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EX-32.1 - EX-32.1 - RLJ ENTERTAINMENT, INC.rlje-ex321_8.htm
EX-31.2 - EX-31.2 - RLJ ENTERTAINMENT, INC.rlje-ex312_6.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 June 30, 2017.

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

For the transition period from ________ to ________.

Commission File Number 001-35675

 

RLJ ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

45-4950432

(State or other jurisdiction of incorporation)

 

(IRS Employer Identification Number)

 

 

 

8515 Georgia Avenue, Suite 650
Silver Spring, Maryland

 

20910

(Address of principal executive offices)

 

(Zip Code)

 

(301) 608-2115

(Registrant’s telephone number, including area code)

 

None

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

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer  

Non-accelerated filer  

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

Emerging growth company

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

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

Number of shares outstanding of the issuer’s common stock on August 3, 2017:  13,559,204

 

 


RLJ ENTERTAINMENT, INC.

INDEX TO FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements  (Unaudited)

4

 

 

 

 

 

 

 

(a)

Consolidated Balance Sheets — June 30, 2017 and December 31, 2016 (audited)

4

 

 

 

 

 

 

 

(b)

Consolidated Statements of Operations — Three and Six Months Ended June 30, 2017 and 2016

5

 

 

 

 

 

 

 

(c)

Consolidated Statements of Comprehensive Loss — Three and Six Months Ended June 30, 2017 and 2016  

6

 

 

 

 

 

 

 

(d)

Consolidated Statements of Changes in Shareholders’ Equity — Six Months Ended June 30, 2017

7

 

 

 

 

 

 

 

(e)

Consolidated Statements of Cash Flows — Six Months Ended June 30, 2017 and 2016 

8

 

 

 

 

 

 

 

(f)

Notes to Consolidated Financial Statements

9

 

 

 

 

Item 2.

 

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

26

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

37

 

 

 

 

Item 4.

 

Controls and Procedures

37

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

38

 

 

 

 

Item 1A.

 

Risk Factors

38

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

 

Item 6.

 

Exhibits

38

 

 

 

 

SIGNATURES

39

 

 

 

2


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2017, includes forward-looking statements that involve risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Other than statements of historical fact, all statements made in this Quarterly Report are forward-looking, including, but not limited to, statements regarding industry prospects, future results of operations or financial position, and statements of our intent, belief and current expectations about our strategic direction, prospective and future results and condition. In some cases, forward-looking statements may be identified by words such as “will,” “should,” “could,” “may,” “might,” “expect,” “plan,” “possible,” “potential,” “predict,” “anticipate,” “believe,” “estimate,” “continue,” “future,” “intend,” “project” or similar words.

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

 

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

 

Our ability to continue to increase the revenues and financial performance of our digital channels having a positive effect on our liquidity, cash flows and operating results

 

The effects of limited cash liquidity on operational performance;

 

Our obligations under the credit agreement;

 

Our ability to satisfy financial ratios;

 

Our ability to generate sufficient cash flows from operating activities;

 

Our ability to fund planned capital expenditures and development efforts;

 

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

 

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

 

Our ability to realize anticipated synergies and other efficiencies in connection with the AMC transaction;

 

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 March 23, 2017. 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, 2017 (unaudited) and December 31, 2016

 

 

 

June 30,

 

 

December 31,

 

(In thousands, except share data)

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

12,247

 

 

$

7,834

 

Accounts receivable, net

 

 

10,858

 

 

 

19,569

 

Inventories, net

 

 

5,901

 

 

 

6,215

 

Investments in content, net

 

 

65,384

 

 

 

60,737

 

Prepaid expenses and other assets

 

 

1,317

 

 

 

798

 

Property, equipment and improvements, net

 

 

1,268

 

 

 

1,336

 

Equity investment in affiliate

 

 

17,595

 

 

 

16,491

 

Other intangible assets, net

 

 

8,353

 

 

 

9,309

 

Goodwill

 

 

13,857

 

 

 

13,691

 

Total assets

 

$

136,780

 

 

$

135,980

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

10,766

 

 

$

11,995

 

Accrued royalties and distribution fees

 

 

46,883

 

 

 

55,614

 

Deferred revenue

 

 

2,183

 

 

 

2,152

 

Debt, net of discounts and debt issuance costs

 

 

50,629

 

 

 

42,053

 

Deferred tax liability

 

 

