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.
Our IP Licensing segment includes intellectual property (or
content
) owned or created by us, other than certain fitness related content, that is sublicensed for exploitation worldwide. The IP Licensing segment also includes our investment in ACL.
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. 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, DirecTV, Hulu, iTunes, Netflix, PBS, Showtime, Starz, Target and Walmart.
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. 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.
9
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
In addition to purchasing inventory fro
m 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 is jointly owned by both companies. During the nine months ended September 30, 2017 and 2016, our Wh
olesale Distribution segment recognized revenues of $1.6 million and $0.2 million, respectively, from its sale of inventory to USA.
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 September 30, 2017 and for the three and nine months ended September 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 September 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.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (or
FASB
) issued an accounting standard update relating to the recognition of revenue from contracts with customers, which will supersede most current U.S. GAAP revenue recognition guidance, including industry-specific guidance. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Based on the current guidance, the new framework will become effective for us on either a full or modified retrospective basis on January 1, 2018. We will be electing the modified retrospective method; and as such, we will not be restating our revenues for 2017. Upon adoption, we will also be applying the new standard to all customer contracts.
Subsequent to the issuance of the May 2014 guidance, several clarifications and updates have been issued by the FASB on this topic, the most recent of which was issued in December 2016. Many of these clarifications and updates to the guidance, as well as a number of interpretive issues, apply to companies in the media and entertainment industry.
We are currently evaluating the impact of the new standard. While there may be additional areas impacted by the new standard, we have identified certain areas that may be impacted as follows:
Renewals of Licenses of Intellectual Property — Under the current guidance, when the term of an existing license agreement is extended, without any other changes to the provisions of the license, revenue for the renewal period is recognized when the agreement is renewed or extended. Under the new guidance, revenue associated with renewals or extensions of existing license agreements will be recognized as revenue when the license content becomes available under the renewal or extension. This change will impact the timing of revenue recognition as compared with current revenue recognition guidance. While revenues from renewals do occur, they
10
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
are not a significant portion of our revenues.
Based on renewals through September 30, 2017, we have renewal revenue of approximately $0.5 million that woul
d require adjustment.
Licenses of Symbolic Intellectual Property — Certain intellectual property, such as brands, tradenames and logos, is categorized in the new guidance as symbolic. Under the new guidance, a licensee’s ability to derive benefit from a license of symbolic intellectual property is assumed to depend on the licensor continuing to support or maintain the intellectual property throughout the license term. Accordingly, under the new guidance, revenue from licenses of symbolic intellectual property is generally recognized over the corresponding license term. Therefore, the new guidance will impact the timing of revenue recognition as compared to current guidance. Our revenues from the licensing of symbolic intellectual property is limited. As of September 30, 2017, we have one symbolic license for approximately $0.4 million that would require adjustment.
Cross Collateralization — Under the current guidance, customer advances for content that is cross collateralized must be deferred when received and later recognized as revenue as the customer recoups their advance. Under the new guidance, the customer advance is allocated to the cross collateralized content and recognized as revenue once the content has been delivered and the customer is free to exploit. Therefore, the new guidance will impact the timing of revenue recognition as compared to the current guidance. Very few of our licensing agreements contain cross collateralized content. As of September 30, 2017, we have less than $0.3 million of deferred revenue related to cross collateralized content. This balance will likely decrease during the fourth quarter of 2017 as the customers recoup their advances. Any remaining advance not yet recognized as revenue as of January 1, 2018, will give rise to an adjustment upon adoption of the new revenue standard.
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.
Liquidity
At September 30, 2017, our cash balance was $6.6 million. For the nine months ended September 30, 2017, we recognized a net loss of $9.9 million and we used $9.5 million of cash for operating activities. At September 30, 2017, we had $51.6 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 for marketing to support subscriber growth and for the acquisition of new content that allows us to generate revenues and margins sufficient to meet our obligations.
11
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
Growth of our Digital Channels segment has the po
tential impact of improving our liquidity.
We continue to realize significant growth in our Digital Channels segment. Our Digital Channels segment revenues increased 75.1% to $19.4
million during the nine months ended September 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 $6.3 million of income from continuing operations during the first nine months of 2017 compared to
$4.1
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 September 30, 2017, will be sufficient to meet our forecasted requirements for operating liquidity, capital expenditure and debt repayments for at least one year from the date of issuance of these consolidated financial statements. However, there can be no assurances that we will be successful in realizing improved results from operations including improved Adjusted EBITDA, generating sufficient cash flows from operations or agreeing with vendors on revised payment terms.
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.
12
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
626
|
|
|
$
|
—
|
|
|
$
|
7,769
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty expense
|
|
|
—
|
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
(195
|
)
|
Manufacturing and fulfillment
|
|
|
—
|
|
|
|
(532
|
)
|
|
|
—
|
|
|
|
(6,223
|
)
|
Selling expenses
|
|
|
—
|
|
|
|
(129
|
)
|
|
|
—
|
|
|
|
(2,280
|
)
|
General and administrative expenses
|
|
|
—
|
|
|
|
(561
|
)
|
|
|
—
|
|
|
|
(986
|
)
|
Depreciation and amortization
|
|
|
—
|
|
|
|
(94
|
)
|
|
|
—
|
|
|
|
(1,067
|
)
|
Loss on disposal of fixed assets
|
|
|
—
|
|
|
|
(187
|
)
|
|
|
—
|
|
|
|
(187
|
)
|
Loss before provision for income taxes
|
|
|
—
|
|
|
|
(917
|
)
|
|
|
—
|
|
|
|
(3,169
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from discontinued operations, net of
income taxes
|
|
$
|
—
|
|
|
$
|
(917
|
)
|
|
$
|
—
|
|
|
$
|
(3,169
|
)
|
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:
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(3,169
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities of discontinued operations:
|
|
|
|
|
|
|
|
|
Royalty expense
|
|
|
—
|
|
|
|
195
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
1,067
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
187
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
35
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
—
|
|
|
|
937
|
|
Inventories, net
|
|
|
—
|
|
|
|
2,417
|
|
Investments in content, net
|
|
|
—
|
|
|
|
(195
|
)
|
Prepaid expenses and other assets
|
|
|
—
|
|
|
|
1,011
|
|
Accounts payable and accrued liabilities
|
|
|
—
|
|
|
|
(5,635
|
)
|
Deferred revenue
|
|
|
—
|
|
|
|
(697
|
)
|
Net cash used in operating activities of
discontinued operations
|
|
$
|
—
|
|
|
$
|
(3,847
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
Net cash used in investing activities of
discontinued operations
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
13
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 that is sublicensed 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 September 30, 2016, we reclassified revenues of $0.4 million and operating costs and expenses of $0.4 million. For the nine months ended September 30, 2016, we reclassified revenues of $1.3 million, operating costs and expenses of $1.6 million and depreciation and amortization of $36,000.
