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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

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FORM 10-Q

 

Commission File Number 001-35675

 

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RLJ ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

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(301) 608-2115

(Registrant’s telephone number, including area code)

None

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

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

 

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

 

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

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

Number of shares outstanding of the issuer’s common stock on November 9, 2015:  12,877,064

 

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RLJ ENTERTAINMENT, INC.

INDEX TO FORM 10-Q

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2015, 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 revenue growth, margins or earnings before income tax, depreciation, amortization, adjusted for cash investment in content, interest expense, transaction and restructuring costs, warrants and other derivatives and stock-based compensation (or Adjusted EBITDA);

·

The effects of limited cash liquidity on operational performance;

·

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

·

Our ability to satisfy financial ratios;

·

Our ability to fund planned capital expenditures and development efforts;

·

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

·

The ability of our officers and directors to generate a number of potential investment opportunities;

·

Our ability to maintain relationships with customers and suppliers;

·

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 May 8, 2015.  You are cautioned not to place undue reliance on such forward-looking statements.

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

RLJ ENTERTAINMENT, INC.

 

CONSOLIDATED BALANCE SHEETS

 

September 30, 2015 (unaudited) and December 31, 2014

 

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RLJ ENTERTAINMENT, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

Three and Nine Months Ended September 30, 2015 and 2014

 

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RLJ ENTERTAINMENT, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

Three and Nine Months Ended September 30, 2015 and 2014

 

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RLJ ENTERTAINMENT, INC.

 

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

Nine Months Ended September 30, 2015 and 2014

 

 

 

RLJ ENTERTAINMENT, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30, 2015 and 2014

 

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NOTE 1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business

 

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

 

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

 

·

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

 

·

through development, production, and ownership of original drama television programming through our wholly-owned subsidiary, RLJE Ltd., and our majority-owned subsidiary, ACL, as well as fitness programs through our Acacia brand.

 

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

 

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

 

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

 

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

 

Basis of Presentation

 

Unaudited Interim Financial Statements

 

The financial information presented in the accompanying unaudited interim consolidated financial statements as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014 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 May 8, 2015 (or 2014 Form 10-K).  Note 2, Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2014 Form 10-K contains a summary of our significant accounting policies.  As of September 30, 2015, we have made no material changes to our significant accounting policies disclosed in our 2014 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 fair value as the debt bears market rates of interest.  The carrying amount of our subordinated debt is approximately $1.7 million more than its fair value as a result of its reduced interest rate from 12.0% to 1.5% for two years beginning January 1, 2015.  The fair value of subordinated debt was determined by discounting future interest and principal payments by an estimated market rate of interest of 12.0%.  This fair value assessment of our subordinated debt is a level 3 measurement as provided by Accounting Standards Codification (or ASC) 820, “Fair Value Measurements and Disclosures.”

 

Accounting and Reporting Pronouncements Issued

 

On April 7, 2015 the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (or ASU) No. 2015-3, Interest – Imputation of Interest (the Update).  The Update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  We will adopt this Update beginning January 1, 2016 by applying the new guidance on a retroactive basis.  As of September 30, 2015 and December 31, 2014, we have unamortized debt issuance costs of $0.9 million and $1.2 million, respectively, that are currently recorded within prepaid expenses and other assets.

 

On April 12, 2015, the FASB deferred the effective date of ASU No. 2014-09, Revenues from Contracts with Customers, for one year from January 1, 2017 to January 1, 2018.

 

Reclassifications and Adjustment

 

Certain amounts reported previously in our consolidated financial statements have been reclassified or adjusted to be comparable with the classifications used for our 2015 consolidated financial statements.  We are now reporting our cost of sales in two components, which are (a) content amortization and royalties and (b) manufacturing and fulfillment.  We are now reporting amortization of deferred financing costs as interest expense.  Previously, we were reporting amortization of deferred financing costs as general and administrative expenses.

 

Principles of Consolidation

 

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.  As such, 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 the 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 in our consolidated statements of operations.  All intercompany transactions and balances have been eliminated.