1,803

 

 

 

1,715

 

Stock warrant and other derivative liabilities

 

 

13,146

 

 

 

9,763

 

Total liabilities

 

 

125,410

 

 

 

123,292

 

Commitments and contingencies (see Note 13)

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

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

   authorized; 31,046 shares issued; 15,198 shares outstanding at June 30, 2017

   and 30,198 shares outstanding at December 31, 2016; liquidation preference

   of $17,993 at June 30, 2017 and $34,366 at December 31, 2016

 

 

19,872

 

 

 

38,708

 

Common stock, $0.001 par value, 250,000,000 shares authorized, 13,510,254

   shares issued and outstanding at June 30, 2017; and 5,240,085

   shares issued and outstanding at December 31, 2016

 

 

14

 

 

 

5

 

Additional paid-in capital

 

 

129,961

 

 

 

106,059

 

Accumulated deficit

 

 

(134,615

)

 

 

(127,388

)

Accumulated other comprehensive loss

 

 

(3,862

)

 

 

(4,696

)

Total shareholders' equity

 

 

11,370

 

 

 

12,688

 

Total liabilities and shareholders' equity

 

$

136,780

 

 

$

135,980

 

 

See accompanying notes to consolidated financial statements.

 

 

4


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three and Six Months Ended June 30, 2017 and 2016

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands, except share data)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

18,833

 

 

$

15,790

 

 

$

32,720

 

 

$

33,531

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Content amortization and royalties

 

 

6,261

 

 

 

6,725

 

 

 

12,329

 

 

 

15,070

 

Manufacturing and fulfillment

 

 

2,829

 

 

 

4,298

 

 

 

5,881

 

 

 

8,606

 

Total cost of sales

 

 

9,090

 

 

 

11,023

 

 

 

18,210

 

 

 

23,676

 

Gross profit

 

 

9,743

 

 

 

4,767

 

 

 

14,510

 

 

 

9,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

2,875

 

 

 

2,222

 

 

 

5,159

 

 

 

4,346

 

General and administrative expenses

 

 

4,716

 

 

 

4,650

 

 

 

9,239

 

 

 

9,495

 

Depreciation and amortization

 

 

904

 

 

 

645

 

 

 

1,777

 

 

 

1,269

 

Total operating expenses

 

 

8,495

 

 

 

7,517

 

 

 

16,175

 

 

 

15,110

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

1,248

 

 

 

(2,750

)

 

 

(1,665

)

 

 

(5,255

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

869

 

 

 

709

 

 

 

1,420

 

 

 

1,208

 

Interest expense, net

 

 

(2,152

)

 

 

(2,190

)

 

 

(4,038

)

 

 

(4,395

)

Change in fair value of stock warrants and other derivatives

 

 

(491

)

 

 

5,993

 

 

 

(3,383

)

 

 

(2,184

)

(Loss) Gain on extinguishment of debt

 

 

(425

)

 

 

 

 

 

470

 

 

 

 

Other income (expense), net

 

 

161

 

 

 

(757

)

 

 

445

 

 

 

(730

)

(LOSS) INCOME FROM CONTINUING OPERATIONS

   BEFORE PROVISION FOR INCOME TAXES

 

 

(790

)

 

 

1,005

 

 

 

(6,751

)

 

 

(11,356

)

Provision for income taxes

 

 

(315

)

 

 

 

 

 

(476

)

 

 

(41

)

(LOSS) INCOME FROM CONTINUING OPERATIONS,

   NET OF INCOME TAXES

 

 

(1,105

)

 

 

1,005

 

 

 

(7,227

)

 

 

(11,397

)

LOSS FROM DISCONTINUED OPERATIONS,

   NET OF INCOME TAXES

 

 

 

 

 

(1,179

)

 

 

 

 

 

(2,252

)

NET LOSS

 

 

(1,105

)

 

 

(174

)

 

 

(7,227

)

 

 

(13,649

)

Accretion on preferred stock

 

 

(379

)

 

 

(1,164

)

 

 

(756

)

 

$

(2,290

)

NET LOSS ATTRIBUTABLE TO COMMON

   SHAREHOLDERS

 

$

(1,484

)

 

$

(1,338

)

 

$

(7,983

)

 

$

(15,939

)

Net loss per common share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.24

)

 

$

(0.04

)

 

$

(1.40

)

 

$

(3.13

)

Discontinued operations

 

 

 

 

 

(0.27

)

 

 

 

 

 

(0.51

)

Basic and diluted net loss per common share attributable

   to common shareholders

 

$

(0.24

)

 

$

(0.31

)

 

$

(1.40

)

 

$

(3.64

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

6,196

 

 

 

4,373

 

 

 

5,691

 

 

 

4,373

 

 

See accompanying notes to consolidated financial statements.