The tables below summarize the segment contribution for the three months ended September 30, 2017 and 2016.
|
|
Three Months Ended September 30, 2017
|
|
(In thousands)
|
|
Digital
Channels
|
|
|
IP Licensing
|
|
|
Wholesale
Distribution
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
6,954
|
|
|
$
|
41
|
|
|
$
|
13,905
|
|
|
$
|
—
|
|
|
$
|
20,900
|
|
Operating costs and expenses
|
|
|
(5,263
|
)
|
|
|
(113
|
)
|
|
|
(12,904
|
)
|
|
|
(3,330
|
)
|
|
|
(21,610
|
)
|
Depreciation and amortization
|
|
|
(272
|
)
|
|
|
(33
|
)
|
|
|
(495
|
)
|
|
|
(174
|
)
|
|
|
(974
|
)
|
Share in ACL earnings
|
|
|
—
|
|
|
|
1,723
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,723
|
|
Segment contribution income (loss)
|
|
$
|
1,419
|
|
|
$
|
1,618
|
|
|
$
|
506
|
|
|
$
|
(3,504
|
)
|
|
$
|
39
|
|
|
|
Three Months Ended September 30, 2016
|
|
(In thousands)
|
|
Digital
Channels
|
|
|
IP Licensing
|
|
|
Wholesale
Distribution
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
4,384
|
|
|
$
|
17
|
|
|
$
|
13,950
|
|
|
$
|
—
|
|
|
$
|
18,351
|
|
Operating costs and expenses
|
|
|
(2,406
|
)
|
|
|
11
|
|
|
|
(13,076
|
)
|
|
|
(2,445
|
)
|
|
|
(17,916
|
)
|
Depreciation and amortization
|
|
|
(174
|
)
|
|
|
(33
|
)
|
|
|
(506
|
)
|
|
|
(118
|
)
|
|
|
(831
|
)
|
Share in ACL earnings
|
|
|
—
|
|
|
|
990
|
|
|
|
—
|
|
|
|
—
|
|
|
|
990
|
|
Segment contribution income (loss)
|
|
$
|
1,804
|
|
|
$
|
985
|
|
|
$
|
368
|
|
|
$
|
(2,563
|
)
|
|
$
|
594
|
|
14
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
The following tables summarize the segment contribution for the
nine months ended September 30, 2017
and 2016
:
|
|
Nine Months Ended September 30, 2017
|
|
(In thousands)
|
|
Digital
Channels
|
|
|
IP Licensing
|
|
|
Wholesale
Distribution
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
19,358
|
|
|
$
|
45
|
|
|
$
|
34,217
|
|
|
$
|
—
|
|
|
$
|
53,620
|
|
Operating costs and expenses
|
|
|
(12,342
|
)
|
|
|
(342
|
)
|
|
|
(32,316
|
)
|
|
|
(9,218
|
)
|
|
|
(54,218
|
)
|
Depreciation and amortization
|
|
|
(702
|
)
|
|
|
(96
|
)
|
|
|
(1,486
|
)
|
|
|
(467
|
)
|
|
|
(2,751
|
)
|
Share in ACL earnings
|
|
|
—
|
|
|
|
3,143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,143
|
|
Segment contribution income (loss)
|
|
$
|
6,314
|
|
|
$
|
2,750
|
|
|
$
|
415
|
|
|
$
|
(9,685
|
)
|
|
$
|
(206
|
)
|
|
|
Nine Months Ended September 30, 2016
|
|
(In thousands)
|
|
Digital
Channels
|
|
|
IP Licensing
|
|
|
Wholesale
Distribution
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
11,053
|
|
|
$
|
43
|
|
|
$
|
40,786
|
|
|
$
|
—
|
|
|
$
|
51,882
|
|
Operating costs and expenses
|
|
|
(6,555
|
)
|
|
|
(225
|
)
|
|
|
(40,481
|
)
|
|
|
(8,172
|
)
|
|
|
(55,433
|
)
|
Depreciation and amortization
|
|
|
(442
|
)
|
|
|
(103
|
)
|
|
|
(1,199
|
)
|
|
|
(356
|
)
|
|
|
(2,100
|
)
|
Share in ACL earnings
|
|
|
—
|
|
|
|
2,198
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,198
|
|
Segment contribution income (loss)
|
|
$
|
4,056
|
|
|
$
|
1,913
|
|
|
$
|
(894
|
)
|
|
$
|
(8,528
|
)
|
|
$
|
(3,453
|
)
|
A reconciliation of total segment contribution income (loss) to loss from continuing operations before provision for income taxes is as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Segment contribution income (loss)
|
|
$
|
39
|
|
|
$
|
594
|
|
|
$
|
(206
|
)
|
|
$
|
(3,453
|
)
|
Interest expense, net
|
|
|
(2,288
|
)
|
|
|
(2,222
|
)
|
|
|
(6,326
|
)
|
|
|
(6,617
|
)
|
Change in fair value of stock warrants and other
derivatives
|
|
|
(264
|
)
|
|
|
(1,222
|
)
|
|
|
(3,647
|
)
|
|
|
(3,406
|
)
|
Gain on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
470
|
|
|
|
—
|
|
Other income (expense), net
|
|
|
169
|
|
|
|
(42
|
)
|
|
|
614
|
|
|
|
(772
|
)
|
Loss from continuing operations before
provision for income taxes
|
|
$
|
(2,344
|
)
|
|
$
|
(2,892
|
)
|
|
$
|
(9,095
|
)
|
|
$
|
(14,248
|
)
|
Total assets for each segment primarily include accounts receivable, inventory and investments in content. The Corporate segment primarily includes assets not fully allocated to any other segment including consolidated cash accounts, certain prepaid assets and fixed assets used across all segments.
Total assets by segment, excluding assets of discontinued operations, are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Digital Channels
|
|
$
|
7,806
|
|
|
$
|
5,941
|
|
IP Licensing
|
|
|
21,717
|
|
|
|
18,648
|
|
Wholesale Distribution
|
|
|
107,068
|
|
|
|
102,748
|
|
Corporate
|
|
|
7,813
|
|
|
|
8,643
|
|
|
|
$
|
144,404
|
|
|
$
|
135,980
|
|
15
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
NOTE 3.