 

 

Liquidity

 

For the nine months ended September 30, 2015 and 2014, we recognized a net loss of $18.3 million and $20.1 million, respectively.  During the nine months ended September 30, 2015 and 2014, we used cash in operating activities of $14.8 million and $400,000, respectively.  At September 30, 2015, our cash balance was $1.8 million.  At September 30, 2015, we had $62.3 million of term debt outstanding (see Note 7, Debt).  We continue to experience liquidity constraints and we are dependent upon growth in sales and margins to meet our liquidity needs and our debt covenants for the next twelve months.  There can be no assurances that we will be successful in realizing this growth or meeting our future covenant requirements within our amended credit agreement.  To address our liquidity risk, on May 20, 2015, we completed a $31.0 million capital restructuring transaction that addressed two fundamental areas: (a) deleveraging the balance sheet and (b) providing new working capital.  As part of the capital restructure, we amended our credit agreement and other notes payable by (i) reducing our minimum cash requirement by $2.5 million, thus making this cash available for operational needs, (ii) modifying certain financial covenants for better operating flexibility in meeting future covenants and maintaining compliance, and (iii) amending our unsecured subordinated seller notes to convert 50% or $8.5 million of the outstanding principal and accrued interest into preferred stock and warrants and reduce the applicable interest rate from 12.0% to 1.5% on the remaining balance through 2016.  The capital restructure improved our liquidity by selling shares of preferred stock and warrants for a total of $31.0 million ($22.5 million in cash and $8.5 million in converted subordinated notes).  The proceeds received were used to make an accelerated principal payment of $10.0 million under our credit agreement and pay fees and expenses incurred of approximately $1.9 million.  The remaining $10.6 million was available for content investment and working capital needs.  By reducing our debt balances and the applicable interest rate on the unsecured subordinated seller notes for two years, our future, annual cash interest expense has been reduced by approximately $2.0 million.  We believe that our current financial position combined with our forecasted operational results will be sufficient to meet our commitments.

 

Goodwill

 

Goodwill is the second largest asset on our balance sheet of which $43.0 million is recorded in our Wholesale reportable segment and $1.9 million is recorded in our Direct-to-Consumer reportable segment.  We assess goodwill for impairment every year in the fourth quarter and when events and circumstances indicate that goodwill may be impaired.  Our common stock price decreased 75% from $1.99 per share as of December 31, 2014 to $0.50 per share as of September 30, 2015.  The decrease occurred primarily during the second quarter of 2015 and was largely due to the issuance of our preferred stock in May 2015, which represents approximately 71% of our outstanding equity securities computed on a fully-diluted basis.  During the third quarter of 2015, our stock price increased 28% from $0.39 to $0.50 per share.

 

We considered the decrease in our common stock price to be an indicator that our goodwill may be impaired.  As a result, management updated its prior year goodwill impairment testing, which is to compare the fair value of our reporting units that have goodwill to the reporting unit’s carrying value.  When computing fair value of the reporting units, management used a discounted cash flow approach and discounted the future cash flows of its reporting units.  Significant assumptions incorporated in the valuation were the reporting unit’s future cash flows and appropriate discount rates (primarily ranging from 18% to 21%).  When doing this fair-value assessment, we also considered our current market capitalization comparing it to the combined fair values of our reporting units.  Significant assumptions that were incorporated in this market capitalization analysis were estimates of the fair values of our debt and preferred stock, as well as appropriate discounts for a minority interest position, limited trading volume and the effects of the issued and outstanding warrants have on our common stock price.

 

The results of our impairment testing indicate that for one of our reporting units, which has $38.9 million of goodwill and is part of our Wholesale segment, the margin by which the unit’s estimated fair value exceeds its carrying value significantly decreased during the nine months ended September 30, 2015.  Currently, the margin expressed as a percentage of fair value is less than 5%.  For our other reporting units that have goodwill their margins are in excess of 25% as of September 30, 2015.

 

Because our analysis and valuation is a level 3 valuation within the valuation hierarchy, which incorporates inputs that are inherently judgmental in nature, when performing our annual assessment in the fourth quarter, with the assistance of outside valuation professionals, we may conclude differently and record a charge for impairment of goodwill.  Further, if our common stock price falls during the fourth quarter or if our future operating results differ significantly from our current forecasts, then we may also conclude in the near future that our goodwill is impaired.  Because our current margin is less than 5% for the reporting unit that has the majority of our recorded goodwill, a change in assumptions and estimates could likely trigger an impairment that could be material.

 

 

Other Intangible Assets

 

During the third quarter of 2015, we committed to using the RLJE brand for all new feature-film content.  We will continue to brand all previously released feature-film content with the Image brand.  As a result of this change, we reassessed the useful life of our Image brand and concluded that the brand's life has been reduced to a trailing eight-year period, with a disproportionate amount of brand benefit being realized during the first three years.  Therefore, we have changed our amortization assumptions.  We were amortizing the carrying value of our Image brand on a straight-line basis over 15 years, with 12 years remaining.  Now we are amortizing the carrying value of our Image brand over the remaining eight years with increased amortization in the earlier years.  The change in amortization assumptions resulted in $208,000 of increased amortization during the current quarter.  The change will result in increased amortization expense through 2019, and then reduced amortization expense thereafter, as follows:

 

 

 

We assessed whether the Image brand was impaired during the third quarter of 2015 and concluded that the estimated future cash flows from the Image brand exceed the brand’s carrying value; therefore we did not recognize an impairment charge.