 

 

5


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

Three and Six Months Ended June 30, 2017 and 2016

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(1,105

)

 

$

(174

)

 

$

(7,227

)

 

$

(13,649

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

782

 

 

 

(1,400

)

 

 

834

 

 

 

(1,959

)

Total comprehensive loss

 

$

(323

)

 

$

(1,574

)

 

$

(6,393

)

 

$

(15,608

)

 

See accompanying notes to consolidated financial statements.

 

 

6


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

Six months ended June 30, 2017

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

(In thousands)

 

Preferred

Stock

 

 

Shares

 

 

Par

Value

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Comprehensive

Loss

 

 

Total

Equity

 

Balance at January 1, 2017

 

$

38,708

 

 

 

5,240

 

 

$

5

 

 

$

106,059

 

 

$

(127,388

)

 

$

(4,696

)

 

$

12,688

 

Issuance of restricted common stock for

   services

 

 

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock to AMC for interest

 

 

 

 

 

609

 

 

 

1

 

 

 

1,688

 

 

 

 

 

 

 

 

 

1,689

 

Exercise of warrants for common stock

 

 

 

 

 

1,685

 

 

 

2

 

 

 

2,872

 

 

 

 

 

 

 

 

 

2,874

 

Conversion of preferred stock

 

 

(19,592

)

 

 

5,906

 

 

 

6

 

 

 

19,586

 

 

 

 

 

 

 

 

 

 

Accretion on preferred stock

 

 

756

 

 

 

 

 

 

 

 

 

(756

)

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

512

 

 

 

 

 

 

 

 

 

512

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

834

 

 

 

834

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,227

)

 

 

 

 

 

(7,227

)

Balance at June 30, 2017

 

$

19,872

 

 

 

13,510

 

 

$

14

 

 

$

129,961

 

 

$

(134,615

)

 

$

(3,862

)

 

$

11,370

 

 

See accompanying notes to consolidated financial statements.

 

 

7


RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30, 2017 and 2016

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,227

)

 

$

(13,649

)

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

 

 

 

 

 

 

 

 

Equity earnings of affiliate

 

 

(1,420

)

 

 

(1,208

)

Content amortization and royalties

 

 

12,329

 

 

 

15,225

 

Depreciation and amortization

 

 

1,777

 

 

 

2,242

 

Foreign currency exchange (gain) loss

 

 

(475

)

 

 

824

 

Fair value adjustment of stock warrant and other derivative liabilities

 

 

3,383

 

 

 

2,184

 

Non-cash interest expense

 

 

3,221

 

 

 

1,030

 

Gain on extinguishment of debt

 

 

(470

)

 

 

 

Stock-based compensation expense

 

 

512

 

 

 

637

 

Dividends received from affiliate

 

 

1,243

 

 

 

1,701

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

8,859

 

 

 

13,126

 

Inventories, net

 

 

416

 

 

 

3,166

 

Investments in content, net

 

 

(25,584

)

 

 

(17,061

)

Prepaid expenses and other assets

 

 

(494

)

 

 

1,117

 

Accounts payable and accrued liabilities

 

 

(373

)

 

 

(7,049

)

Deferred revenue

 

 

31

 

 

 

(214

)

Net cash (used in) provided by operating activities

 

 

(4,272

)

 

 

2,071

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(816

)

 

 

(743

)

Net cash used in investing activities

 

 

(816

)

 

 

(743

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds received from AMC to amend debt

 

 

18,000

 

 

 

 

Proceeds from exercise of warrants

 

 

28

 

 

 

 

Repayment of debt

 

 

(8,618

)

 

 

(1,225

)

Payment of debt modification costs

 

 

(71

)

 

 

 

Net cash provided by (used in) financing activities

 

 

9,339

 

 

 

(1,225

)

Effect of exchange rate changes on cash

 

 

162

 

 

 

(176

)

NET INCREASE (DECREASE) IN CASH:

 

 

4,413

 

 

 

(73

)

Cash at beginning of period

 

 

7,834

 

 

 

4,530

 

Cash at end of period

 

$

12,247

 

 

$

4,457

 

 

See accompanying notes to consolidated financial statements.