EQUITY EARNINGS OF AFFILIATE
In February 2012, Acorn Media acquired a 64% interest in ACL for total purchase consideration of £13.7 million or approximately $21.9 million excluding direct transaction costs. The acquisition gave Acorn Media a majority ownership of ACL’s extensive works including a variety of short story collections, more than 80 novels, 19 plays and a film library of over 100 made-for-television films.
We account for our investment in ACL using the equity method of accounting because (1) Acorn Media is only entitled to appoint one-half of ACL’s board members and (2) in the event the board is deadlocked, the chairman of the board, who is appointed by the directors elected by the minority shareholders, casts a deciding vote.
As of the Business Combination, our 64% share of the difference between ACL’s fair value and the amount of underlying equity in ACL’s net assets was approximately $18.7 million. This step-up basis difference is primarily attributable to the fair value of ACL’s copyrights, which expire in 2046. We are amortizing the basis difference through 2046 using the straight-line method. Basis difference amortization is recorded against our share of ACL’s net income in our consolidated statements of operations; however, this amortization is not included within ACL’s financial statements presented below.
The following summarized financial information is derived from the unaudited financial statements of ACL:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
5,016
|
|
|
$
|
3,506
|
|
|
$
|
11,970
|
|
|
$
|
14,357
|
|
Film cost amortization
|
|
|
(260
|
)
|
|
|
(431
|
)
|
|
|
(2,175
|
)
|
|
|
(6,056
|
)
|
General, administrative and other expenses
|
|
|
(1,096
|
)
|
|
|
(961
|
)
|
|
|
(2,926
|
)
|
|
|
(3,131
|
)
|
Income from operations
|
|
$
|
3,660
|
|
|
$
|
2,114
|
|
|
$
|
6,869
|
|
|
$
|
5,170
|
|
Net income
|
|
$
|
2,922
|
|
|
$
|
1,693
|
|
|
$
|
5,483
|
|
|
$
|
4,142
|
|
ACL's functional currency is the British Pound Sterling (the
Pound
). Amounts have been translated from the Pound to U.S. dollar using the average exchange rate for the periods presented.
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable for our Digital Channels segment are primarily derived from subscription revenues, which are processed by merchant banks or our channel partners such as Amazon, that have not cleared our bank as of period end. Accounts receivable for our Wholesale Distribution segment are primarily derived from (1) video content we license to broadcast, cable/satellite providers and digital subscription platforms like Netflix, and (2) the sale of physical content to retailers and wholesale distributors and U.K. ecommerce and catalog sales. Our accounts receivable typically trends with retail seasonality.
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Digital Channels
|
|
$
|
2,508
|
|
|
$
|
2,200
|
|
Wholesale Distribution
|
|
|
13,436
|
|
|
|
22,231
|
|
Accounts receivable before allowances and reserves
|
|
|
15,944
|
|
|
|
24,431
|
|
Less: reserve for returns
|
|
|
(2,610
|
)
|
|
|
(4,817
|
)
|
Less: allowance for doubtful accounts
|
|
|
(71
|
)
|
|
|
(45
|
)
|
Accounts receivable, net
|
|
$
|
13,263
|
|
|
$
|
19,569
|
|
Wholesale Distribution receivables are partially billed and collected by our U.S. distribution facilitation partner, Sony Pictures Home Entertainment (or
SPHE
). Each quarter, SPHE preliminarily settles their portion of our wholesale receivables assuming a timing lag on collections and an average-return rate. When actual returns differ from the amounts previously assumed, adjustments are made that give rise to payables and receivables between us and SPHE. Amounts vary and tend to be seasonal following our sales activity. As of September 30, 2017, we owed SPHE $5.2 million for receivables settled at quarter end. As of December 31, 2016, we owed SPHE $5.6 million for receivables settled as of year‑end. The Wholesale Distribution receivables are reported net of amounts owed to SPHE as these amounts are offset against each other when settling.
16
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
As of
September 30, 2017
, the net Wholesale Distribution payables due to SPHE were
$2.2
million, which is included in accounts payable and accrued liabilities. As of Decembe
r 31, 2016, the net Wholesale Distribution receivables with SPHE were $4.3 million, which is included in accounts receivable.
NOTE 5. INVENTORIES
Inventories are summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Packaged discs
|
|
$
|
4,745
|
|
|
$
|
5,601
|
|
Packaging materials
|
|
|
440
|
|
|
|
452
|
|
Other merchandise
|
|
|
183
|
|
|
|
162
|
|
Inventories, net
|
|
$
|
5,368
|
|
|
$
|
6,215
|
|
For each reporting period, we review the value of inventories on hand to estimate the recoverability through future sales. Values in excess of anticipated future sales are booked as obsolescence reserve. Our obsolescence reserve was $9.9 million as of September 30, 2017 and $10.0 million as of December 31, 2016. We reduce our inventories with adjustments for lower of cost or market valuation, shrinkage, excess quantities and obsolescence. During the nine months ended September 30, 2017 and 2016, we recorded impairment charges of $1.0 million and $1.8 million, respectively. During the three months ended September 30, 2017 and 2016, we recorded impairment charges of $0.5 million and $0.6 million, respectively. These charges are included in cost of sales as manufacturing and fulfillment cost.
NOTE 6. INVESTMENTS IN CONTENT
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Released
|
|
$
|
65,292
|
|
|
$
|
48,593
|
|
Completed, not released
|
|
|
5,365
|
|
|
|
8,453
|
|
In-production
|
|
|
4,657
|
|
|
|
3,691
|
|
Investments in content, net
|
|
$
|
75,314
|
|
|
$
|
60,737
|
|
Investments in content are stated at the lower of unamortized cost or estimated fair value. The valuation of investments in content is reviewed on a title-by-title basis when an event or change in circumstances indicates that the fair value of content is less than its unamortized cost. For the three months ended September 30, 2017 and 2016, impairment charges were $0.5 million and $0.3 million, respectively. For the nine months ended September 30, 2017 and 2016, impairment charges were $1.1 million and $2.1 million, respectively. These charges are included in cost of sales as part of content amortization and royalties.
In determining the fair value of content for impairments (Note 10,
Fair Value Measurements
), we employ a discounted cash flow (or
DCF
) methodology. Key inputs employed in the DCF methodology include estimates of ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on a market participant's weighted average cost of capital plus a risk premium representing the risk associated with producing a particular type of content.
