RLJ ENTERTAINMENT, INC. (Form: 10-Q, Received: 11/07/2013 16:03:53)

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	( a)	Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012	4

	( b)	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012	5

	(c)	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2012	6

	(d)	Consolidated Statements of Equity for the Nine Months Ended September 30, 2013 and 2012	7

	(e)	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	8

	(f)	Notes to Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2013	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36

Item 4.	Controls and Procedures		36

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		37

Item 1A.	Risk Factors		37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3.	Defaults Upon Senior Securities		37

Item 4.	Mine Safety Disclosures		37

Item 5.	Other Information		37

Item 6.	Exhibits		38

SIGNATURES			39

Index

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2013 (or Quarterly Report ), includes forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. 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 ability to integrate the businesses of Image Entertainment, Inc. and Acorn Media Group, Inc.;

the anticipated benefits of the business combination may not be fully realized or may take longer to realize than expected;

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

our ability to maintain relationships with customers, employees, suppliers and lessors;

the loss of key personnel;

delays in the release of new titles or other content;

the effects of disruptions in our supply chain;

our public securities’ limited liquidity and trading;

our ability to continue to meet the NASDAQ Capital Market continuing listing standards; or

our financial performance, including our ability to achieve new revenue growth and earnings before interest, taxes, depreciation and amortization (or EBITDA ) margins or realize synergies.

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 April 10, 2013. You are cautioned not to place undue reliance on such forward-looking statements.

EXPLANATORY NOTE

On October 3, 2012, the business combination of RLJ Entertainment, Inc., Image Entertainment, Inc. and Acorn Media Group, Inc. was completed. For financial reporting purposes, the financial statements accompanying this Quarterly Report have been divided into (i) the “Predecessor” period (pre-October 3, 2012) which include the activities of Acorn Media Group, Inc. and its subsidiaries, and (ii) the “Successor” period (post-October 3, 2012) which include the activities of RLJ Entertainment, Inc. and its subsidiaries, including Image Entertainment, Inc. and Acorn Media Group, Inc. Results for the Predecessor period are not indicative of, or comparable to, results for the Successor period. “We,” “our” or “us” when used in this Quarterly Report refer to RLJ Entertainment, Inc. and its subsidiaries for the Successor period, and Acorn Media Group, Inc. and its subsidiaries for the Predecessor period, unless otherwise indicated.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

RLJ ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

September 30, 2013 and December 31, 2012

	Successor
(In thousands, except share data)	September 30,			December 31,
	2013			2012
ASSETS
Current assets:
Cash and cash equivalents	$	2,630		$	4,739
Accounts receivable, net		12,148			20,484
Inventories, net		16,718			23,029
Investments in content, net		36,600			30,981
Prepaid expenses and other assets		3,097			1,938
Total current assets		71,193			81,171
Noncurrent portion of accounts receivable		3,250			4,127
Noncurrent portion of investments in content		46,441			58,816
Property, equipment and improvements, net		1,576			1,800
Equity investment in affiliates		24,269			25,449
Other intangible assets		20,144			23,883
Goodwill		47,066			47,382
Total assets	$	213,939		$	242,628
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	23,322		$	30,590
Accrued royalties and distribution fees		38,491			32,658
Deferred revenue		5,747			4,339
Current portion of long term debt		15,040			4,000
Total current liabilities		82,600			71,587
Long term portion of debt, less debt discount		63,858			78,323
Deferred tax liability		350			350
Stock warrant liability		7,406			4,324
Total liabilities		154,214			154,584
Equity:
Common stock, $0.001 par value, 250 million shares authorized,13,700,862 and 13,377,546 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		13			13
Additional paid-in capital		86,596			86,133
Retained earnings (deficit)		(27,267	)		1,743
Accumulated other comprehensive gain		383			155
Total equity		59,725			88,044
Total liabilities and equity	$	213,939		$	242,628

See accompanying notes to consolidated financial statements.

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RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

For the Three and Nine Months Ended September 30, 2013 and 2012

	Successor						Predecessor
(In thousands, except per share data)	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2013			2013			2012			2012

Revenue	$	32,741		$	107,333		$	20,568		$	57,447
Cost of sales		24,747			88,627			12,149			31,633
Gross profit		7,994			18,706			8,419			25,814

Selling expenses		6,397			18,046			4,388			11,063
General and administrative expenses		4,560			16,827			4,955			14,607
Depreciation and amortization		1,388			4,308			137			398
Total selling, general and administrative expenses		12,345			39,181			9,480			26,068
LOSS FROM OPERATIONS		(4,351	)		(20,475	)		(1,061	)		(254	)

Equity earnings of affiliates		1,364			2,924			462			983
Interest expense, net		(2,019	)		(6,027	)		(261	)		(838	)
Other income (expense)		(2,832	)		(3,751	)		501			118
Total other income (expense)		(3,487	)		(6,854	)		702			263
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		(7,838	)		(27,329	)		(359	)		9
Provision for income taxes		670			1,681			123			203
NET LOSS		(8,508	)		(29,010	)		(482	)		(194	)
Less (net income) loss attributable to noncontrolling interests		—			—			13			(43	)
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(8,508	)	$	(29,010	)	$	(469	)	$	(237	)
Net loss per common share:

Unrestricted common stock:
Basic and diluted	$	(0.62	)	$	(2.15	)	$	(0.46	)	$	(0.23	)
Restricted common stock:
Basic and diluted	$	(0.62	)	$	(2.15	)	$	—		$	—

Unrestricted weighted average shares outstanding:
Basic and diluted		13,340			13,340			1,023			1,023
Restricted weighted average shares outstanding:
Basic and diluted		292			127			—			—

See accompanying notes to consolidated financial statements.

Index

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

For the Three and Nine Months Ended September 30, 2013 and 2012

	Successor						Predecessor
(In thousands)	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2013			2013			2012			2012

NET LOSS:
Net loss	$	(8,508	)	$	(29,010	)	$	(482	)	$	(194	)
Other comprehensive income:
Foreign currency translation gain		803			228			151			295
Total comprehensive income (loss)		(7,705	)		(28,782	)		(331	)		101
Less: comprehensive income (loss) attributable to noncontrolling interests:
Share of net income (loss)		—			—			(13	)		43
Share of foreign currency translation gain		—			—			42			37
Comprehensive income attributable to noncontrolling interest		—			—			29			80
Comprehensive income (loss) attributable to common shareholders	$	(7,705	)	$	(28,782	)	$	(360	)	$	21

See accompanying notes to consolidated financial statements.