 

 

8


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

RLJ Entertainment, Inc. (RLJE or the Company) is a premium digital channel company serving distinct audiences through its proprietary subscription-based digital channels, Acorn TV and UMC or Urban Movie Channel, and 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 U.K. subsidiaries RLJ Entertainment Ltd (or RLJE Ltd.), Acorn Media Enterprises Limited (or AME), and RLJE International Ltd (collectively, RLJE UK), as well as RLJ Entertainment Australia Pty Ltd (or RLJE Australia). In February 2012, Acorn Media acquired a 64% ownership of Agatha Christie Limited (or ACL). References to Image include its wholly-owned subsidiary Image/Madacy Home Entertainment, LLC. “We,” “our” or “us” refers to RLJE and its subsidiaries unless otherwise noted. Our principal executive offices are located in Silver Spring, Maryland, with an additional location in Woodland Hills, California. We also have international offices in London, England and Sydney, Australia.

We acquire content rights in various categories including, British mysteries and dramas, content targeting urban audiences and full-length independent motion pictures. We acquire content in three ways:  

 

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

 

through development, production and ownership of original drama television programming through our wholly-owned subsidiary, AME, and our 64%-owned equity method investee, ACL; and

 

through both acquired and original programming licensed and produced for our proprietary UMC subscription streaming service.

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

Our Digital Channels segment includes the subscription-based sale of video content directly and through third-party distribution to consumers through our digital channels, such as Acorn TV and UMC.

On June 24, 2016, we entered into a licensing agreement with Universal Screen Arts (or USA) whereby USA took over our Acorn U.S. catalog/ecommerce business becoming the official, exclusive, direct-to-consumer seller of Acorn product in the U.S. Under the licensing agreement, USA became the official, exclusive, direct-to-consumer seller of U.S. Acorn product through catalogs and ecommerce. As such, USA received the rights to the Acorn catalog and related website for an 18-month period. In May 2017, we amended the agreement and extended the licensing term through March 31, 2020. To facilitate the transfer of the catalog to USA, we granted USA access to the catalog’s customer list and the Acorn brand. Going forward, we will also endeavor to provide USA with an exclusivity period for new Acorn releases. USA is responsible for all costs associated with their efforts. On an annual basis, USA will purchase from us a minimum of $1.2 million of inventory (Acorn video content) at pricing that is consistent with wholesale pricing. We also agreed to a one-time transfer of certain existing inventory to USA at cost. Further, we have been given meaningful consultation rights regarding sales prices of Acorn content listed in the catalog.

In addition to purchasing inventory from us, USA makes royalty payments to us for the various rights we have licensed. Further, all customer and marketing data obtained during the license period shall be jointly owned by both companies. During the six months ended June 30, 2017, our Wholesale segment recognized revenues of $1.4 million from its sale of inventory to USA. There were no sales to USA during the six months ended June 30, 2016.

The IP Licensing segment includes intellectual property rights that we own or create and then sublicense for exploitation worldwide. Our Wholesale Distribution segment consists 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 Distribution segment exploits content through third-party vendors, which we also refer to as wholesale partners.

9


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

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, Barnes & Noble, Costco, DirecTV, Hulu, iTunes, Netflix, PBS, Showtime, Starz, Target and Walmart.

RLJE’s management evaluates business performance based on these three distinctive reporting segments: (1) Digital Channels, (2) IP Licensing and (3) Wholesale Distribution. Operations and net assets that are not associated with any of these stated segments are reported as “Corporate” when disclosing and discussing segment information.

Basis of Presentation

Unaudited Interim Financial Statements

The consolidated financial information presented in the accompanying unaudited interim consolidated financial statements as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 has been prepared in accordance with accounting principles generally accepted in the United States (or U.S. GAAP) and with the Securities and Exchange Commission’s (or SEC) instructions for interim financial reporting instructions for the Form 10-Q and Article 10 of Regulation S‑X of the SEC. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements.

In management’s opinion, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Due to the seasonal nature of our business, with a disproportionate amount of sales occurring in the fourth quarter and other factors, including our content release schedule, interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying unaudited financial information should, therefore, be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K filed on March 23, 2017 (or 2016 Form 10-K). Note 2, Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2016 Form 10-K contains a summary of our significant accounting policies. As of June 30, 2017, we have made no material changes to our significant accounting policies disclosed in our 2016 Form 10-K.