 

NOTE 2.

SEGMENT INFORMATION

 

In accordance with the requirements of the ASC 280 Segment Reporting” selected financial information regarding our three reportable business segments 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 customer base or acquires content differently.  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 segment consists of the acquisition, enhancement and worldwide exploitation of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), VOD, streaming video, downloading and sublicensing.  Our Direct-to-Consumer segment consists of our mail-order catalog and ecommerce businesses and our proprietary digital streaming channels.

 

Management currently evaluates segment performance based primarily on revenues and operating income (loss), including earnings from ACL.  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 following tables summarize the segment contribution for the three-month periods ended September 30, 2015 and 2014:

 

 

 

 

 

In July of 2014, our IP Licensing segment released the most recent season of Foyle’s War.

 

The following tables summarize the segment contribution for the nine-month periods ended September 30, 2015 and 2014:

 

 

 

 

 

A reconciliation of total segment contribution (loss) to loss before provision for income taxes is as follows:

 

 

 

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 are as follows:

 

 

 

NOTE 3.

EQUITY EARNINGS OF AFFILIATE

 

In 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.

 

 

The following summarized financial information is derived from the unaudited financial statements of ACL:

 

 

 

ACL's functional currency is the British Pound Sterling (GBP).  Amounts have been translated from GBP to U.S. dollar using the average exchange rate for the periods presented.  The above operating results of ACL do not include step-up basis amortization resulting from the Business Combination.

 

NOTE 4.

ACCOUNTS RECEIVABLE

 

Accounts receivable are primarily derived from:  (1) the sale of physical content (DVDs) to retailers and wholesale distributors who ship to mass retailers, (2) direct-to-consumer, ecommerce, catalog and download-to-own sales and (3) video content we license to broadcast, cable/satellite providers and digital subscription platforms such as Netflix and Amazon.  Our accounts receivable typically trend with retail seasonality.

 

 

 

Wholesale receivables are primarily billed and collected by our U.S. distribution facilitation partner.  Each month, our distribution partner preliminarily settles 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 our distribution partners.  Amounts vary and tend to be seasonal following our sales activity.  As of September 30, 2015 and December 31, 2014, we owed our distribution partners $2.0 million and $3.1 million, respectively, for receivables settled as of period-end.

 

The wholesale receivables are reported net of amounts we owe to our distribution partner as these amounts are offset against each other when settling receivables in accordance with the contract.  As of September 30, 2015 and December 31, 2014, the net wholesale receivables with our distribution partner were $3.7 million and $6.6 million, respectively, which is included in accounts receivable.

 

Our Direct-to-Consumer receivable represents amounts due to us from our merchant bank related to our credit card transactions processed as of period end.

 

 

NOTE 5.

INVENTORIES

 

Inventories are summarized as follows:

 

 

 

(1)

Other merchandise primarily consists of gifts, jewelry and home accents purchased from third-parties.

 

During the three and nine months ended September 30, 2015 and 2014, we reduced our inventories with adjustments for lower of cost or market valuation, shrinkage, and excess and obsolescence.  Impairment charges for the three months ended September 30, 2015 and 2014 were $307,000 and $712,000, respectively, and for the nine months ended September 30, 2015 and 2014, they were $1.4 million and $1.9 million, respectively.  These charges are included in cost of sales as manufacturing and fulfillment cost.

 

NOTE 6.

INVESTMENTS IN CONTENT

 

 

 

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, 2015 and 2014, impairment charges were $462,000 and $1.4 million, respectively.  For the nine months ended September 30, 2015 and 2014, impairment charges were $2.7 million and $2.7 million, respectively.  These charges are included in the cost of sales as content amortization and royalties.

 

In determining the fair value of content for impairments (Note 10, Fair Value Measurements), we employ a discounted cash flows (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.

 

NOTE 7.

DEBT

 

Debt consists of the following:

 

 

 

Future minimum principal payments of our debt as of September 30, 2015 are as follows:

 

 

 

The subordinated notes mature in 2018 and the senior notes mature in 2019; however, if we do not subsequently extend the subordinated debt maturity, then the new senior notes’ maturity would accelerate in conjunction with the repayment of the subordinated notes in 2018.  The above table reflects the assumption that no extension of the subordinated notes occurs.  The senior notes’ minimum principal payments in 2018 would be $5.3 million if the senior notes’ maturity is not accelerated.