Index

RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

For the Nine Months Ended September 30, 2013 (Successor)

	Common Stock											Accumulated
(In thousands)	Shares		Par Value		Additional Paid-in Capital		Stockholder Notes Receivable		Retained Earnings (Deficit)			Other Comprehensive Gain		Treasury Stock		Non- controlling Interests		Total Equity
Balance at January 1, 2013		13,378	$	13	$	86,133	$	—	$	1,743		$	155	$	—	$	—	$	88,044
Issuance of restricted common stock for services		323		—		—		—		—			—		—		—		—
Stock-based compensation		—		—		463		—		—			—		—		—		463
Foreign currency translation		—		—		—		—		—			228		—		—		228
Net loss		—		—		—		—		(29,010	)		—		—		—		(29,010	)
Balance at September 30, 2013		13,701	$	13	$	86,596	$	—	$	(27,267	)	$	383	$	—	$	—	$	59,725

For the Nine Months Ended September 30, 2012 (Predecessor)

	Common Stock												Accumulated
(In thousands)	Shares		Par Value		Additional Paid-in Capital		Stockholder Notes Receivable			Retained Earnings			Other Comprehensive Loss			Treasury Stock			Non- controlling Interests			Total Equity
Balance at January 1, 2012		1,023	$	10	$	4,451	$	(684	)	$	26,295		$	(421	)	$	(583	)	$	759		$	29,827
Stock-based compensation		—		—		373		—			—			—			—			—			373
Foreign currency translation		—		—		—		—			—			258			—			37			295
Net income		—		—		—		—			(237	)		—			—			43			(194	)
Stockholders’ Distributions		—		—		—		—			(4,879	)		—			—			(265	)		(5,144	)
Balance at September 30, 2012		1,023	$	10	$	4,834	$	(684	)	$	21,179		$	(163	)	$	(583	)	$	574		$	25,157

See accompanying notes to consolidated financial statements.

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RLJ ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

For the Nine Months Ended September 30, 2013 and 2012

(In thousands)	Successor			Predecessor
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(29,010	)	$	(194	)
Adjustments to reconcile net loss to net cash:
Equity earnings in affiliates		(2,924	)		(983	)
Amortization of content, including impairments		50,535			11,412
Depreciation and amortization		510			339
Amortization of intangible assets		3,798			59
Foreign currency exchange loss/(gain)		706			(310	)
Fair value adjustment of stock warrant liability		3,082			—
Noncash interest expense		750			—
Stock-based compensation expense		463			373
Changes in assets and liabilities:
Accounts receivable, net		9,151			3,487
Inventories, net		6,308			(244	)
Investment in content, net		(38,276	)		(18,935	)
Prepaid expenses and other assets		(361	)		(1,137	)
Accounts payable and accrued liabilities		(7,617	)		877
Deferred revenue		1,403			—
Net cash used in operating activities		(1,482	)		(5,256	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(350	)		(505	)
Acquisition of affiliate		—			(21,871	)
Dividends received from affiliate		4,005			2,682
Net cash provided by (used in) investing activities		3,655			(19,694	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility		10,398			6,167
Repayments of borrowings under revolving credit facility		(3,000	)		—
Proceeds from debt		191			27,511
Repayment of debt		(11,452	)		(3,502	)
Distributions to stockholders		—			(5,144	)
Net cash provided by (used in) financing activities		(3,863	)		25,032
Effect of exchange rate changes on cash		(419	)		(198	)
NET DECREASE IN CASH:		(2,109	)		(116	)
Cash at beginning of period		4,739			1,625
Cash at end of period	$	2,630		$	1,509
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	4,183		$	659
Income taxes	$	539		$	727

See accompanying notes to consolidated financial statements.

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RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

RLJ Entertainment, Inc. (or Successor ). RLJ Entertainment, Inc. (or RLJE ) is a global entertainment company with a strong presence in North America, the United Kingdom and Australia and 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 Acorn Media UK Limited (or Acorn UK ), Acorn Media Australia Pty Ltd. (or Acorn Australia ) and Acorn Productions Limited (or APL ). 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 for periods following the Business Combination (as described below) and Acorn Media and its subsidiaries for periods prior to the Business Combination, unless otherwise noted.

We acquire content rights in various categories, with particular focus on full-length motion pictures, urban programming, and British episodic mystery and drama. We acquire this content in three ways. Through long term agreements, we license multiple rights to third-party products. We own content libraries. We also develop, produce, and own original programming through our wholly-owned subsidiary, APL, and our majority-owned subsidiary, ACL, in addition to fitness titles through our Acacia brand. We distribute this content across multiple platforms, including broadcast/cable, existing digital distribution formats: download-to-own, rental, subscription video on demand (or SVOD ), free video on demand (or FVOD ); new digital channels platforms; DVD and Blu-ray retail and online ecommerce; and international broadcast licensing and sales. Our principal executive offices are located in Silver Spring, Maryland, with additional offices U.S. locations in Chatsworth, California, and Stillwater, Minnesota, and international locations in London, England and Sydney, Australia.

We market our products through a multi-channel strategy encompassing (1) the development and licensing of original program offerings through our wholly-owned subsidiary, APL, and our majority-owned subsidiary, ACL, as well as our fitness offerings; (2) wholesale distribution through retail partners covering brick-and-mortar establishments, digital, mobile, broadcast and cable partners; and (3) a direct-to-consumer presence in the United States and United Kingdom through traditional catalog and e-commerce offerings.

APL manages the intellectual property rights that we own and revenues associated with those rights and includes ACL, which owns a the vast majority of the Agatha Christie library that includes approximately 80 novels and short story collections and 19 plays and a film library of nearly 40 made-for-television films. Beginning in 2014, ACL has commissioned a new writer to expand the Agatha Christie library content for a new title.

Our wholesale partners are broadcast, digital outlets and major retailers in the United States, Canada, United Kingdom and Australia, including Amazon, Walmart, Target, Costco, Barnes & Noble, iTunes, Netflix, BET, Showtime, DirectTV, and Hulu. We have a catalog of owned and long term licensed content in excess of 5,300 titles, segmented into genre-based franchise content program lines such as Acorn (British drama/mystery, including content produced by ACL), Image (independent feature films, stand-up comedy), On-Cue and One Village (urban), Acacia (fitness), Slingshot Pictures (faith), Athena (educational), Criterion (art films) and Madacy (uniquely packaged collections of historical footage/documentaries). Our owned content includes 25 Foyle’s War made for TV films; multiple instructional Acacia titles; and through our 64% ownership interest in ACL, a majority share of the Agatha Christie branded library.

Our direct-to-consumer segment includes the continued roll-out of our proprietary digital channels, such as the subscription-based Acorn TV platform. As of October 31, 2013, Acorn TV platform has over 40,000 paying subscribers. We plan to invest, expand and launch additional subscription platforms in the near-term within the United States (or US ), with platforms focusing on urban content.

Acorn Media Group, Inc. (or Predecessor ). Acorn Media was formed as a corporation in the District of Columbia in 1984 and elected in 1989 to be treated as an S corporation. Acorn Media is a marketer and distributor of niche content, through physical, digital and broadcast platforms, and complementary products, selling through both third party (wholesale) and proprietary direct-to-consumer channels. Acorn Media acquires exclusive home video, digital and broadcast rights from third parties, usually for a period of seven years, for a diverse array of British television and other specialty programming. Acorn Media also creates additional content and value-added features for its content, such as interactive menus, audio commentaries, packaging and marketing materials. Acorn Media results include its subsidiaries Acorn UK, Acorn Australia and APL and its subsidiaries. In February 2012, Acorn Media acquired a 64% ownership in ACL.

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RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

Business Combination

On October 3, 2012, the Business Combination of RLJE, Image and Acorn Media was completed.