Fair Value of Financial Instruments

The carrying amount of our financial instruments, which principally include cash, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relative short maturity of such instruments. The carrying amount of our debt under our senior credit agreement approximates its fair value as it bears interest at market rates of interest after taking into consideration its debt discount.

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.

Earnings (Loss) per Common Share

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

10


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

Liquidity

For the six months ended June 30, 2017 and 2016, we recognized a net loss of $7.2 million and $13.6 million, respectively. We used $4.3 million of cash for operating activities during the six months ended June 30, 2017. During the six months ended June 30, 2016, we generated $2.1 million of cash from operating activities. At June 30, 2017, our cash balance was $12.2 million. At June 30, 2017, we had $50.6 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.

We continue to realize significant growth in our Digital Channels segment. Our Digital Channels segment revenues increased 86.0% to $12.4 million during the six months ended June 30, 2017 as compared to the same period in 2016 (see Note 2, Segment Information). After cost of sales and operating expenses, our Digital Channels segment contributed $4.9 million of income from continuing operations during the first half of 2017 compared to $2.3 million last year. Our expectation is that our digital channels will continue to grow, although there is no assurance that this will occur.

On October 14, 2016, we refinanced our senior debt (see Note 7, Debt). In January 2017, to repay our subordinated notes payable, we amended our senior debt and borrowed an additional $8.0 million. In June 2017, we expanded our senior debt and borrowed an additional $10.0 million. The proceeds received are available for working capital purposes, including the acquisition of content. In addition to providing us liquidity, the amended senior loan facility helps us address our liquidity constraints going forward in three ways: (1) it eliminates cash interest payments, which were 12% prior to October 14, 2016 and 4% through March 31, 2017, (2) there are no required principal payments until 2020, and (3) the financial covenants have been reset to less restrictive levels that provide us the necessary flexibility to invest in our operations.

In 2016, we also took actions to improve our operating results and Adjusted EBITDA (as defined in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Adjusted EBITDA) by exiting certain non-core operations that have been generating losses. During the first half of 2016, we closed our Acacia catalog operations. Further, on June 24, 2016, we entered into a licensing agreement to outsource the U.S. Acorn catalog/ecommerce business to USA (see our Discontinued Operations disclosure below). During 2016, our U.S. catalog/ecommerce business was fully transitioned to USA and we do not anticipate future losses from this line of business.

We believe that our current cash at June 30, 2017, will be sufficient to meet our operating liquidity, capital expenditure and debt repayment requirements for at least the next one year from the date of issuance of these financial statements. However, there can be no assurances that we will be successful in realizing improved results from operations including improved Adjusted EBITDA, generating sufficient cash flows from operations or agreeing with vendors on revised payment terms.

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 USA. USA began selling Acorn video content during the third quarter of 2016.

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 USA during the quarter ended June 30, 2016, we classified the U.S. catalog/ecommerce business (Acacia and U.S. Acorn catalogs) as discontinued operations.

11


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

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)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

 

 

$

2,078

 

 

$

 

 

$

7,143

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty expense

 

 

 

 

 

(49

)

 

 

 

 

 

(155

)

Manufacturing and fulfillment

 

 

 

 

 

(1,657

)

 

 

 

 

 

(5,691

)

Selling expenses

 

 

 

 

 

(716

)

 

 

 

 

 

(2,213

)

General and administrative expenses

 

 

 

 

 

(174

)

 

 

 

 

 

(364

)

Depreciation and amortization

 

 

 

 

 

(661

)

 

 

 

 

 

(972

)

Loss before provision for income taxes

 

 

 

 

 

(1,179

)

 

 

 

 

 

(2,252

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

$

 

 

$

(1,179

)

 

$

 

 

$

(2,252

)

 

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.