 

Senior Term Notes

 

On September 11, 2014, we entered into a $70.0 million Credit and Guaranty Agreement (the Credit Agreement) with a syndicate of lenders led by McLarty Capital Partners, as administrative agent.  This agreement was amended as described below.  The Credit Agreement, as amended, consists of a term loan totaling $70.0 million with a maturity of five years, at an interest rate equal to LIBOR plus 10.64%.  LIBOR has a floor of 0.25%.  Principal payment obligations as a percentage of the amount initially borrowed are 3.5% per annum paid quarterly for the first two years, 5.0% for the third year and 7.5% for the remaining term with any unpaid principal balance due at maturity.  The obligations under the Credit Agreement are secured by a lien on substantially all of our consolidated assets pursuant to the Pledge and Security Agreement, dated as of September 11, 2014.

 

Under the Credit Agreement, interest and principal is payable quarterly with principal payments beginning on December 31, 2014.  Beginning in 2016, we are obligated to make certain accelerated principal payments annually which are contingent upon: (1) the occurrence of consolidated excess cash flows, as defined in the Credit Agreement, and (2) only to the extent at which such excess cash flows are above our minimum cash threshold of $12.0 million.  We are permitted to make additional voluntary principal payments under the Credit Agreement, but prepayments are subject to an applicable prepayment premium of:  (a) 5% if prepaid during the first year, (b) 3% if prepaid during the second year, and (c) 1.5% if prepaid during the third year.  The first $5.0 million of voluntary prepayment is not subject to any prepayment premium.

 

 

On April 15, 2015, we entered into an agreement with the lenders to amend the Credit Agreement.  The principal terms of the amendment are as follows:

 

(a) a reduction of the Minimum Cash Balance (as defined in the Credit Agreement) that we are required to maintain from $3.5 million to $1.0 million, thus providing access to $2.5 million of cash previously restricted,

 

(b) a waiver of certain Defaults (as defined in the Credit Agreement) and Events of Default (as defined in the Credit Agreement) caused by, or that would be caused by the breach of certain financial covenants under the Credit Agreement;

 

(c) amendments of the Credit Agreement (i) modifying the interest rate to equal LIBOR plus 10.64%, (ii) modifying certain financial statement and other reporting and lender communication requirements, (iii) increasing the covenant ratio thresholds for March 31 and June 30, 2015; and

 

(d) the consent of the lenders to the issuance of the preferred stock and warrants, as well as the use of the proceeds from the issuance of the preferred stock and warrants (i) to pay $10.0 million of the amounts outstanding pursuant to the Credit Agreement, (ii) to pay certain fees and costs associated with the issuance of the preferred stock, and (iii) for working capital purposes.

 

The Credit Agreement, as amended, contains certain financial and non-financial covenants beginning on December 31, 2014.  Financial covenants are assessed quarterly and are based on Adjusted EBITDA, as defined in the Credit Agreement.  Financial covenants vary each quarter and generally become more restrictive over time.

 

Financial covenants, as amended, include the following:

 

 

 

We are also obligated to maintain a minimum valuation ratio computed on the outstanding principal balance of our senior debt compared to the sum of our valuations of our content library and our investment in ACL.  To the extent the valuation ratio exceeds the allowed threshold; we are obligated to make an additional principal payment such that the threshold would not be exceeded after giving effect to this payment.  The valuation threshold is 83% as long as the unpaid principal balance exceeds $65.0 million and 75% thereafter.

 

The 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 Credit Agreement.

 

The Credit Agreement imposes restrictions on such items as encumbrances and liens, payments of dividends, 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 amended Credit Agreement, we must maintain at all times a cash balance of $1.0 million.  As of September 30, 2015, we were in compliance with all covenants as stipulated in the amended Credit Agreement.

 

Subordinated Notes Payable

 

In October 2012, we issued unsecured subordinated promissory notes in the aggregate principal amount of $14.8 million to the selling preferred stockholders of Image (or Subordinated Note Holders).  The subordinated promissory notes mature on the earlier of October 3, 2018 or six months after the latest stated maturity of the senior debt issued pursuant to the Credit Agreement.  The unsecured subordinated promissory notes currently bear an interest rate of 1.5% per an annum, of which 45% is payable in cash annually and the balance is accrued and added to the principal, which is payable upon maturity.

 

On April 15, 2015, we entered into an agreement to amend the subordinated promissory notes (the Note Amendment) that were issued to the Subordinated Note Holders.  The principal terms of the Note Amendment are as follows:

 

(a) an agreement by the Subordinated Note Holders to convert 50% of the outstanding balance under the subordinated notes into shares of preferred stock and warrants;

 

(b) amendments to the subordinated notes (i) changing the interest rate payable from 12% to 1.5% per annum for the 24-month period commencing on January 1, 2015, and then 12% per annum thereafter; and (ii) specifying that 45% of the interest due will be payable in cash and the remainder of the accrued interest will be payable in the form of additional subordinated notes; and

 

(c) a waiver of any existing defaults and events of default.