For financial reporting purposes, RLJE is the acquirer of Image and Acorn Media. Acorn Media was determined to be the Predecessor based primarily on its significantly higher purchase price relative to Image. The Business Combination was accounted for in accordance with accounting principles generally accepted in the United States (or US GAAP ) and accordingly, the assets and liabilities were recorded using fair value at October 3, 2012. The financial statements for the three and nine months ended September 30, 2013 and 2012 are not comparable as a result of the acquisition accounting. The financial statements for the three and nine months ended September 30, 2013 and 2012 are presented for two periods, the period prior to the Business Combination (“Predecessor”) and the period subsequent to the Business Combination (“Successor”).

Prior to the closing of the Business Combination on October 3, 2012, RLJE had no meaningful operating activities. The “Predecessor” period (pre-October 3, 2012) includes the activities of Acorn Media. The “Successor” period (post-October 3, 2012) includes the activities of RLJE, Image and Acorn Media. All information as of and for the three and nine months ended September 30, 2012 solely relate to Acorn Media.

Unaudited Interim Financial Statements

The balance sheet as of December 31, 2012, included in this report, which has been derived from audited financial statements, and the accompanying unaudited interim consolidated financial statements have been prepared in accordance with US GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Commission. Accordingly, they do not include all the information and footnotes required by US GAAP for complete audited financial statements.

In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Due to the seasonal nature of our business and other factors, including our new 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 April 10, 2013 (or the 2012 Form 10-K) . Note 2, Principles of Consolidation and Summary of Significant Accounting Policies of our audited consolidated financial statements included in our 2012 Form 10-K contains a summary of our significant accounting policies.

Principles of Consolidation

The operations of ACL are entirely managed by RLJE, 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 over the majority shareholder. We have included our share of ACL’s operating results, using the equity method of accounting, in our consolidated financial statements beginning from when Acorn Media acquired its 64% ownership interest in ACL (February 29, 2012).

Our consolidated financial statements include the accounts of all majority-owned subsidiary companies, except for ACL. Investment in ACL is carried as a separate asset on the Condensed Consolidated Balance Sheet at cost adjusted for equity in undistributed earnings. Except for dividends and changes in ownership interest, changes in equity in undistributed earnings of ACL are included in “Other income (expense)” on the Consolidated Statements of Operations. All intercompany transactions and balances have been eliminated.

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RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Significant Accounting Policies

We generate our revenue primarily from the exploitation of acquired or produced content rights through multiplatform distribution channels. The content is monetized in DVD format to wholesale, licensed to broadcast and cable, video-on-demand, direct-to-consumer, catalogs, subscription streaming video and licensed to digital platforms like Amazon and Netflix. Revenue is presented net of sales returns, rebates, unit price adjustments, sales return reserve, sales discounts and market development funds.

Accounting and Reporting Pronouncements Adopted

Since the filing of our 2012 Form 10-K, there were no new accounting pronouncements adopted.

Reclassifications

Some balances have been reclassified to conform to the current presentation. We have changed our consolidated balance sheet presentation from an unclassified presentation to a classified presentation. Current assets and liabilities are presented separately from long term balances.

Liquidity

As of September 30, 2013, we had a working capital deficit of $11.4 million. For the nine months ended September 30, 2013, we incurred a net use of cash of $1.5 million resulting from our operating activities. The net use of cash was largely attributable management’s use of cash flow to payoff largely pre-merger vendor trade payables. For the nine months ended September 30, 2013, we paid approximately $13.9 million of past due vendor short-term trade payables and distributor advances. The payment of approximately $13.9 million is reflected in the Consolidated Statement of Cash Flows as (1) $7.6 million reduction in accounts payable and accrued liabilities and (2) $6.3 million in recoupments on advances by our U.S. distributor. These advances are presented net of the gross accounts receivable balance (Note 5, Accounts Receivable ).

Beginning in the fourth quarter of 2013, we believe the deficit in our cash used in operating activities will be positively impacted by:

The seasonal fourth quarter sales, which generate 35-40% of our annual sales revenue;

The full realization of approximately $8.0 million in synergy changes that will be realized in 2014;

Improved gross margin from re-allocating $15.0 million of capital into higher yielding content; and

Revenue expansion and continued positive EBITDA results from operating improvements.

We have agreed to use a portion of our projected 2014 cash flow to make accelerated principal payments to our lenders to reduce our leverage. As a result of this agreement, we have classified $15.0 million of principal payments as current liabilities versus $4.0 million as of December 31, 2012 (Note 8, Debt ). We are forecasting that the incremental principal reduction will be paid from our 2014 free cash flows. These incremental payments are not expected to affect our ability to increase content investment or meet normal operating commitments. We believe that our current financial position combined with our forecasted operational results will be sufficient to meet our commitments.

NOTE 2. SEGMENT INFORMATION

In accordance with the requirements of the Accounting Standards Codification (the ASC) 280 “ Segment Reporting, ” selected financial information regarding our reportable business segments, Intellectual Property (or IP ) Licensing, Wholesale Distribution, and Direct-to-Consumer, are presented below. Our reportable segments are determined based on the distinct nature of their operations, and 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 that is licensed for distribution worldwide. The IP Licensing segment includes our investment in ACL. Our Wholesale Distribution segment consists of the acquisition, content enhancement and worldwide distribution of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), video-on-demand (or VOD ), streaming video, downloading and sublicensing. Our Direct-to-Consumer segment consists of our mail-order catalog and e-commerce businesses and our proprietary digital streaming channel.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Management currently evaluates segment performance based primarily on revenue, and operating income (loss), including earnings from ACL. Operating costs and expenses allocated below to Corporate include only those expenses incurred by us at the parent corporate level, which are not allocated to our reporting segments, and transaction costs incurred in connection with the acquisitions of Image, Acorn Media and ACL. Interest expense and other income (expense) are evaluated on a consolidated basis and are not allocated to our reportable segments.

The following tables summarize the segments for each of the three and nine month periods ended September 30, 2013 and 2012:

	Successor
(In thousands)	Three Months Ended September 30, 2013
	IP Licensing			Wholesale Distribution (a)			Direct-to- Consumer			Corporate			Total
Revenue	$	16		$	25,026		$	7,699		$	—		$	32,741
Operating costs and expenses		(74	)		(26,621	)		(8,949	)		(1,448	)		(37,092	)
Share in ACL earnings		1,364			—			—			—			1,364
Segment contribution	$	1,306		$	(1,595	)	$	(1,250	)	$	(1,448	)	$	(2,987	)

	Successor
(In thousands)	Nine Months Ended September 30, 2013
	IP Licensing			Wholesale Distribution (a)			Direct-to- Consumer			Corporate			Total
Revenue	$	8,040		$	75,750		$	23,543		$	—		$	107,333
Operating costs and expenses		(8,032	)		(90,067	)		(26,006	)		(3,703	)		(127,808	)
Share in ACL earnings		2,924			—			—			—			2,924
Segment contribution	$	2,932		$	(14,317	)	$	(2,463	)	$	(3,703	)	$	(17,551	)

Note (a): Wholesale operating cost and expenses include non-cash impairments related to investments in content and inventories totaling $3.2 million and $11.4 million for the three and nine months ended September 30, 2013.