17
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
NOTE 7. DEBT
Debt consists of the following:
|
|
Maturity
|
|
Interest
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
Date
|
|
Rate
|
|
|
2017
|
|
|
2016
|
|
Senior secured term notes
with AMC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche A Loan
|
|
Beginning June 30, 2020
|
|
|
7.0%
|
|
|
$
|
23,000
|
|
|
$
|
5,000
|
|
Tranche B Loan
|
|
Beginning October 14, 2021
|
|
|
6.0%
|
|
|
|
54,999
|
|
|
|
60,000
|
|
Less: debt discount
|
|
|
|
|
|
|
|
|
(26,400
|
)
|
|
|
(31,565
|
)
|
Total senior-term notes, net of
discount
|
|
|
|
|
|
|
|
|
51,599
|
|
|
|
33,435
|
|
Subordinated notes payable to prior
Image Shareholders
|
|
Repaid January 31, 2017
|
|
1.5% through 2016 then 12%
|
|
|
|
—
|
|
|
|
8,618
|
|
Debt, net of discount
|
|
|
|
|
|
|
|
$
|
51,599
|
|
|
$
|
42,053
|
|
Future minimum principal payments, exclusive of debt discount, as of September 30, 2017 are as follows:
(In thousands)
|
|
Senior Notes
|
|
Remainder of 2017
|
|
$
|
—
|
|
2018
|
|
|
—
|
|
2019
|
|
|
—
|
|
2020
|
|
|
13,000
|
|
2021
|
|
|
25,000
|
|
2022
|
|
|
30,000
|
|
2023
|
|
|
9,999
|
|
|
|
$
|
77,999
|
|
Senior Term Notes
On October 14, 2016, we entered into a $65.0 million Credit and Guaranty Agreement (the
AMC
Credit Agreement
) with Digital Entertainment Holdings LLC, a wholly owned subsidiary of AMC Networks Inc. (or
AMC
). Concurrent with entering into the AMC Credit Agreement, we also issued AMC three warrants (the
AMC Warrants
) to acquire a total of 20.0 million shares of our common stock at $3.00 per share. The entering of the AMC Credit Agreement, the issuance of the AMC Warrants and the associated transactions are referred to as the AMC Transaction.
The proceeds received from the AMC Credit Agreement were used to repay our prior senior secured term notes of $55.1 million, including accrued interest, and transaction expenses of approximately $1.7 million, which includes a prepayment penalty of $0.8 million. Initially, the AMC Credit Agreement consisted of (i) a term loan tranche in the principal amount of $5.0 million (or
Tranche A Loan)
, which was due on October 14, 2017, and (ii) a term loan tranche in the principal amount of $60.0 million (or
Tranche B Loan)
of which 25% is due after five years, 50% is due after six years and the remaining 25% is due after seven years. The Tranche A Loan bears interest at a rate of 7.0% per annum and the Tranche B Loan bears interest at a rate of 6.0% per annum. Interest is payable quarterly whereby 4.0% was payable in cash and the balance is payable in shares of common stock determined using a per-share value of $3.00. The loan is secured by a lien on substantially all of our consolidated assets.
On January 30, 2017, to repay prior debt obligations under the subordinated notes payable we amended the AMC Credit Agreement and borrowed an additional $8.0 million, thereby increasing our Tranche A Loan from $5.0 million to $13.0 million. We also extended the maturity date for our Tranche A Loan from October 14, 2017 to June 30, 2019. When doing so, we did not incur a prepayment penalty.
On June 16, 2017, to fuel the growth of our business we expanded the AMC Credit Agreement and borrowed an additional $10.0 million, thereby increasing our Tranche A Loan from $13.0 million to $23.0 million. Further, we extended the maturity date for
18
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
our Tranche A Loan from June 30, 2019 to beginning on June 30, 2020. We also amended the payment provisions regarding interest whereby all interest is now settled with shares of common stock at $3.00 per
share beginning as of April 1, 2017. The additional $10.0 million borrowed is available for working capital purposes, including the acquisition of content. This amendment also changed certain debt covenant ratios to reflect the extended maturity date and t
he increase of the Tranche A Loan balance.
Concurrent with the June amendment, RLJ SPAC Acquisition, LLC converted all of its preferred stock holdings into shares of common stock (see Note 8,
Redeemable Convertible Preferred Stock and Equity
) and AMC exercised a portion of their warrants (see Note 9,
Stock Warrants
) that resulted in the Tranche B Loan principal reduction of $5.0 million. This reduction in principal did not result in a prepayment penalty.
Subject to certain customary exceptions, the AMC Credit Agreement requires mandatory prepayments if we were to receive proceeds from asset sales, insurance, debt issuance or the exercise of the warrants (see Note 9,
Stock Warrants
). We may also make voluntary prepayments. Prepayments of the Tranche B Loan (either voluntary or mandatory) are subject to a prepayment premium of 3.0% if principal is repaid on or before October 14, 2018, and 1.5% if principal is repaid after October 14, 2018 but on or before October 14, 2019. No prepayment premium is due for amounts prepaid after October 14, 2019, and for mandatory prepayments made from proceeds received from the exercise of warrants. The Tranche A Loan is not subject to prepayment penalties.
The AMC Credit Agreement contains certain financial and non-financial covenants. Financial covenants are assessed annually and are based on Consolidated Adjusted EBITDA, as defined in the AMC Credit Agreement. Financial covenants vary by fiscal year and generally become more restrictive over time.
Financial covenants include the following:
|
|
Fiscal Year Ended December 31, 2016
|
|
Fiscal Year Ending December 31, 2017
|
|
Fiscal Year Ending December 31, 2018
|
|
Thereafter
|
Leverage Ratios:
|
|
|
|
|
|
|
|
|
Senior debt-to-Adjusted EBITDA
|
|
6.00 : 1.00
|
|
5.75 : 1.00
|
|
4.00 : 1.00
|
|
Ranges from 3.75 : 1.00 to 2.50 : 1.00
|
Total debt-to-Adjusted EBITDA
|
|
6.75 : 1.00
|
|
6.00 : 1.00
|
|
5.00 : 1.00
|
|
4.00 : 1.00
|
Fixed charge coverage ratio
|
|
1.00 : 1.00
|
|
1.00 : 1.00
|
|
2.00 : 1.00
|
|
2.00 : 1.00
|
The AMC Credit Agreement contains events of default that include, among others, non-payment of principal, interest or fees; violation of covenants; inaccuracy of representations and warranties; bankruptcy and insolvency events; material judgments; cross defaults to certain other contracts (including, for example, business arrangements with our U.S. distribution facilitation partner and other material contracts); and indebtedness and events constituting a change of control or a material adverse effect in any of our results of operations or conditions (financial or otherwise). The occurrence of an event of default would increase the applicable rate of interest and could result in the acceleration of our obligations under the AMC Credit Agreement.