 

We are providing interest expense on our subordinated notes payable using the effective interest rate method at an annual interest rate of approximately 5 percent.

 

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 2,563,873 warrants (see Note 9, Stock Warrants).

 

NOTE 8.

MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY

 

Mandatorily Redeemable Convertible Preferred Stock

 

On May 20, 2015, we closed a transaction in which we sold 31,046 shares of preferred stock and warrants to acquire 9,313,873 shares of common stock 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 4,950,000 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 Credit Agreement 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 is intended to be used for working capital purposes.  Of the fees incurred, $878,000 was recorded against the proceeds received, $450,000 was recorded as additional debt discounts, $250,000 was included as interest expense and the balance was included in other expense.

 

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 and dividends.

 

·

Dividends – the preferred stock is 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 is due July 1, 2017 and then payments are to be made quarterly thereafter.  At our discretion, dividend payments are payable in either cash or common stock, or added to the preferred share’s stated value.

 

·

Conversion – at the preferred stockholder’s discretion, each share of preferred stock is convertible into 1,000 shares of our common stock, subject to adjustment for any unpaid dividends.  The conversion rate is subject to anti-dilution protection including adjustments for offerings consummated at a per-share price of less than $1.00 per common share.

 

·

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 $1.00) or (ii) 85% of the then trading price, as defined, of our common stock.

 

·

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.

 

Dividends are recognized using the effective interest-rate method and are recorded against additional paid-in capital.  During the three months ended September 30, 2015, we accreted $1.1 million of dividends and during the nine months ended September 30, 2015, we accreted $1.5 million of dividends.

 

Because the conversion rate is contingent upon our common stock price at the time of redemption, we cannot conclude that we have enough authorized, unissued shares of common stock to settle the mandatory redemption with shares of equity.  Therefore we have recorded the preferred stock separate from our permanent equity.  Also, because of the potential adjustments to the conversion rate, including adjustments for offerings consummated at a per-share price of less than $1.00 per common share, we have bifurcated the conversion feature from its host instrument (a preferred share) and we are accounting for the conversion feature as a derivative liability in accordance with ASC 815-40, Contracts in Entity’s Own Equity.

 

In connection with the sale, the holders of the preferred stock appointed two board members temporarily increasing the board to 11 members.  On June 4, 2015, four board members resigned thus reducing the board size to seven members, which we committed to when issuing the preferred stock.

 

The warrants issued with the preferred stock have a term of five years and an exercise price of $1.50 per share.  The exercise price is subject to standard anti-dilution protection including adjustments for offerings consummated at a per-share price of less than $1.50 per common share.  Additionally, if we were to consummate certain fundamental transactions, such as a business combination or other change-in-control transactions, the warrant holders may require, under certain conditions, that we repurchase the warrants with cash equal to the warrants’ then fair value as determined using the Black Scholes valuation model.

 

On July 9, 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 warrants.  The registration statement was declared effective in July 2015.  We will use our best efforts to keep the registration statement effective.  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 are accreting the carrying value of our preferred stock up to its redemption value over a period of time beginning from the issuance on May 20, 2015 to the required redemption date of May 20, 2020.

 

Common Stock

 

Included in our common shares outstanding at December 31, 2014 were 437,241 shares held by certain founding shareholders as part of the initial public offering of RLJE.  These shares were subject to forfeiture over a two-year period if certain stock price targets were not achieved.  All shares were forfeited and returned in January 2015.

 

Restricted Stock-Based Compensation Grants

 

Compensation expense relating to our restricted stock awards for the three months ended September 30, 2015 and 2014 was $59,000 and $227,000, respectively, and for the nine months ended September 30, 2015 and 2014 stock-based compensation was $213,000 and $683,000, respectively.  Compensation expense related to restricted stock awards is included in general and administrative expenses.  On June 30, 2015, we allowed 57,224 shares of common stock to vest that were granted to those board members who resigned on June 4, 2015 (see Mandatorily Redeemable Convertible Preferred Stock above).  We accounted for this as a modification of vesting provisions and revalued these shares as of June 30, 2015.  This revaluation resulted in a reduction in share-based compensation expense of $146,000 during the nine months ended September 30, 2015.