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

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss from discontinued operations

 

$

 

 

$

(2,252

)

Adjustments to reconcile net loss to net cash used in operating

   activities of discontinued operations:

 

 

 

 

 

 

 

 

Royalty expense

 

 

 

 

 

155

 

Depreciation and amortization

 

 

 

 

 

972

 

Stock-based compensation expense

 

 

 

 

 

27

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

 

 

687

 

Inventories, net

 

 

 

 

 

2,009

 

Investments in content, net

 

 

 

 

 

(155

)

Prepaid expenses and other assets

 

 

 

 

 

944

 

Accounts payable and accrued liabilities

 

 

 

 

 

(4,603

)

Deferred revenue

 

 

 

 

 

(626

)

Net cash used in operating activities of

   discontinued operations

 

$

 

 

$

(2,842

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

$

 

 

$

(5

)

Net cash used in investing activities of

   discontinued operations

 

$

 

 

$

(5

)

 

 

12


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

NOTE 2. SEGMENT INFORMATION

In accordance with the requirements of ASC 280 “Segment Reporting,” selected financial information regarding our reportable business segments, Digital Channels, IP Licensing and Wholesale Distribution, is presented below. Our reportable segments are determined based on the distinct nature of their operation. Each segment is a strategic business unit that is managed separately and either exploits our content over a different business model (subscription based vs. transactional) or acquires content differently. Our Digital Channels segment consists of our proprietary digital streaming channels. Our IP Licensing segment includes intellectual property (or content) owned or created by us, other than certain fitness related content, that is licensed for exploitation worldwide. The IP Licensing segment also includes our investment in ACL. Our Wholesale Distribution segment consists of the acquisition, enhancement and worldwide exploitation through our wholesale partners of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), VOD, streaming video, downloading and sublicensing. Our Wholesale Distribution segment also includes our U.K. mail-order catalog and ecommerce businesses.

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

The segment results exclude our discontinued operations. During 2016, we reclassified our U.K. mail-order catalog and ecommerce businesses into our Wholesale Distribution segment. As a result, for the three months ended June 30, 2016, we reclassified revenues of $0.3 million, operating costs and expenses of $0.4 million and depreciation and amortization of $21,000. For the six months ended June 30, 2016, we reclassified revenues of $0.9 million, operating costs and expenses of $1.2 million and depreciation and amortization of $36,000.

The tables below summarize the segment contribution for the three months ended June 30, 2017 and 2016.

 

 

 

Three Months Ended June 30, 2017

 

(In thousands)

 

Digital

Channels

 

 

IP Licensing

 

 

Wholesale

Distribution

 

 

Corporate

 

 

Total

 

Revenues

 

$

6,439

 

 

$

2

 

 

$

12,392

 

 

$

 

 

$

18,833

 

Operating costs and expenses

 

 

(3,965

)

 

 

(136

)

 

 

(9,856

)

 

 

(2,724

)

 

 

(16,681

)

Depreciation and amortization

 

 

(227

)

 

 

(31

)

 

 

(498

)

 

 

(148

)

 

 

(904

)

Share in ACL earnings

 

 

 

 

 

869

 

 

 

 

 

 

 

 

 

869

 

Segment contribution income (loss)

 

$

2,247

 

 

$

704

 

 

$

2,038

 

 

$

(2,872

)

 

$

2,117

 

 

 

 

Three Months Ended June 30, 2016

 

(In thousands)

 

Digital

Channels

 

 

IP Licensing

 

 

Wholesale

Distribution

 

 

Corporate

 

 

Total

 

Revenues

 

$

3,741

 

 

$

 

 

$

12,049

 

 

$

 

 

$

15,790

 

Operating costs and expenses

 

 

(2,324

)

 

 

(120

)

 

 

(12,622

)

 

 

(2,829

)

 

 

(17,895

)

Depreciation and amortization

 

 

(144

)

 

 

(36

)

 

 

(349

)

 

 

(116

)

 

 

(645

)

Share in ACL earnings

 

 

 

 

 

709

 

 

 

 

 

 

 

 

 

709

 

Segment contribution income (loss)

 

$

1,273

 

 

$

553

 

 

$

(922

)

 

$

(2,945

)

 

$

(2,041

)

 

13


RLJ Entertainment, Inc.

 

Notes To Consolidated Financial Statements

(Unaudited)

 

The following tables summarize the segment contribution for the six months ended June 30, 2017 and 2016:

 

 

 

Six Months Ended June 30, 2017

 

(In thousands)

 

Digital

Channels

 

 

IP Licensing

 

 

Wholesale

Distribution

 

 

Corporate

 

 

Total

 

Revenues

 

$

12,404

 

 

$

4

 

 

$

20,312

 

 

$

 

 

$

32,720

 

Operating costs and expenses

 

 

(7,079

)