The AMC Credit Agreement imposes restrictions on such items as encumbrances and liens, payments of dividends to common stockholders, other indebtedness, stock repurchases, capital expenditures and entering into new lease obligations. Additional covenants restrict our ability to make certain investments, such as loans and equity investments, or investments in content that are not in the ordinary course of business. Pursuant to the AMC Credit Agreement, we must maintain at all times a cash balance of $1.0 million for 2016, $2.0 million in cash for 2017 and $3.5 million in cash for all years thereafter. As of September 30, 2017, we were in compliance with all covenants as stipulated in the AMC Credit Agreement.
Concurrent with entering into the AMC Transaction, we issued the AMC Warrants to acquire shares of our common stock. The first warrant is for 5.0 million shares of common stock, of which 1.7 million shares were exercised in June 2017, and expires on October 14, 2021. The second warrant is for 10.0 million shares of common stock and expires on October 14, 2022. The third warrant is for 5.0 million shares of common stock, subject to adjustment, and expires on October 14, 2023. The AMC Warrants are subject to certain standard anti-dilution provisions, and may be exercised on a non-cash basis at AMC’s discretion.
The third warrant (the
AMC Tranche C Warrant
)
contains a provision that may increase the number of shares acquirable upon exercising, for no additional consideration payable by AMC, such that the number of shares acquirable upon exercise is equal to the sum of (i) at least 50.1% of our then outstanding shares of common stock, determined on a fully diluted basis, less (ii) the sum of 15.0 million shares and the equity interest shares issued in connection with the AMC Credit Agreement. This provision provides AMC
19
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
the ability to acquire at least 50.1% of our common stock for $60.0 million, provided that all warrants are exercised and AMC elects not to exerci
se on a non-cash basis. The third warrant with this guarantee provision is being accounted for as a derivative liability.
Subordinated Notes Payable
On January 31, 2017, we repaid the outstanding principal and interest on our unsecured subordinated promissory notes. The subordinated notes were issued in 2012 in the aggregate principal amount of $14.8 million to the selling preferred stockholders of Image (or
Subordinated Note Holders
). In 2015, and in connection with the sale of preferred stock and warrants, the Subordinated Note Holders exchanged approximately $8.5 million of subordinated notes for 8,546 shares of preferred stock and warrants to acquire approximately 855,000 shares of common stock.
NOTE 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY
Redeemable Convertible Preferred Stock and 2015 Warrants
On May 20, 2015, we closed a transaction in which we sold 31,046 shares of preferred stock and warrants to acquire 3.1 million shares of common stock (the
2015 Warrants
) for $22.5 million in cash and the exchange of $8.5 million in subordinated notes. Of the preferred shares and warrants sold, 16,500 shares of preferred stock and warrants to acquire 1.7 million shares of common stock were sold to certain board members or their affiliated companies. We used $10.0 million of the cash proceeds from this sale to make partial payment on our senior notes payable and approximately $1.9 million for prepayment penalties, legal and accounting fees, which include fees associated with our registration statement filed in July 2015 and other expenses associated with the transaction. The balance of the net cash proceeds was used for content investment and working capital purposes. Of the fees incurred, $0.9 million was recorded against the proceeds received, $0.5 million was recorded as additional debt discounts, $0.2 million was included as interest expense and the balance was included in other expense.
On October 14, 2016 and concurrent with the close of our AMC Credit Agreement, we amended our preferred stock such that we were able to classify our preferred stock and its embedded conversion feature within our shareholders’ equity. Prior to the amendment, our preferred stock and its embedded conversion feature were recorded on our consolidated balance sheet outside of shareholders’ equity. The amended terms are disclosed below.
The preferred stock has the following rights and preferences:
|
•
|
Rank
– the preferred stock ranks higher than other company issued equity securities in terms of distributions, dividends and other payments upon liquidation.
|
|
•
|
Dividends
– the preferred stockholders are entitled to cumulative dividends at a rate of 8% per annum of a preferred share’s stated value ($1,000 per share plus any unpaid dividends). The first dividend payment was made on July 1, 2017 and payments will be made quarterly thereafter. At our discretion, dividend payments are payable in either cash, or if we satisfy certain equity issuance conditions, in shares of common stock. Pursuant to the October 14, 2016 amended terms, if we don’t satisfy equity issuance conditions, then we may elect to accrue the value of the dividend and add it to the preferred share’s stated value.
|
|
•
|
Conversion
– at the preferred stockholder’s discretion, each share of preferred stock is convertible into 333.3 shares of our common stock, subject to adjustment for any unpaid dividends. Prior to the October 14, 2016 amendment, the conversion rate was subject to anti-dilution protection for offerings consummated at a per-share price of less than $3.00 per common share. This down-round provision was removed as part of the October 14, 2016 amendment.
|
|
•
|
Mandatory Redemption
– unless previously converted, on May 20, 2020, at our option we will either redeem the preferred stock with (a) cash equal to $1,000 per share plus any unpaid dividends (
Redemption Value
), or (b) shares of common stock determined by dividing the Redemption Value by a conversion rate equal to the lower of (i) the conversion rate then in effect (which is currently $3.00) or (ii) 85% of the then trading price, as defined, of our common stock. As part of the October 14, 2016 amendment, a floor was established for all but 16,500 shares of preferred stock such that the redemption ratio cannot be below $0.50 per common share. For the 16,500 shares of preferred stock, a floor of $2.49 was already in place and remained unchanged. I
f we were to redeem with shares of common stock, the actual number of shares that would be issued upon redemption is not determinable as the number is contingent upon the then trading price of our common stock. Generally, if we were to redeem with shares, the number of common shares needed for redemption increases as our common stock price decreases. Because of the October 14, 2016 amendment, the maximum number of
|
20
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
|
|
common shares issuable upon redemption is determinable given the redemption conversion floors. If we elect to redeem with shares of common stock, and w
e fail to meet certain conditions with respect to the issuance of equity, then we would be subject to a 20% penalty of the maturity redemption price, payable in either cash or shares of common stock. This penalty is subject to, and therefore possibly limit
ed by, a $0.50 per share floor.
|
|
•
|
Voting
– except for certain matters that require the approval of the preferred stockholders, such as changes to the rights and preferences of the preferred stock, the preferred stock does not have voting rights. However, the holders of the preferred stock are entitled to appoint two board members and, under certain circumstances, appoint a third member.
|
We are increasing (or accreting) the carrying balance of our preferred stock up to its Redemption Value using the effective interest-rate method over a period of time beginning from the issuance date of May 20, 2015 to the required redemption date of May 20, 2020. During the nine months ended September 30, 2017 and 2016, we recognized accretion of $1.0 million and $3.8 million, respectively. Accretion includes cumulative preferred dividends. As of September 30, 2017, the accumulated unpaid dividends on preferred stock were $2.8 million. During the nine months ended September 30, 2017 and 2016 accumulated dividends increased by $1.4 million (or $46.16 per share of preferred stock) and $2.0 million (or $64.80 per share of preferred stock), respectively. On July 1, 2017, we made the first cash dividend payment of $0.4 million.
