 

 

(1,061

)

Treasury shares, at cost, zero shares at  September 30, 2016 and

   December 31, 2015

 

 

 

 

 

 

Total shareholders' deficit

 

 

(42,756

)

 

 

(21,170

)

Total liabilities and shareholders' deficit

 

$

131,209

 

 

$

150,628

 

 

See accompanying notes to consolidated financial statements.

 

 

4


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three and Nine Months Ended September 30, 2016 and 2015

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(In thousands, except share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

18,351

 

 

$

25,963

 

 

$

51,882

 

 

$

66,454

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Content amortization and royalties

 

 

7,887

 

 

 

12,552

 

 

 

22,957

 

 

 

35,916

 

Manufacturing and fulfillment

 

 

3,425

 

 

 

5,811

 

 

 

12,031

 

 

 

16,112

 

Total cost of sales

 

 

11,312

 

 

 

18,363

 

 

 

34,988

 

 

 

52,028

 

Gross profit

 

 

7,039

 

 

 

7,600

 

 

 

16,894

 

 

 

14,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

2,536

 

 

 

2,296

 

 

 

6,882

 

 

 

8,066

 

General and administrative expenses

 

 

4,068

 

 

 

4,422

 

 

 

13,563

 

 

 

13,566

 

Depreciation and amortization

 

 

831

 

 

 

1,094

 

 

 

2,100

 

 

 

2,398

 

Total operating expenses

 

 

7,435

 

 

 

7,812

 

 

 

22,545

 

 

 

24,030

 

LOSS FROM CONTINUING OPERATIONS

 

 

(396

)

 

 

(212

)

 

 

(5,651

)

 

 

(9,604

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

990

 

 

 

188

 

 

 

2,198

 

 

 

876

 

Interest expense, net

 

 

(2,222

)

 

 

(2,223

)

 

 

(6,617

)

 

 

(7,747

)

Change in fair value of stock warrants and other derivatives

 

 

(1,222

)

 

 

(2,506

)

 

 

(3,406

)

 

 

5,131

 

Other income (expense)

 

 

(42

)

 

 

(782

)

 

 

(772

)

 

 

(1,397

)

LOSS FROM CONTINUING OPERATIONS

   BEFORE PROVISION FOR INCOME TAXES

 

 

(2,892

)

 

 

(5,535

)

 

 

(14,248

)

 

 

(12,741

)

Provision for income taxes

 

 

(151

)

 

 

(49

)

 

 

(192

)

 

 

(631

)

LOSS FROM CONTINUING OPERATIONS,

   NET OF INCOME TAXES

 

 

(3,043

)

 

 

(5,584

)

 

 

(14,440

)

 

 

(13,372

)

LOSS FROM DISCONTINUED OPERATIONS,

   NET OF INCOME TAXES

 

 

(917

)

 

 

(1,562

)

 

 

(3,169

)

 

 

(4,950

)

NET LOSS

 

 

(3,960

)

 

 

(7,146

)

 

 

(17,609

)

 

 

(18,322

)

Accretion on preferred stock

 

 

(1,473

)

 

 

(1,066

)

 

 

(3,763

)

 

 

(1,525

)

NET LOSS ATTRIBUTABLE TO COMMON

   SHAREHOLDERS

 

$

(5,433

)

 

$

(8,212

)

 

$

(21,372

)

 

$

(19,847

)

Net loss per common share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.97

)

 

$

(1.56

)

 

$

(4.08

)

 

$

(3.51

)

Discontinued operations

 

 

(0.20

)

 

 

(0.36

)

 

 

(0.71

)

 

 

(1.17

)

Basic and diluted net loss per common share attributable

   to common shareholders

 

$

(1.17

)

 

$

(1.92

)

 

$

(4.79

)

 

$

(4.68

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

4,640

 

 

 

4,266

 

 

 

4,463

 

 

 

4,243

 

 

See accompanying notes to consolidated financial statements.

 

 

5


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

Three and Nine Months Ended September 30, 2016 and 2015

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(3,960

)

 

$

(7,146

)

 

$

(17,609

)

 

$

(18,322

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(409

)

 

 

(607

)

 

 

(2,368

)

 

 

36

 

Total comprehensive loss

 

$

(4,369

)

 

$

(7,753

)

 

$

(19,977

)

 

$

(18,286

)

 

See accompanying notes to consolidated financial statements.