	Predecessor
(In thousands)	Three Months Ended September 30, 2012
	IP Licensing			Wholesale Distribution			Direct-to- Consumer			Corporate			Total
Revenue	$	—		$	13,418		$	7,150		$	—		$	20,568
Operating costs and expenses		(348	)		(10,680	)		(8,780	)		(1,821	)		(21,629	)
Share in ACL earnings		462			—			—			—			462
Segment contribution	$	114		$	2,738		$	(1,630	)	$	(1,821	)	$	(599	)

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Predecessor
(In thousands)	Nine Months Ended September 30, 2012
	IP Licensing			Wholesale Distribution			Direct-to- Consumer			Corporate			Total
Revenue	$	—		$	35,973		$	21,474		$	—		$	57,447
Operating costs and expenses		(509	)		(28,607	)		(23,497	)		(5,088	)		(57,701	)
Share in ACL earnings		983			—			—			—			983
Segment contribution	$	474		$	7,366		$	(2,023	)	$	(5,088	)	$	729

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

	Successor						Predecessor
	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
(In thousands)	September 30,			September 30,			September 30,			September 30,
	2013			2013			2012			2012

Total segment contribution	$	(2,987	)	$	(17,551	)	$	(599	)	$	729
Interest expense, net		(2,019	)		(6,027	)		(261	)		(838	)
Other income (expenses)		(2,832	)		(3,751	)		501			118
Income (loss) before provision for income taxes	$	(7,838	)	$	(27,329	)	$	(359	)	$	9

Total assets for each segment primarily include accounts receivable, inventory, and investments in content. The Corporate segment primarily includes assets not fully allocated to a segment including consolidated cash accounts, prepaid assets and fixed assets used across all segments.

Total assets by segment are as follows:

	Successor
(In thousands)	September 30,		December 31,
	2013		2012

IP Licensing	$	25,940	$	34,736
Wholesale Distribution		166,746		179,787
Direct-to-Consumer		18,567		24,897
Corporate		2,686		3,208
	$	213,939	$	242,628

Goodwill by segment is as follows:

	Successor
(In thousands)	September 30,		December 31,
	2013		2012

Wholesale Distribution	$	44,230	$	37,966
Direct-to-Consumer		2,836		9,416
IP Licensing		—		—
	$	47,066	$	47,382

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. BUSINESS COMBINATION

On October 3, 2012, pursuant to (1) an agreement and plan of merger and (2) a preferred stock purchase agreement, as amended, RLJE acquired all of the outstanding common and preferred stock of Image. RLJE’s acquisition of Image is referred to as the “Image Merger.” Concurrently with the Image Merger, and pursuant to a stock purchase agreement, as amended, RLJE acquired all of the outstanding common stock of Acorn Media. RLJE’s acquisition of Acorn Media is referred to as the “Acorn Merger.”

The Image and Acorn Mergers have been accounted for as business acquisitions in accordance with ASC 805, Business Combinations . The purchase price allocation as disclosed in the 2012 Form 10-K was based upon our preliminary valuation using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets acquired, based on their estimated fair values.

Our allocation of the purchase consideration was finalized as of September 30, 2013. A summary of the final purchase price allocation and adjustments to goodwill are as follows:

(In thousands)


Goodwill as reported at December 31, 2012	$	47,382

Adjustments:
Cash received from escrow		(389	)
Increase in the fair value of investment in content		(226	)
Valuation adjustment for tax liabilities		259
Valuation of registration right obligation		40
Total adjustments		(316	)
Goodwill at September 30, 2013	$	47,066

NOTE 4. EQUITY EARNINGS IN AFFILIATE

In February 2012, the Predecessor 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 more than 80 novels and short story collections, 19 plays, and a film library of nearly 40 made-for-television films. The acquisition was funded by a combination of cash on hand, a three-year, $18.0 million term loan from a bank and $2.7 million in subordinated debt from certain Acorn Media stockholders, which were all paid off at the closing of the Business Combination.

Notwithstanding Acorn Media’s acquisition of 64% of ACL’s outstanding stock, Acorn Media is accounting for its 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.

We have continued to account for ACL using the equity method of accounting.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Successor						Predecessor
	Three Months Ended			Nine Months Ended			Three Months Ended			February 29, 2012 to
(In thousands)	September 30,			September 30,			September 30,			September 30,
	2013			2013			2012			2012

Revenues	$	11,326		$	28,165		$	2,760		$	5,410
Film cost amortization		(7,731	)		(19,156	)		(966	)		(1,461	)
General, administrative and other expenses		(789	)		(2,266	)		(621	)		(1,405	)
Income from operations		2,806			6,743			1,173			2,544
Net income	$	2,349		$	5,218		$	894		$	1,940

Amounts have been translated from British Pound 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 acquisition.

NOTE 5. ACCOUNTS RECEIVABLE

Accounts receivable are primarily derived from (1) the sale of physical content (DVDs) to wholesale distributors who ship to mass retail, (2) direct-to-consumer, e-commerce, catalog and download-to-own and (3) video content we license to broadcast, cable/satellite providers and digital subscription platforms like Acorn TV, Netflix and Amazon. Our accounts receivable typically trends with retail seasonality.

	Successor
(In thousands)	September 30,			December 31,
	2013			2012

Wholesale Distribution	$	24,839		$	42,037
IP Licensing		313			—
Direct-to-Consumer		—			3,032
Less: advances from distributor		(2,768	)		(9,023	)
Accounts receivable before allowances and reserves		22,384			36,046
Less: reserve for returns		(6,933	)		(11,297	)
Less: allowance for doubtful accounts		(53	)		(138	)
Accounts receivable, net	$	15,398		$	24,611

Accounts receivable includes both the current and noncurrent portion of accounts receivable. Wholesale distribution receivables are primarily billed and collected by our U.S. distribution partner.

At September 30, 2013 and December 31, 2012, our U.S. distribution partner had advanced us approximately $2.8 million and $9.0 million, respectively, against future collection of our receivables, which they manage on our behalf. Because our distribution partner has the right to offset our obligation to repay these advances against the receivables that are collected for us, these advances are netted against our receivables.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6. INVENTORIES

Inventories are summarized as follows:

	Successor
(In thousands)	September 30,		December 31,
	2013		2012

Packaged discs	$	12,595	$	17,248
Packaging materials		825		2,144
Other merchandise ⁽¹⁾		3,298		3,637
Inventories, net	$	16,718	$	23,029

(1)

Other merchandise consists of third-party products, primarily gifts, jewelry, and home accents.