During 2016, two preferred shareholders converted a total of 849 shares of preferred stock and $0.1 million of accumulated dividends into 0.3 million shares of common stock. During June 2017, the largest preferred shareholder (RLJ SPAC Acquisition, LLC) converted a total of 15,000 shares of preferred stock and $2.7 million of accumulated dividends into 5.9 million shares of common stock.
In 2015, we filed a registration statement with the Securities and Exchange Commission to register the shares issuable upon conversion of the preferred stock and exercise of the 2015 Warrants (see Note 9,
Stock Warrants
). The registration statement was declared effective in July 2015 and amended in 2016. If we are in default of the registration rights agreement, and as long as the event of default is not cured, then we are required to pay, in cash, partial liquidation damages, which in total are not to exceed 6% of the aggregated subscription amount of $31.0 million. We will use our best efforts to keep the registration statement effective.
Share-Based Compensation
Our share-based compensation consists of awards of restricted stock, restricted stock units, performance stock units and stock options. During the nine months ended September 30, 2017, 1.1 million shares of restricted stock-based awards were granted, 1.4 million options were granted to an executive officer, 0.2 million shares vested and 3,668 shares were forfeited due to employee terminations. Of the shares granted, we issued 0.9 million shares of restricted stock-based awards to executive officers and directors and 0.2 million shares of restricted stock units to employees. The restricted stock-based awards were fair valued on the date of grant using the closing price of the common stock on the grant date. The restricted stock-based awards generally vest over a three to four-year period for executive officers and a one-year period for directors. The restricted stock units generally vest over a three-year period for employees. The vesting of restricted stock awards and restricted stock units is subject to certain service criteria.
The option grants in 2017 include an option to purchase 700,000 shares of common stock with an exercise price of $2.66 per share vesting in two years and an option to purchase 700,000 shares of common stock with an exercise price of $3.00 per share vesting in four years. The options were fair valued at $1.90 per share using the Black Scholes model. Inputs into the model included the stock price of $2.66 at the time of grant, the exercise price, the risk-free interest rate of 1.97%, expected volatility of 75% and the expected terms, which were 7.0 years and 8.4 years. The expected term for the option with an exercise price of $2.66 was estimated as the average of its vesting term of two years and its contractual term of 10 years. The expected term of the other option was estimated by using a lattice model that took into consideration the vesting term, the contractual term of 10 years, post-vesting exercise behavior and the award’s exercise price relative to the current fair value of a share of common stock.
Compensation expense relating to our share-based grants for the three months ended September 30, 2017 and 2016 was $0.7 million and $0.3 million, respectively. Compensation expense relating to our share-based grants for the nine months ended September 30, 2017 and 2016 was $1.2 million and $0.9 million, respectively. Compensation expense related to share-based grants is included in general and administrative expenses. As of September 30, 2017, unrecognized share-based compensation expense relating to the service awards of $4.4 million is expected to be expensed ratably over the remaining vesting period 1.4 years. Unrecognized compensation expense relating to the performance awards of $1.7 million is expected to be expensed ratably over the remaining weighted-average vesting period of 1.8 years. Expense associated with our performance award is contingent upon achieving specified
21
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
financial criteria and upon certification by the Compensation Committee of
the satisfaction of such performance criteria based upon our audited financial statements for 2017, 2018, 2019 and 2020. The above unrecognized stock-based compensation expense assumes that the performance awards will vest at 100% (or 0.5
million shares).
However, the possible range of vesting is between zero and 1.0
million shares.
Assuming 100% vesting for all awards, we expect to recognize $2.8 million of compensation expense in the next 12 months.
During the nine months ended September 30, 2016, 418,805 shares of restricted stock-based awards were granted, 192,501 shares vested and 6,231 shares were forfeited based upon the failure to achieve the 2015 performance criteria. Of the shares granted, we issued 216,982 shares of restricted stock awards to executive officers and directors and 201,823 shares of restricted stock units to employees. A summary of the restricted stock-based award activity since December 31, 2016 is as follows:
(In thousands, except per share data)
|
|
Service Shares
|
|
|
Performance Shares
|
|
Restricted Stock-Based Compensation Award Activity
|
|
Shares
|
|
|
Weighted-
Average
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Non-vested shares at December 31, 2016
|
|
|
409
|
|
|
$
|
1.92
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
634
|
|
|
$
|
3.22
|
|
|
|
500
|
|
|
$
|
2.40
|
|
Vested
|
|
|
(204
|
)
|
|
$
|
2.01
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(4
|
)
|
|
$
|
1.92
|
|
|
|
—
|
|
|
$
|
—
|
|
Non-vested shares at September 30, 2017
|
|
|
835
|
|
|
$
|
2.90
|
|
|
|
500
|
|
|
$
|
2.40
|
|
NOTE 9. STOCK WARRANTS
As of September 30, 2017, outstanding warrants to purchase shares of common stock are as follows:
|
|
September 30, 2017
|
(In thousands, except per share data)
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining Life
|
AMC Unregistered warrants
|
|
|
18,333
|
|
|
$
|
3.00
|
|
|
5.1 years
|
2015 Unregistered warrants
|
|
|
2,999
|
|
|
$
|
2.29
|
|
|
2.6 years
|
2012 Warrants:
|
|
|
|
|
|
|
|
|
|
|
Registered warrants
|
|
|
5,125
|
|
|
$
|
36.00
|
|
|
—
|
Sponsor warrants
|
|
|
1,272
|
|
|
$
|
36.00
|
|
|
—
|
Unregistered warrants
|
|
|
617
|
|
|
$
|
36.00
|
|
|
—
|
|
|
|
28,346
|
|
|
|
|
|
|
|
Concurrent with entering into the AMC Credit Agreement, we issued AMC three warrants (the
AMC Warrants
) to acquire shares of our common stock at $3.00 per share. The first warrant is for 5.0 million shares of common stock, of which 1.7 million shares were exercised in June 2017, and expires on October 14, 2021. The second warrant is for 10.0 million shares of common stock and expires on October 14, 2022. The third warrant is for 5.0 million shares of common stock, subject to adjustment, and expires on October 14, 2023. The AMC Warrants are subject to certain standard anti-dilution provisions, and may be exercised on a non-cash basis at AMC’s discretion.
