|RLJ ENTERTAINMENT, INC. filed this Form 10-Q on 11/09/2017|
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RLJ Entertainment, Inc.
Notes To Consolidated Financial Statements
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.
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
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