During the nine months ended September 30, 2013 and 2012, we incurred impairment charges associated with our inventories due to adjustments for lower of cost or market valuation, shrinkage, and excess and obsolescence. A summary of the impairment charges by quarter is as follows:

(In thousands)
	Successor		Predecessor
Three Months Ended	2013		2012

March 31st	$	189	$	149
June 30th		4,772		143
September 30th		1,234		275
Total inventory impairments	$	6,195	$	567

During the second quarter of 2013, we recorded an inventory impairment charge of $3.3 million resulting from the early termination arrangement with a content supplier. The impairment charge reflected the shortened sell-off period of three months beginning January 1, 2014.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. INVESTMENTS IN CONTENT

Investments in content are as follows:

	Successor
	September 30,				December 31,
(In thousands)	2013				2012
	Advances and Production Costs		Production Development Costs		Advances and Production Costs		Production Development Costs
Leased Content:
Released	$	63,200	$	3,619	$	69,737	$	2,907
Unreleased		10,281		954		5,730		217
Produced and Acquired Content:
Released		3,915		633		1,420		223
Completed, not released		303		136		415		36
In-production		—		—		9,106		6
Investments in content, net	$	77,699	$	5,342	$	86,408	$	3,389

Investments in content include both the current and noncurrent portion of investments in content.

Unamortized content investments are charged to cost of sales as revenues are earned. These unrecouped investments are amortized to expense in the same ratio that current period revenue for a title or group of titles bears to the estimated remaining unrecognized ultimate revenue for that title.

Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release, or for episodic television series a period not to exceed 10 years from the date of delivery of the first episode or, if still in production, five years from the date of delivery of the most recent episode, if later.

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. A summary of impairment charges by quarter during the nine months ended September 30, 2013 and 2012, is as follows:

(In thousands)
	Successor		Predecessor
Three Months Ended	2013		2012

March 31st	$	607	$	430
June 30th		2,620		430
September 30th		1,932		1,175
Total content impairments	$	5,159	$	2,035

As a result of the early termination with a key supplier during the quarter ended June 30, 2013, we incurred accelerated amortization and an impairment charge totaling $1.5 million reflecting the shortened content distribution arrangement. In determining the fair value of content (Note 10, Fair Value Measurements ), we employ a discounted cash flows (or DCF ) methodology with assumptions for cash flows. 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 our weighted average cost of capital plus a risk premium representing the risk associated with producing a particular content.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. DEBT

Successor

Long term debt consists of the following:

	Successor
(In thousands)	September 30,			December 31,
	2013			2012

Revolving credit facility	$	14,949		$	7,551

Senior term notes:
Term loan – A		22,196			24,375
Term loan – B		13,317			14,625
Term loan – C		15,458			15,089
Principal balance outstanding		50,971			54,089
Less: debt discount		(2,354	)		(2,864	)
Total senior term notes		48,617			51,225

Subordinated notes payable and other debt		15,332			23,547
Total long term debt, including current portion, less debt discount	$	78,898		$	82,323

Current portion of long term debt	$	15,040		$	4,000

As of September 30, 2013, the current portion of our debt includes $10.75 million related to an acceleration of principal repayments resulting from the second Amendment and Waiver entered into on November 6, 2013, as disclosed below.

Credit Facility

On October 3, 2012, in connection with the consummation of the Business Combination, RLJE and certain of its subsidiaries (collectively, the Borrowers ) entered into a Credit Agreement (the Credit Facility ) with certain lenders and SunTrust, N.A., as Administrative Agent. The Credit Facility includes a five-year $15.0 million revolving credit facility and three tranches of senior term loans totaling $55.0 million. The obligations under the Credit Facility are secured by a lien on substantially all of the assets of the Borrowers.

On November 6, 2013, we entered into a second Amendment and Waiver (the Second Amendment ) with respect to the Credit Facility. As of June 30, 2013 and September 30, 2013, we triggered a technical default of our financial covenants resulting from the negative impact on our EBITDA (as defined by the Credit Facility) of certain significant impairment and severance charges, totaling $10.5 million, recognized during the second quarter of 2013. The covenants impacted include: (1) senior debt-to-adjusted EBITDA, (2) total debt-to-adjusted EBITDA and (3) our interest coverage ratio. Each covenant is calculated on a trailing twelve month (or TTM ) basis. The significant second quarter impairment and severance charges were not contemplated in the covenant threshold determination when setting the covenant requirements in the first amendment (see below). The Second Amendment provides for (a) a full waiver of the second and third quarter financial covenant technical defaults and (b) modifies the Credit Facility to increase the maximum permitted Leverage Ratios (as defined in the Credit Facility) through December 31, 2014, which is intended to cover on a TTM basis all future periods impacted by the charges recognized during the second quarter. Based on our projected operating results, we believe that we will meet the revised covenants. We did not incur any fees or default interest as a result of these technical defaults and waivers. We are in compliance with all other aspects of the Credit Facility including having made all debt service payments on time since inception.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The modified Leverage Ratios, as amended, are presented below:

	December 31,	March 31,	June 30,	September 30,	December 31,
	2013	2014	2014	2014	2014
Leverage Ratios:
Senior debt-to-adjusted EBITDA	4.58 to 1.00	4.02 to 1.00	2.00 to 1.00	2.00 to 1.00	1.50 to 1.00
Total debt-to adjusted EBITDA	7.54 to 1.00	6.90 to 1.00	3.40 to 1.00	2.50 to 1.00	2.05 to 1.00
Interest coverage ratio	1.31 to 1.00	1.44 to 1.00	2.84 to 1.00	3.00 to 1.00	3.00 to 1.00

The leverage ratios for the quarters following December 31, 2014 generally are: senior debt-to adjusted EBITDA of 1.25 to 1.00, total debt-to-adjusted EBITDA of 1.75 to 1.00 and interest coverage ratio of 3.00 to 1.00.

In addition to the above, the Second Amendment includes a commitment by the company to make incremental principal payments on the Credit Facility totaling $1.75 million in 2013, $12.25 million in 2014 and $11.0 million in 2015. The amendment removes the requirement for us to make accelerated principal payments of $7.5 million that was previously committed in the first amendment (see below). Based on our projected operating results and cash flows, we believe that we will be able to make all required principal payments. The cash is expected to be generated from operating cash flows from normal business operations.

As of June 28, 2013, we entered into an Amendment and Waiver (the First Amendment ) with respect to the Credit Facility. The First Amendment has been superseded by the Second Amendment as discussed above for the maximum permitted leverage ratios and the requirement to make incremental principal payments of $7.5 million by December 31, 2015. The First Amendment modified the Credit Facility (a) to increase the maximum permitted Leverage Ratio (as defined in the Credit Facility) from 3.0 to 1.0 to 3.8 to 1.0 for the quarter ended June 30, 2013, (b) to permit the Borrowers to retain (and not apply to debt service) dividends received from ACL and its subsidiaries between June 25, 2013 and December 31, 2013 and (c) to exclude aged trade payables from the Leverage Ratios until 2015. In addition, the Amendment requires that the Borrowers, for at least one business day of each calendar year, beginning with calendar year 2015, cause the principal amount of the revolving loans outstanding to be $7.5 million or less. After any repayment required by this provision, the Borrowers may reborrow all or any part of the revolving loans to the extent they are otherwise permitted to do so under the terms of the Credit Facility.

Advances under the revolving facility bear interest at prime rate plus 5% or LIBOR plus 6% per annum and is payable quarterly. As of September 30, 2013, we had borrowings outstanding of approximately $14.9 million under the revolving facility. In addition to interest, the revolving facility also bears a fee of 0.5% applied to the unused portion of the line that was available but not drawn. As of September 30, 2013, there was $51,000 of borrowing capacity; however due to the technical default, these funds were not available to be draw on prior to obtaining waivers, which were obtained on November 6, 2013.