 

During the nine months ended September 30, 2015, 15,136 shares of restricted stock were granted to a director, 162,939 shares were vested and 36,089 shares of restricted stock were forfeited.  The shares granted during 2015 were fair valued, on the date of grant, using our publicly traded stock price of $0.76 per share.  Of the shares forfeited, 28,633 shares of restricted stock were forfeited based upon the failure to achieve the 2014 performance criteria and the remainder of the forfeitures were due to employee terminations.  During the nine months ended September 30, 2014, 190,280 shares of restricted stock were granted, 182,206 shares were vested and 82,838 shares were forfeited.  Of the 190,280 shares granted in 2014, 164,780 shares were granted to executive officers and directors and 25,500 shares were granted to other members of management.  Of the 82,838 shares forfeited, 66,244 shares of restricted stock were forfeited based upon the failure to achieve the 2013 performance criteria and the remainder of the forfeitures were due to employee terminations.  The shares granted during 2014 were fair valued on the date of grant with a range of $3.49 ‑ $5.00 per share, for a total value of approximately $766,000.  A summary of the activity since December 31, 2014 is as follows:

 

 

 

The performance shares vest if certain performance criteria are achieved contingent upon the grantees being employed by RLJE when the performance criteria are evaluated.  Vesting for the outstanding restricted performance shares is contingent upon achieving 2015 targets.

 

As of September 30, 2015, there is $30,000 of unamortized compensation that will vest solely on completion of future services over the next six months, with a weighted-average remaining vesting period of four months.  As of September 30, 2015, there is $28,000 of unamortized compensation that will vest based on achieving certain performance and service criteria over the next six months, with a weighted-average remaining vesting period of four months.

 

NOTE 9.

STOCK WARRANTS

 

RLJE had the following warrants outstanding:

 

 

 

We issued warrants with a term of five years beginning October 3, 2012 that provide the warrant holder the right to acquire a share of our common stock for $12.00 per share (the 2012 Warrants).  The warrants are redeemable by us for $0.01 per warrant share if our common stock trades at $17.50 or more per share for 20 out of 30 trading days. The warrants contain standard anti-dilution provisions.

 

The 2012 Warrants contain a provision whereby the exercise price will be reduced if RLJE reorganized as a private company.  The reduction in exercise price depends upon the amount of other consideration, if any, received by the warrant holders in the reorganization and how many years after the Business Combination reorganization is consummated.  Generally, the reduction in exercise price would be between $6.00 and $9.00 assuming no additional consideration was received.  Because of this provision, all warrants are being accounted for as a derivative liability in accordance with ASC 815-40, Contracts in Entity’s Own Equity.

 

On May 20, 2015, we issued warrants to acquire 9.3 million shares of our common stock (the 2015 Warrants).  The terms are described in Note 8, Convertible Preferred Stock and Equity.  We are accounting for these warrants as a derivative liability because the warrants contain a provision that allows the warrant holders to sell, at their discretion, their warrants back to us upon the consummation of certain fundamental transactions, such as a business combination or other change-in-control transactions, at a cash purchase price equal to the warrants’ then fair value.

 

NOTE 10.

FAIR VALUE MEASUREMENTS

 

Stock Warrant and Other Derivative Liabilities

 

We have warrants outstanding to purchase 30,355,540 shares of our common stock, which are recorded at fair value on the consolidated balance sheets.  We issued the 2012 Warrants to purchase 21,041,667 shares of our common stock in 2012 and we issued the 2015 Warrants to purchase 9,313,873 shares of our common stock in 2015.

 

Of the 2012 Warrants, 15,375,000 are registered under the Securities Act and are available for trading on the over-the-counter market.  Since the first quarter of 2014, there has been a lack of trading activity for the registered warrants, and as such, when assessing their fair value we transferred them from Level 1 to Level 3 within the fair-value hierarchy.  As of September 30, 2015 and December 31, 2014, we determined the fair value of the registered warrants using a Monte Carlo simulation model.  Inputs to the model are stock volatility, contractual warrant terms (which are remaining life of the warrant, the redemption feature, the exercise price, and assumptions for the reduction in exercise price if we were to reorganize as a private company), the risk-free interest rate, and a discount for the lack of marketability (DLOM) pertaining to the underlying common stock as the shares acquirable are not registered.  We use the closing market price of our common stock to compute stock volatility.  The DLOM is determined using the Finnerty Average-Strike Put Option Marketability Discount Model (Finnerty Model), which takes into consideration the discount period, stock dividend rates, and stock volatility.  We used a DLOM rate of 13.3% as of September 30, 2015 and 11.2% as of December 31, 2014.  Assumptions regarding adjustments to the exercise price are based on management’s best estimates of the likelihood of reorganizing as a private company and the amount of the resulting exercise-price adjustment.

 

The remaining 2012 Warrants, consisting of Sponsor warrants of 3,816,667 and unregistered warrants of 1,850,000, are classified as Level 3 within the fair-value hierarchy.  Because RLJE has agreed not to exercise its redemption right pertaining to certain warrants held by RLJ SPAC Acquisition LLC (or the Sponsor) and because the unregistered warrants generally have a discounted fair value as compared to the registered warrants, the valuation of the sponsor warrants and the unregistered warrants has always been a Level 3 measurement.  We determined the fair value of the Sponsor warrants using a Monte Carlo simulation model and using the same assumptions used for the registered warrants, except we did not include the redemption feature.