The third warrant (the
AMC Tranche C Warrant
)
contains a provision that may increase the number of shares acquirable upon exercising, for no additional consideration payable by AMC, such that the number of shares acquirable upon exercise is equal to the sum of (i) at least 50.1% of our then outstanding shares of common stock, determined on a fully diluted basis, less (ii) the sum of 15.0 million shares and the equity interest shares issued in connection with the AMC Credit Agreement. This provision provides AMC the ability to acquire at least 50.1% of our common stock for $60.0 million, provided that all warrants are exercised and AMC elects not to exercise on a non-cash basis. The third warrant with this guarantee provision is being accounted for as a derivative liability.
On May 20, 2015 and concurrent with our preferred stock placement, we issued warrants to our preferred stock holders to acquire 3.1 million shares of our common stock (the
2015 Warrants
). The warrants have term of five years. On October 14, 2016 and in connection with the AMC Credit Agreement, we amended the anti-dilution and redemption provisions of the warrants to
22
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
conform to the terms of the amended preferred stock
. Because of the AMC transaction and the then-existing terms of the 2015 Warrants, the warrant exercise price was reduced from $4.50 to $3.00; however, the exercise price was further reduced down to $1.50 for warrants to acquire 1.5 million shares of commo
n stock, and down to $2.37 for warrants to acquire 150,000 shares of common stock.
Because of the October 14, 2016 amendment, we began accounting for the 2015 Warrants as equity awards and reclassified the carrying balance of the warrants to shareholders’
equity.
During the nine months ended September 30, 2017, warrant holders exercised warrants for approximately 106,000 shares with an exercise price of $1.50. We received cash proceeds of $0.2 million.
On October 3, 2012, we issued warrants with a term of five years that provide the warrant holder the right to acquire one share of our common stock for $36.00 per share (the
2012 Warrants
). The warrants expired on October 3, 2017.
NOTE 10. FAIR VALUE MEASUREMENTS
Stock Warrant and Other Derivative Liabilities
Certain warrants are accounted for as derivative liabilities, which require us to carry them on our consolidated balance sheet at their fair value. Our derivative liability warrants consist of the AMC Tranche C Warrant to acquire 5.0 million shares of common stock and our 2012 Warrants to acquire 7.0 million shares of common stock. Prior to the amendment on October 14, 2016, our 2015 Warrants to purchase 3.1 million shares of our common stock and the preferred stock’s embedded conversion feature were being accounted for as derivative liabilities as well.
We determined the fair value of the AMC Tranche C warrant using a lattice model, which is classified as Level 3 within in the fair-value hierarchy. Inputs to the model include our publicly-traded stock price, our stock volatility, the risk-free interest rate and contractual terms of the warrant (which are remaining life of the warrant, exercise price and assumptions pertaining to increasing the number of acquirable shares of common stock to achieve 50.1% ownership). We use the closing stock price of our common stock to compute stock volatility. To quantify and value the possibility of increasing the number of acquirable shares, management took into consideration its current capital structure, the impact of the 20% penalty if we were to fail to meet certain equity issuance conditions, and management’s best estimates of the likelihood of being subject to the 20% penalty. The AMC Tranche C warrant was valued at $13.4 million as of September 30, 2017 and $9.8 million as of December 31, 2016. During the current year, the AMC Tranche C warrant increased in value as a result of an increase in our common stock price.
We determined the fair value of our 2012 Warrants using a Monte Carlo simulation model. Because the warrants are so far out-of-the-money (exercise price is $36.00 per share) and as they approach their expiration date (which is October 2017) their fair value is effectively zero as of December 31, 2016 and September 30, 2017.
Prior to the October 14, 2016 amendment, we were using a lattice model to value the 2015 Warrants, which was classified as Level 3 within the fair-value hierarchy. Inputs to the model were stock volatility, contractual warrant terms (which were remaining life of the warrant and the exercise price), the risk-free interest rate and management’s assessment of the likelihood of doing a down-round transaction.
Prior to the October 14, 2016 amendment, we were using the lattice model to value the preferred stock’s embedded conversion feature, which was classified as Level 3 within the fair-value hierarchy. Inputs to the model were stock volatility, contractual terms (which were remaining life of the conversion option and the conversion rate), the risk-free interest rate and management’s assessment of the likelihood of doing a down-round transaction.
The following tables represent the valuation of our warrant and other derivative liabilities within the fair-value hierarchy:
|
|
September 30, 2017
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Stock warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,410
|
|
|
$
|
13,410
|
|
|
|
December 31, 2016
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Stock warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,763
|
|
|
$
|
9,763
|
|
23
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
The following tables include a roll-forward of our warrant and other derivative liabilities classified within Level 3 of the fair-value hierarchy:
|
|
Nine Months Ended September 30, 2017
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Stock warrants at December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,763
|
|
|
$
|
9,763
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
3,647
|
|
|
|
3,647
|
|
Stock warrants at September 30, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,410
|
|
|
$
|
13,410
|
|
|
|
Nine Months Ended September 30, 2016
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Stock warrants at December 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,252
|
|
|
$
|
2,252
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
1,011
|
|
|
|
1,011
|
|
Stock warrants at September 30, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,263
|
|
|
$
|
3,263
|
|
|
|
Nine Months Ended September 30, 2016
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Embedded conversion feature at December 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,426
|
|
|
$
|
8,426
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
2,395
|
|
|
|
2,395
|
|
Amount reclassified to equity upon conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
(296
|
)
|
|
|
(296
|
)
|
Embedded conversion feature at September 30, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,525
|
|
|
$
|
10,525
|
|
Investments in Content
When events and circumstances indicate that investments in content are impaired, we determine the fair value of the investment; and if the fair value is less than the carrying amount, we recognize additional amortization expense equal to the excess. The following fair value hierarchy tables present information about our assets and liabilities measured at fair value on a non-recurring basis.
|
|
Nine Months Ended September 30, 2017
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Loss
|
|
Investments in content
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,702
|
|
|
$
|
1,702
|
|
|
$
|
1,057
|
|
|
|
Nine Months Ended September 30, 2016
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Loss
|
|
Investments in content
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
598
|
|
|
$
|
598
|
|
|
$
|
2,062
|
|
During the nine months ended September 30, 2017 and 2016, the investments in content were impaired by $1.1 million and $2.1 million, respectively. In determining the fair value of our investments in content, we employ a discounted cash flow (or
DCF
) methodology. Key inputs employed in the DCF methodology include estimates of a film's ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on our weighted average cost of capital plus a risk premium representing the risk associated with producing a particular film or television program. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a Level 3 measurement.
