10-Q
RLJ ENTERTAINMENT, INC. filed this Form 10-Q on 11/09/2017
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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.

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