 

The unregistered 2012 Warrants differ from the registered warrants in that they have not been registered under the Securities Act and are not available for trading.  As of September 30, 2015 and December 31, 2014, we determined the fair value of these warrants by taking the fair value of a registered warrant and discounting it using the Finnerty Model for the lack of marketability as these warrants are not registered.  We used a DLOM rate of 18.2% as of September 30, 2015 and 17.8% as of December 31, 2014.  The 2012 Warrants decreased in fair value from $601,000 as of December 31, 2014 to zero as of September 30, 2015.

 

We are using the Black Scholes option valuation model to value the 2015 Warrants, which is classified as Level 3 within the fair-value hierarchy.  Inputs to the model are stock volatility, contractual warrant terms (which are remaining life of the warrant and the exercise price) and the risk-free interest rate.  We use the closing market price of our common stock to compute stock volatility.  The 2015 Warrants decreased in fair value since issuance from $2.1 million as of May 20, 2015 to $1.3 million as of September 30, 2015.

 

We are using the Black Scholes option valuation model to value the preferred stock’s embedded conversion feature, which is classified as Level 3 within the fair-value hierarchy.  Inputs to the model are stock volatility, contractual terms (which are remaining life of the conversion option and the conversion rate) and the risk-free interest rate.  We use the closing market price of our common stock to compute stock volatility.  The fair value of the embedded conversion feature decreased since issuance from $9.4 million as of May 20, 2015 to $5.6 million as of September 30, 2015.

 

(In thousands)		December 31, 2014
		Level 1				Level 2				Level 3				Total
Stock warrant and other derivative liabilities		$	—			$	—			$	601			$	601

(In thousands)		Nine Months Ended September 30, 2015
		Level 1				Level 2				Level 3				Total
Stock warrant and other derivative liabilities at December 31, 2014		$	—			$	—			$	601			$	601
Issuance of warrants and other derivatives			—				—				11,450				11,450
Change in fair value			—				—				(5,131	)			(5,131	)
Stock warrant and other derivative liabilities at September 30, 2015		$	—			$	—			$	6,920			$	6,920

(In thousands)		Nine Months Ended September 30, 2014
		Level 1				Level 2				Level 3				Total
Stock warrant and other derivative liabilities at December 31, 2013		$	2,630			$	—			$	1,493			$	4,123
Change in fair value hierarchy			(2,755	)			—				2,755				—
Change in fair value			125				—				2,152				2,277
Stock warrant and other derivative liabilities at September 30, 2014		$	—			$	—			$	6,400			$	6,400

(In thousands)		Nine Months Ended September 30, 2015
		Level 1				Level 2				Level 3				Total				Loss
Investments in content		$	—			$	—			$	3,504			$	3,504			$	2,730

(In thousands)		Nine Months Ended September 30, 2014
		Level 1				Level 2				Level 3				Total				Loss
Investments in content		$	—			$	—			$	11,223			$	11,223			$	2,743

(In thousands)		Nine Months Ended September 30,
		2015				2014
Cash paid during the period for:
Interest		$	6,321			$	4,830
Income taxes		$	140			$	180
Non-cash investing and financing activities:
Subordinated notes payable exchanged for preferred stock and warrants		$	8,546			$	—
Accretion on preferred stock		$	1,525			$	—
Preferred stock issuance costs accrued for in accounts payable and accrued liabilities		$	95			$	—
Capital expenditures accrued for in accounts payable and accrued liabilities		$	5			$	—

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2015				2014				2015				2014
Revenues		$	32,549			$	37,123			$	82,778			$	99,478
Costs of sales			22,099				28,149				61,089				74,521
Gross profit			10,450				8,974				21,689				24,957
Operating expenses			12,224				11,373				36,243				36,172
Loss from operations			(1,774	)			(2,399	)			(14,554	)			(11,215	)
Equity in earnings of affiliate			188				1,190				876				2,540
Interest expense, net			(2,223	)			(2,557	)			(7,747	)			(6,560	)
Change in fair value of stock warrants and other derivatives			(2,506	)			(1,599	)			5,131				(2,277	)
Loss on extinguishment of debt			—				(1,457	)			—				(1,457	)
Other expense			(782	)			(1,141	)			(1,397	)			(655	)
(Provision) Benefit for income taxes			(49	)			164				(631	)			(524	)
Net loss		$	(7,146	)		$	(7,799	)		$	(18,322	)		$	(20,148	)