The Credit Facility 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 Sony parties 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 condition (financial or otherwise). The occurrence of an event of default will increase the applicable rate of interest and could result in the acceleration of our obligations under the Credit Facility.

The Credit Facility imposes restrictions on such items as encumbrances and liens, payments of dividends, other indebtedness, stock repurchases and capital expenditures. The Credit Facility also requires us to comply with minimum financial and operating covenants as disclosed above. The covenants related to total debt and senior debt are predicated on the actual amounts of obligations calculated against an EBITDA base, as defined in the Credit Facility. For covenant purposes, EBITDA is defined as net income before income taxes and interest expense plus noncash items such as depreciation and amortization and certain other cash and noncash movements within the balance sheet. Additional covenants restrict the level of production spending, prints and advertising spending for theatrical releases, disposal of fixed assets and entering into new lease obligations. At September 30, 2013, we were in default of our financial covenants and on November 6, 2013, received waivers that cured the events of default.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our senior term loans have final maturities ranging from five to five and one-half years from issuance (October 2012), bear interest at rates that range from prime rate plus 5.0% to 6.25% or LIBOR plus 6.0% to 7.25%, payable quarterly. The term loan - C bears additional interest at a rate of 3% per annum paid-in-kind at maturity. On December 10, 2012, RLJE entered into a forward interest rate cap agreement that effectively caps the LIBOR rate of interest at 1.25%. The interest rate cap has a notional amount of $30.0 million and has a maturity date of November 30, 2014. We paid a one-time fixed fee of $23,000 for this rate cap agreement. The fair value of this interest rate cap agreement is insignificant.

Future minimum principal payments under the Credit Facility as of September 30, 2013 are as follows:

(In thousands)			Revolving
	Senior Notes		Credit Facility		Total

2013	$	2,750	$	—	$	2,750
2014		16,250		—		16,250
2015		15,000		—		15,000
2016		1,513		—		1,513
2017		—		14,949		14,949
Thereafter		15,458		—		15,458
	$	50,971	$	14,949	$	65,920

Subordinated Notes Payable and Other Debt

Upon consummation of the Image Merger, we issued to the selling preferred stockholders of Image unsecured subordinated promissory notes in the aggregate principal amount of $14.8 million. The unsecured subordinated notes bear interest at 12% per annum, of which 5.4% is payable in cash annually and at our discretion the balance is either paid through the issuance of shares of our common stock valued at their then-current market price, or accrues and is added to principal, which is payable upon maturity. The subordinated notes mature on October 3, 2018 or nine months after the latest stated maturity of the senior debt issued pursuant to the Credit Facility. In May 2013, $439,000 interest was due on the promissory notes, of which $198,000 was paid in cash and the balance was added to principal. At September 30, 2013, our principal balance due pursuant to these notes was $15.0 million.

On July 3, 2012, Foyle’s War 8 Productions Ltd, a wholly-owned subsidiary of APL, entered into a cash advance facility with U.K. based Coutts and Co. for purposes of producing three ninety-minute television programs entitled “Foyle’s War 8.” The facility carried an interest rate of LIBOR plus 2.25%. As of December 31, 2012, amounts owed under the facility were $8.7 million. As of September 30, 2013, the outstanding balance was $290,000, which was fully repaid in October 2013. The assets and intellectual property created with Foyle’s War 8 will become part of collateral that secures the company’s Credit Facility during the fourth quarter of 2013.

In October 2013, the company began is pre-production of the next franchise series of Foyle’s War. Acorn Productions (UK) Ltd, and Acorn Global Enterprises Ltd, both wholly-owned subsidiaries of APL, entered into a cash advance facility (the FW9 Facility ) with Coutts and Co., a U.K. based lender, for purposes of producing three ninety-minute television programs entitled “Foyle’s War Series 9.” The facility carries interest at a rate of LIBOR plus 2.15%. Interest and repayment of advances received are due on or before November 8, 2014. The facility is secured by (i) executed license agreements providing advances totaling approximately £5.9 million for the programs being produced that are in place with ITV Networks and, to a lesser extent, Acorn Global Enterprises Ltd., a wholly-owned subsidiary of Acorn Media; and (ii) U.K. tax credits of approximately £1.4 million based on anticipated qualifying production expenditures. The assets and intellectual property will become secured collateral of the company’s Credit Facility once the Coutts loan is fully paid and settled.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Predecessor

The Predecessor had a revolving line of credit which provided for borrowings of up to $10.0 million at the prevailing one-month LIBOR rate plus 1.90% (4.0% as of September 30, 2012). At September 30, 2012, the Predecessor had approximately $6.3 million outstanding on the line of credit. The line of credit required the Predecessor to comply with certain financial covenants and was collateralized by the assets of Acorn Media. In February 2012, in connection with the closing of the acquisition of ACL, the Predecessor renegotiated and closed on a new borrowing facility with its existing bank. The new facility provided for borrowings of $28.0 million, which consisted of an $18.0 million term loan (the “Term Loan”) and a $10.0 million revolving line of credit (the “Line of Credit”), which replaced the previous line of credit. For outstanding borrowings on the Term Loan and the Line of Credit, the Predecessor could choose an interest rate equal to LIBOR or a fixed rate equal to the bank’s prime rate plus a margin based upon the Predecessor’s then leverage ratio. Interest on outstanding borrowings was due monthly on the Line of Credit, and all amounts outstanding on the Line of Credit, including unpaid interest were due upon maturity of February 28, 2015. Principal only payments were due quarterly over the three-year term of the Term Loan and all remaining unpaid principal and all accrued interest were due upon maturity, February 28, 2015. The Line of Credit and Term Loan were fully repaid in connection with the Image and Acorn Media Mergers.

Also in connection with the acquisition of ACL, the Predecessor borrowed $2.7 million from existing stockholders of Acorn Media (the “Subordinated Loans”). Amounts outstanding under the Subordinated Loans were subordinated to those amounts outstanding under the Term Loan, accrued interest at a rate of 12.5% per annum, but interest was only required to be paid upon maturity along with all outstanding principal on February 28, 2015. The Subordinated Loans were fully repaid in connection with the Image and Acorn Media Mergers.

NOTE 9. STOCK WARRANTS

RLJE had the following warrants outstanding:

	Successor
	September 30, 2013
(In thousands, except per share data)	Shares		Exercise Price		Remaining Life
Registered warrants		12,525
Sponsor warrants		6,667
Unregistered warrants		1,850
		21,042	$	12.00	4.00 years

We have warrants outstanding to purchase 21,041,667 shares of our common stock, which are recorded at fair value on the condensed consolidated balance sheet. The registered warrants have a term of five years beginning October 3, 2012, and provide the warrant holder the right to acquire a share of our common stock for $12.00 per share. The warrants are redeemable by us for $0.01 per warrant share if our common stock trades at $17.50 per share for 20 out of 30 trading days. The warrants contain standard anti-dilution provisions.