 

 

6


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(Unaudited)

Nine Months Ended September 30, 2016 and 2015

 

 

 

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, 2016

 

 

4,717

 

 

$

5

 

 

$

85,400

 

 

$

(105,514

)

 

$

(1,061

)

 

 

 

 

$

 

 

$

(21,170

)

Issuance of restricted common stock for services

 

 

217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

 

Forfeiture of restricted common stock

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

Conversion of preferred stock

 

 

312

 

 

 

 

 

 

1,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,232

 

Accretion on preferred stock

 

 

 

 

 

 

 

 

(3,763

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,763

)

Stock-based compensation

 

 

 

 

 

 

 

 

922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

922

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,368

)

 

 

 

 

 

 

 

 

(2,368

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(17,609

)

 

 

 

 

 

 

 

 

 

 

 

(17,609

)

Balance at September 30, 2016

 

 

5,240

 

 

$

5

 

 

$

83,791

 

 

$

(123,123

)

 

$

(3,429

)

 

 

 

 

$

 

 

$

(42,756

)

 

 

 

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

)

 

 

130

 

 

$

 

 

$

36,457

 

Issuance of restricted common stock for

   services

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

Forfeiture of restricted common stock

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

Forfeiture of founder shares

 

 

(146

)

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

146

 

 

 

 

 

 

 

Accretion on preferred stock

 

 

 

 

 

 

 

 

(1,525

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,525

)

Stock-based compensation

 

 

 

 

 

 

 

 

213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

213

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

 

 

 

 

 

 

36

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(18,322

)

 

 

 

 

 

 

 

 

 

 

 

(18,322

)

Balance at September 30, 2015

 

 

4,292

 

 

$

4

 

 

$

86,404

 

 

$

(68,856

)

 

$

(693

)

 

 

283

 

 

$

 

 

$

16,859

 

 

See accompanying notes to consolidated financial statements.

 

 

7


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30, 2016 and 2015

 

 

 

Nine Months Ended September 30,

 

(In thousands)

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(17,609

)

 

$

(18,322

)

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

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

(2,198

)

 

 

(876

)

Content amortization and royalties

 

 

23,152

 

 

 

36,355

 

Depreciation and amortization

 

 

3,167

 

 

 

3,819

 

Foreign currency exchange loss

 

 

900

 

 

 

1,102

 

Fair value adjustment of stock warrant and other derivative liabilities

 

 

3,406

 

 

 

(5,131

)

Non-cash interest expense

 

 

1,512

 

 

 

2,516

 

Stock-based compensation expense

 

 

922

 

 

 

213

 

Loss on disposal of fixed assets

 

 

187

 

 

 

 

Dividends received from affiliate

 

 

1,701

 

 

 

1,729

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

13,205

 

 

 

2,957

 

Inventories, net

 

 

4,034

 

 

 

1,339

 

Investments in content, net

 

 

(24,779

)

 

 

(29,597

)

Prepaid expenses and other assets

 

 

695

 

 

 

(389

)

Accounts payable and accrued liabilities

 

 

(8,010

)

 

 

(6,242

)

Deferred revenue

 

 

(36

)

 

 

(2,575

)

Net cash provided by (used in) operating activities

 

 

249

 

 

 

(13,102

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,006

)

 

 

(1,297

)

Net cash used in investing activities

 

 

(1,006

)

 

 

(1,297

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of preferred stock and warrants

 

 

 

 

 

22,500

 

Repayment of senior debt

 

 

(2,100

)

 

 

(11,837

)

Payment of preferred stock and warrant issuance costs

 

 

 

 

 

(783

)

Payment of senior debt modification costs

 

 

 

 

 

(450

)

Net cash (used in) provided by financing activities

 

 

(2,100

)

 

 

9,430

 

Effect of exchange rate changes on cash

 

 

(199

)

 

 

114

 

NET DECREASE IN CASH:

 

 

(3,056

)

 

 

(4,855

)

Cash at beginning of period

 

 

4,530

 

 

 

6,662

 

Cash at end of period

 

$

1,474

 

 

$

1,807

 

 

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 an additional location in Woodland Hills, California. We also have international offices 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 directly to consumers through our proprietary subscription-based SVOD channels, such as Acorn TV and UMC (or Urban Movie Channel). We also sell video content and complementary merchandise in the U.K. 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 September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 has been prepared in accordance with

9


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

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

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 September 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. 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 $1.1 million more than its fair value of $8.5 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 nine months ended September 30, 2015, we reclassified $1.3 million of these costs from selling expenses to cost of sales in our consolidated statement of operations. For the three months ended September 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)

 

Recently Issued Accounting Pronouncement

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how cash receipts and cash payments are classified in the statement of cash flows. It provides guidance on eight specific cash flow issues. The accounting standard update will be effective for us on January 1, 2018, on a retrospective basis, although early adoption is permitted. We are currently evaluating the guidance and evaluating its impact on our consolidated financial statements.