(In thousands)		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Wholesale:
U.S.		$	19,110			$	19,749			$	47,826			$	57,306
International			2,435				2,254				9,499				9,471
Total Wholesale			21,545				22,003				57,325				66,777
Direct-to-Consumer:
Ecommerce Catalog U.S.			6,586				4,806				16,323				19,665
Proprietary Digital Channels			1,965				1,162				5,183				2,769
International Ecommerce			407				478				1,443				1,580
Total Direct-to-Consumer			8,958				6,446				22,949				24,014
Intellectual Property			2,046				8,674				2,504				8,687
Total revenues		$	32,549			$	37,123			$	82,778			$	99,478

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2015				2014				2015				2014
IP Licensing		$	1,243			$	6,278			$	1,587			$	6,557
Wholesale			15,441				18,230				46,104				54,517
Direct-to-Consumer			5,415				3,641				13,398				13,447
COS by segment		$	22,099			$	28,149			$	61,089			$	74,521

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2015				2014				2015				2014
Selling expenses		$	5,989			$	5,411			$	17,628			$	17,448
General and administrative expenses			4,791				4,661				14,796				14,466
Depreciation and amortization			1,444				1,301				3,819				4,258
Total selling, general and administrative expenses		$	12,224			$	11,373			$	36,243			$	36,172

(In thousands)		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net loss		$	(7,146	)		$	(7,799	)		$	(18,322	)		$	(20,148	)
Amortization of content			12,676				18,911				36,355				44,979
Cash investment in content			(11,545	)			(11,467	)			(29,597	)			(37,618	)
Depreciation and amortization			1,444				1,301				3,819				4,258
Interest expense			2,223				2,557				7,747				6,560
Loss on extinguishment of debt			—				1,457				—				1,457
Provision for income taxes			49				(164	)			631				524
Transaction costs and restructuring			244				—				751				—
Warrant and other derivative liability fair value adjustment			2,506				1,599				(5,131	)			2,277
Stock-based compensation			59				227				213				683
Adjusted EBITDA		$	510			$	6,622			$	(3,534	)		$	2,972

(In thousands)		Nine Months Ended September 30,
		2015				2014
Adjusted EBITDA		$	(3,534	)		$	2,972
Cash interest expense			(5,231	)			(4,635	)
Income tax provision			(631	)			(524	)
Transaction costs and restructuring			(751	)			—
Proceeds from issuance of preferred stock and warrants			22,500				—
Proceeds from debt borrowings less net principal payments			(11,837	)			(165	)
Payment of preferred stock issuance and senior debt modification costs			(1,233	)			(30	)
ACL dividends in excess of earnings			853				407
Capital expenditures			(1,297	)			(1,580	)
Changes in working capital			(4,910	)			3,922
Foreign currency impact on cash flows			1,216				133
Net (decrease) increase in cash		$	(4,855	)		$	500

(In thousands)		September 30, 2015				December 31, 2014
IP Licensing		$	23,607			$	30,197
Wholesale			140,088				140,935
Direct-to-Consumer			11,075				12,049
Corporate			3,529				8,873
		$	178,299			$	192,054

(In thousands)		Nine Months Ended September 30,
		2015				2014
Net cash used in operating activities		$	(14,831	)		$	(400	)
Net cash provided by investing activities			432				1,367
Net cash provided by financing activities			9,430				(195	)
Effect of exchange rate changes on cash			114				(272	)
Net (decrease) increase in cash			(4,855	)			500
Cash at beginning of period			6,662				7,674
Cash at end of period		$	1,807			$	8,174

		December 31, 2014		Second Half of 2015		2016		Thereafter
Leverage Ratios:
Senior debt-to-Adjusted EBITDA		4.64 : 1.00		Ranges from 4.47 : 1.00 to 4.03 : 1.00		Ranges from 3.83 : 1:00 to 2:67 : 1.00		2.67 : 1.00
Total debt-to-Adjusted EBITDA		5.71 : 1.00		Ranges from 5.56 : 1.00 to 5.06 : 1.00		Ranges from 4.82 : 1:00 to 3.44 : 1.00		3.44 : 1.00
Fixed charge coverage ratio		1.10 : 1.00		Ranges from 1.13 : 1.00 to 1.20 : 1.00		Ranges from 1.24 : 1.00 to 1.59 : 1.00		1.59 : 1.00

	31.1*	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
	31.2*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
	32.1*	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

		RLJ ENTERTAINMENT, INC.
Date:	November 16, 2015	By:	/S/ MIGUEL PENELLA
			Miguel Penella
			Chief Executive Officer
			(Principal Executive Officer)
Date:	November 16, 2015	By:	/S/ MARK NUNIS
			Mark Nunis
			Chief Accounting Officer
			(Principal Financial and Accounting Officer)