NOTE 11. NET INCOME (LOSS) PER COMMON SHARE
We have outstanding warrants to acquire 28.3 million and 10.1 million shares of common stock as of September 30, 2017 and 2016, respectively, which are not included in the computation of diluted net loss per common share as the effect would be anti-dilutive.
During periods of reported net losses from continuing operations after adjusting for accretion on preferred stock, all reported net losses are allocated to our unrestricted common stock. This has the effect of excluding our outstanding restricted common stock from the computation of our net loss per common share. For the three months ended September 30, 2017 and 2016, we have weighted average unvested shares of 2.7 million and 0.5 million, respectively, of compensatory stock options and restricted share-based awards
24
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
that were not included in the computation of diluted net loss per c
ommon share as the effect would be anti-dilutive. For the
nine months ended September 30, 2017 and 2016
, we had weighted average unvested shares of
1.5
million and
0.4
million respectively, of compensatory stock options and restricted share-based awards th
at were not included in the computation of diluted net loss per common share as the effect would be anti-dilutive.
When dilutive, we include in our computation of diluted loss per share the number of shares of common stock that is acquirable upon conversion of the preferred stock by applying the as-converted method per ASC 260,
Earnings per Share
. For the three and nine months ended September 30, 2017 and 2016, we excluded 5.9 million and 11.2 million shares of common stock that are acquirable upon conversion of the preferred stock as they were anti-dilutive.
NOTE 12. STATEMENTS OF CASH FLOWS
Supplemental Disclosures
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,592
|
|
|
$
|
4,911
|
|
Income taxes
|
|
$
|
30
|
|
|
$
|
35
|
|
Reclassification of deferred financing costs from prepaid
expenses and other assets to debt, net of discounts
|
|
$
|
—
|
|
|
$
|
832
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accretion on preferred stock
|
|
$
|
959
|
|
|
$
|
3,763
|
|
Preferred stock and derivative liability converted
into common stock
|
|
$
|
—
|
|
|
$
|
1,232
|
|
Common stock issued to AMC as payment for
prior year interest expense
|
|
$
|
158
|
|
|
$
|
—
|
|
Conversion of preferred stock into shares of common
|
|
$
|
19,592
|
|
|
$
|
—
|
|
Exercise of AMC warrant and reduction of senior debt
|
|
$
|
2,847
|
|
|
$
|
—
|
|
Interest payable on subordinated notes converted to
principal
|
|
$
|
—
|
|
|
$
|
72
|
|
Capital expenditures accrued for in accounts payable and
accrued liabilities
|
|
$
|
369
|
|
|
$
|
357
|
|
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we are subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations relating to content ownership, copyright and employment matters. While it is not possible to predict the outcome of these matters, it is the opinion of management, based on consultations with legal counsel, that the ultimate disposition of known proceedings will not have a material adverse impact on our financial position, results of operations or liquidity. Accordingly, we record a charge to earnings based on the probability of settlement and determination of an estimated amount. These charges were not material to our results.
NOTE 14. RELATED PARTY TRANSACTIONS
Equity Investment in Affiliate
During the nine months ended September 30, 2017 and 2016, we paid ACL $0.1 million and $3.2 million, respectively, for distribution rights for three titles, two of which were released as of December 31, 2016 and one which was released in 2017. As we recognize revenues from these titles, and all other titles, we amortize our content advances resulting in the recognition of content amortization and royalty expense. For the nine months ended September 30, 2017, we recognized content amortization and royalty expense of $0.2 million and none during the three months ended September 30, 2017. For the three and nine months ended
25
RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
September
30, 2016
, we recognized content amortization and royalty expense of
$0.1
million and
$0.4
million, respectively. This amortization is included in our cost of sales as content amortization and royalties. As of
September 3
0, 2017
, our remaining unamortized content advance is
$1.6
million.
ACL paid dividends to RLJE Ltd. of $1.2 million during the nine months ended September 30, 2017 and $1.7 million during the nine months ended September 30, 2016. No dividends were received during the three months ended September 30, 2017 and 2016. We record dividends received as a reduction to the ACL investment account.
Foreign Currency
We recognize foreign currency gains and losses, as a component of other expense, on amounts lent by Acorn Media to RLJE Ltd. and RLJE Australia. As of September 30, 2017, Acorn Media had lent its U.K. subsidiaries approximately $3.9 million and its Australian subsidiary approximately $3.3 million. Amounts lent will be repaid in U.S. dollars based on available cash. Movement in exchange rates between the U.S. dollar and the functional currencies (which are the Pound and the Australian dollar) of those subsidiaries that were lent the monies will result in foreign currency gains and losses. During the three months ended September 30, 2017, we recognized foreign currency gains of $0.2 million and during the three months ended September 30, 2016 we recognized foreign currency losses of $0.1 million. During the nine months ended September 30, 2017, we recognized foreign currency gains of $0.6 million and during the nine months ended September 30, 2016, we recognized foreign currency losses of $0.9 million.
The RLJ Companies, LLC
In June 2013, The RLJ Companies, LLC (whose sole manager and voting member is the chairman of our board of directors) purchased from one of our vendors $3.5 million of contract obligations that we owed to the vendor. These purchased liabilities, which are now owed to The RLJ Companies, are included in accrued royalties and distribution fees in the accompanying consolidated balance sheets. During the three months ended September 30, 2017, we made a $0.5 million payment to The RLJ Companies which reduced our remaining obligation to $3.0 million.
Preferred Stock and Warrants
In May 2015, certain present and former board members and their affiliate companies, including RLJ SPAC Acquisition, LLC, which is owned by the chairman of our board of directors, purchased 16,500 shares of preferred stock and warrants to acquire 1.7 million shares of common stock from us for $16.5 million.
In June 2017, RLJ SPAC Acquisition, LLC converted its 15,000 shares of preferred stock and accumulated dividends and received 5.9 million shares of common stock.
On July 1, 2017, we made a $0.4 million cash dividend payment to preferred stockholders.
NOTE 15. SUBSEQUENT EVENT
On October 2, 2017, we made a dividend payment of $0.4 million to our preferred shareholders.
On October 2, 2017, we issued AMC 427,347 shares of common stock in payment of $1.3 million of interest on $78.0 million of principal outstanding under the AMC Credit Agreement.
At September 30, 2017, this accrued interest was included in accounts payable and accrued liabilities.
26