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 nine months ended September 30, 2016 and 2015, we recognized a net loss of $17.6 million and $18.3 million, respectively, and we generated $0.2 million of cash from operating activities during the nine months ended September 30, 2016. At September 30, 2016, our cash balance was $1.5 million. At September 30, 2016, we had $60.7 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. 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. Additionally, we must maintain a certain level of expenditures to acquire new content that allows us to generate revenues and margins sufficient to meet our obligations.

In 2016, we have taken actions to improve our operating results and Adjusted EBITDA 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. The last Acacia print catalogs were circulated in January 2016 and electronic email distribution continued through 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). As of September 30, 2016, our U.S. catalog/ecommerce business has been fully transitioned to Universal, and as such we do not anticipate future losses from this line of business.

On October 14, 2016, we refinanced our senior debt and amended our preferred stock, subordinated notes payable and certain warrants (see Note 15, Subsequent Events). After repayment of our senior debt, including the payment of certain expenses, we received net proceeds of $8.5 million from this refinancing. In addition to providing us liquidity at closing, the new facility helps us address our liquidity constraints going forward in three ways: (1) it bears a substantially lower cash-interest rate, (2) except for a $5.0 million principal payment after one year, there are no required principal payments until the end of the fifth year, and (3) the

11


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

financial covenants have been reset to less restrictive levels reducing the potential need for an additional principal payment to remain in compliance.

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 or agreeing with vendors on revised payment terms.

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. Universal began selling Acorn video content during the third quarter of 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. Sales to Universal began during the third quarter of 2016.

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. During the three months ended September 30, 2016, our Wholesale segment recognized revenues of $0.2 million from its sale of inventory to Universal.

We consider the outsourcing of the U.S. Acorn catalog to be a major strategic shift in our business. Future revenues and gross margins from our outsourced operations 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 September 30,

 

 

Nine Months Ended September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

626

 

 

$

6,586

 

 

$

7,769

 

 

$

16,324

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty expense

 

 

(40

)

 

 

(124

)

 

 

(195

)

 

 

(439

)

Manufacturing and fulfillment

 

 

(532

)

 

 

(4,021

)

 

 

(6,223

)

 

 

(9,905

)

Selling expenses

 

 

(129

)

 

 

(3,284

)

 

 

(2,280

)

 

 

(8,279

)

General and administrative expenses

 

 

(561

)

 

 

(369

)

 

 

(986

)

 

 

(1,230

)

Depreciation and amortization

 

 

(94

)

 

 

(350

)

 

 

(1,067

)

 

 

(1,421

)

Loss on disposal of fixed assets

 

 

(187

)

 

 

 

 

 

(187

)

 

 

 

Loss before provision for income taxes

 

 

(917

)

 

 

(1,562

)

 

 

(3,169

)

 

 

(4,950

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

$

(917

)

 

$

(1,562

)

 

$

(3,169

)

 

$

(4,950

)

 

12


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

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.

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

 

 

 

September 30,

 

 

December 31,

 

(In thousands)

 

2016

 

 

2015

 

Accounts receivable, net

 

$

174

 

 

$

1,111

 

Inventories, net

 

 

 

 

 

2,417

 

Prepaid expenses and other assets

 

 

125

 

 

 

1,136

 

Property, equipment and improvements, net

 

 

 

 

 

670

 

Other intangible assets, net

 

 

 

 

 

1,536

 

Total assets of discontinued operations

 

$

299

 

 

$

6,870

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

1,423

 

 

$

6,863

 

Deferred revenue

 

 

 

 

 

697

 

Total liabilities of discontinued operations

 

$

1,423

 

 

$

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 during the second quarter of 2016. 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 were required to provide services through October 2016. For those employees, we accrued additional severance of $0.2 million during the quarter ending September 30, 2016.

In September 2016, we vacated our office space in Minnesota. Our lease in Minnesota requires us to make average monthly payments of $12,500 through June 2022. We subleased our office space effective Octobe