The Sponsor warrants contain the same provisions as the registered warrants. However, RLJE has agreed with the Sponsor that we would not redeem the Sponsor warrants if our stock price was $17.50 or higher as long as the Sponsor continues to hold the Sponsor warrants. The unregistered warrants contain the same provisions as the registered warrants except neither they nor the shares of our common stock that would be acquired upon exercise have been registered.

All of the 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 a 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 .

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fair value of the warrants as of September 30, 2013 was $7.4 million. The valuation of the registered warrants is a Level 1 measurement as the warrants are traded on the over-the-counter market. Because RLJE has agreed not to exercise its redemption right pertaining to the Sponsor warrants and because the unregistered warrants have a discounted fair value as compared to the registered warrants, the valuation of the other warrants is a Level 3 measurement. The increase in the fair value of the warrants for the three and nine months ended September 30, 2013 of $3.9 million and $3.1 million, respectively, was included as a component of other income.

NOTE 10. FAIR VALUE MEASUREMENTS

Successor

The following table represents RLJE’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring:

	Successor
(In thousands)	September 30, 2013
	Level 1		Level 2		Level 3		Total

Warrant liability	$	4,634	$	—	$	2,772	$	7,406

The following table includes a rollforward of liabilities classified within Level 1 and Level 3:

	Successor
(In thousands)	Nine Months Ended September 30, 2013
	Level 1		Level 2		Level 3		Total

Warrant liability at December 31, 2012	$	2,755	$	—	$	1,569	$	4,324
Change in fair value of warrant liability		1,879		—		1,203		3,082
Warrant liability	$	4,634	$	—	$	2,772	$	7,406

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. Our nonrecurring fair value measurement information of assets and liabilities is classified in the table below:

	Successor
(In thousands)	Nine Months Ended September 30, 2013
	Level 1		Level 2		Level 3		Total		Loss

Investments in content	$	—	$	—	$	8,361	$	8,361	$	5,159

During the three and nine month periods ended September 30, 2013, the investments in content were written down by $1.9 million and $5.2 million, respectively, as a result of a change in fair value. In determining the fair value, we employ a discounted cash flows (“DCF”) methodology with assumptions for cash flows. 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.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the third quarter of 2013, we reviewed and improved our process for achieving our forecasted revenue by title (or ultimates ). This process increased the emphasis placed on the input received from our sales and operations personnel. The review concluded that no significant adjustments were required.

Predecessor

The following table represents Predecessor’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of and for the nine months ended September 30, 2012.

	Predecessor
(In thousands)	Nine Months Ended September 30, 2012
	Level 1		Level 2			Level 3		Total

Interest rate derivative at December 31, 2011	$	—	$	(36	)	$	—	$	(36	)
Change in fair value of interest rate derivative		—		5			—		5
Interest rate derivative at September 30, 2012	$	—	$	(31	)	$	—	$	(31	)

During the nine months ended September 30, 2012, investments in content with a carrying amount of $3.3 million were written down to their fair value resulting in an impairment charge of $2.0 million. Of this amount, $1.2 million was written down during the three months ended September 30, 2012. Our nonrecurring fair value measurement information of assets and liabilities during the nine months ended September 30, 2012 is classified in the table below:

	Predecessor
(In thousands)	Nine Months Ended September 30, 2012
	Level 1		Level 2		Level 3		Total		Loss

Investments in content	$	—	$	—	$	1,270	$	1,270	$	2,035

NOTE 11. CUSTOMER RELATIONSHIP

During the second quarter ended June 30 2013, we terminated our business relationship with an inventory fulfillment partner and recorded a sales return of approximately $2.4 million, which negatively impacted our gross margin by approximately $1.1 million. During the third quarter of 2013, we received additional returns from our former fulfillment partner of approximately $400,000. Additionally, we agreed terms to early terminate a content output agreement with a content supplier effective December 31, 2013. The result of the termination was a non-cash charge of approximately $4.6 million recorded in the second quarter of 2013, which related to its unamortized content assets, including inventories, on the Company’s balance sheet. There were no adjustments to these charges during the third quarter of 2013, and we have not had any comparable events in the prior periods.

NOTE 12. TRANSACTION COSTS AND SEVERANCE

During the three and nine months ended September 30, 2013 (Successor), we incurred severance charges of $351,000 and $2.4 million, respectively, as part of the implemented reorganization from the formation of RLJE with former employees. The severance charge was recorded as a component of general and administrative expense. During the three and nine month periods ended September 30, 2012 (Predecessor), we incurred $60,000 of severance charges.

During the three and nine months ended September 30, 2012, the Predecessor incurred transaction costs of $2.0 million and $5.2 million, respectively, related to the Acorn Merger (Note 3, Business Combination ) as well as the acquisition of ACL (Note 4, Equity Earnings in Affiliate ). These costs are included in general and administrative expenses. There were no similar transaction costs during 2013.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13. NET LOSS PER COMMON SHARE DATA

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per common share for the three and nine months ended September 30, 2013 (Successor) and September 30, 2012 (Predecessor):

	Successor						Predecessor
	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
(In thousands, except per share data)	September 30, 2013			September 30, 2013			September 30, 2012			September 30, 2012
Numerator – basic and diluted:
Net loss	$	(8,508	)	$	(29,010	)	$	(482	)	$	(194	)
Less net income (loss) attributable to noncontrolling interest		—			—			(13	)		43
Net loss applicable to common shareholders		(8,508	)		(29,010	)		(469	)		(237	)
Less net loss applicable to restricted common shareholders		(182	)		(273	)		—			—
Net loss applicable to unrestricted common shareholders	$	(8,326	)	$	(28,737	)	$	(469	)	$	(237	)
Unrestricted common shareholders - net income (loss) per share:
Net loss – numerator	$	(8,326	)	$	(28,737	)	$	(469	)	$	(237	)
Weighted-average common shares outstanding – basic denominator		13,340			13,340			1,023			1,023
Effect of dilutive securities		—			—			—			—
Weighted-average common shares outstanding – diluted denominator		13,340			13,340			1,023			1,023
Net income (loss) per common share – unrestricted:
Basic and diluted	$	(0.62	)	$	(2.15	)	$	(0.46	)	$	(0.23	)
Restricted common shareholders - net income (loss) per share:
Net loss – numerator	$	(182	)	$	(273	)	$	—		$	—
Weighted-average common shares outstanding –
basic and diluted denominator		292			127			—			—
Net loss per common share –restricted:
Basic and diluted	$	(0.62	)	$	(2.15	)	$	—		$	—

For the Successor periods, outstanding warrants to acquire 21,041,667 shares of common stock are not included in the computation of diluted net loss per common share as the effect would not change the result of the calculation because they are anti-dilutive.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the three and nine month Predecessor periods ended September 30, 2012, outstanding options to acquire 75,140 shares of common stock of Acorn Media are not included in the computation of diluted net income per share as the effect would not change the result of the calculation because they are anti-dilutive.

NOTE 14. 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 employment and tax matters. While it is not possible to predict the outcome of these matters, the opinion of management is, based on consultations with internal and external legal counsel, that the ultimate disposition of known proceedings will not have a material adverse impact on our financial condition, 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 15. RELATED PARTY TRANSACTIONS

Equity Investments in Affiliates

All of ACL’s staff is employed by APL. ACL was charged overhead and personnel costs for the three and nine months ended September 30, 2013 (Successor) of approximately $443,000 and $1.4 million, respectively. ACL was charged overhead and personnel costs for the three and nine months ended September 30, 2012 (Predecessor) of approximately $920,000 in each period. Amounts were recorded as a reduction in general and administrative expenses in the accompanying consolidated statements of operations.

ACL paid dividends to APL of $4.0 million during the nine months ended September 30, 2013 (Successor) and $1.6 million and $2.7 million during the three and nine months ended September 30, 2012 (Predecessor), respectively. There were no dividends received during the three month period ended September 30, 2013. Dividends received were recorded as a reduction to the ACL investment account.

On February 29, 2012, certain shareholders of the Predecessor lent $2.7 million to the Predecessor in connection with the purchase of a 64% ownership interest in ACL (Note 8, Debt , for further discussion).

Foreign Currency

We recognized foreign currency gains and losses as a component of other income (expense) on amounts Acorn Media lent to APL and Acorn Australia. Amounts lent will be repaid based on available cash. During the three and nine months ended September 30, 2013, we recognized a gain of $1.1 million and a loss of $706,000, respectively. During the three and nine months ended September 30, 2012, we recognized a gains of $686,000 and $310,000, respectively.

RLJ Companies, LLC

On June 27, 2013, 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 obligation were payable by us to the vendor through September 5, 2013. Pursuant to the purchase, RLJ Companies, LLC has become the account creditor with respect to these accounts, but the accounts have not been otherwise modified, and the vendor continues to be the account creditor with respect to other outstanding accounts payable by us after September 5, 2013. These purchased liabilities are included in accrued royalties and distribution fees in the accompanying consolidated balance sheets.

Index

RLJ ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock Based Compensation

During the nine months ended September 30, 2013, 323,316 shares of restricted common stock were granted. Of the 323,316 shares granted, 233,707 shares were granted to executive officers and directors and 89,609 shares were granted to other members of management. The shares were fair valued on the date of grant with a range of $3.72 - $5.97 per share, for a total value of approximately $1.7 million. The restricted shares will vest and be expensed over a three-year period for executive management and other management while restricted shares granted to directors vest over a one-year period. The vesting of restricted shares is subject to the achievement of certain service criteria, performance criteria, or both.

RLJ SPAC Acquisition, LLC

Mr. Robert L. Johnson through his company, RLJ SPAC Acquisition, LLC has entered into a plan to purchase up to $2.0 million of our outstanding common stock from time to time over a 24 month period beginning June 19, 2013. Any purchases under the plan will be at the discretion of Lazard Capital Markets LLC in the open market or in privately negotiated transactions in compliance with applicable laws and regulations

All $2.0 million of Common Stock may not be purchased during such period. The Plan may be terminated by Mr. Johnson at any time.

The repurchases by RLJ SPAC Acquisition LLC during the quarter is reported in Part II, Other Information, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q.

NOTE 16. SUBSEQUENT EVENTS

We have performed an evaluation of subsequent events through the date we issued these financial statements and had the following subsequent events since September 30, 2013 through our filing date.

Credit Facility

On November 6, 2013, we entered into an amendment for our Credit Facility. The details of this amendment are disclosed in Note 8, Debt of our consolidated financial statements.

Lease Commitments

In October 2013, we entered into a seven year lease agreement for new office space in Woodland Hills, California. All employees currently located in Chatsworth, California will move to the new location in Woodland Hills, California. The anticipated move will occur in February 2014. Total lease commitment is approximately $3.3 million plus a portion of the building operating expenses.

In October 2013, we entered into a four and a half year lease agreement for new office space in London, England. All employees currently located in two separate offices located in London will move to the new location in London, England. The anticipated move will occur in January 2014. Total lease commitment is approximately $1.5 million plus a portion of the building operating expenses.

Other Debt

On October 28, 2013, a new credit facility was entered into for the financing of Foyle’s War 9 production. The details of this amendment are disclosed in Note 8, Debt of our consolidated financial statements.

Repurchase of shares by RLJ SPAC Acquisition LLC

As disclosed in Note 15, Related Party Transactions , RLJ SPAC Acquisition LLC, continues to repurchase our shares in the open market.

Index

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. As described at the beginning of this Quarterly Report under the heading “Forward-Looking Statements,” our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could contribute to such differences include those discussed elsewhere in this Quarterly Report under the heading “Forward-Looking Statements.” You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report. Except as may be required under federal law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related footnotes included in Item 1 of this Quarterly Report and with our audited consolidated financial statements and notes thereto, and with the information under the headings entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our Annual Report on Form 10-K.

Overview

RLJ Entertainment, Inc. (or RLJE ) is a leading global entertainment company with a strong presence in North America, the United Kingdom and Australia and strategic sublicense and distribution relationships covering Europe, Asia and Latin America. RLJE was incorporated in Nevada in April 2012. On October 3, 2012, the business combination of RLJE, Image Entertainment, Inc. (or Image ) and Acorn Media Group, Inc. (or Acorn Media ) was completed, which is referred to herein as the “Business Combination.” Acorn Media includes its subsidiaries Acorn Media UK Limited (or Acorn UK ), Acorn Media Australia Pty Ltd. (or Acorn Australia ) and Acorn Productions Limited (or APL ). 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 for periods following the Business Combination and Acorn Media and its subsidiaries for periods prior to the Business Combination, unless otherwise noted.

We acquire content rights in various categories, with particular focus on full-length motion pictures, urban programming, and British episodic mystery and drama. We acquire this content in three ways. Through long term agreements, we license multiple rights to third-party products. We own content liabraries. We also develop, produce, and own original programming through our wholly-owned subsidiary, APL, and our majority-owned subsidiary, ACL, in addition to fitness titles through our Acacia brand. We distribute this content across multiple platforms, including broadcast/cable, existing digital distribution formats: download-to-own, rental, subscription video on demand (or SVOD ), free video on demand (or FVOD ); new digital channels platforms; DVD and Blu-ray retail and online ecommerce; and international broadcast licensing and sales. Our principal executive offices are located in Silver Spring, Maryland, with additional U.S. locations in Chatsworth, California, and Stillwater, Minnesota, and international locations in London, England and Sydney, Australia.

We market our products through a multi-channel strategy encompassing (1) the development and licensing of original program offerings through our wholly-owned subsidiary, APL, and our majority-owned subsidiary, ACL, as well as our fitness offerings; (2) wholesale distribution through partners covering brick and mortar establishments, and digital, mobile, broadcast and cable partners; and (3) a strong direct-to-consumer presence in the United States and United Kingdom through traditional catalog and e-commerce offerings.

APL manages our British drama co-productions, including the intellectual property rights owned by ACL and revenues associated with those rights. ACL is home to some of the world’s greatest works of mystery fiction, including Murder on the Orient Express and Death on the Nile and includes all rights to iconic sleuths such as Hercule Poirot and Miss Marple. The Agatha Christie library includes approximately 80 novels and short story collections, 19 plays and a film library of nearly 40 made-for-television films. Beginning in 2014, ACL has commissioned a new writer to expand the Agatha Christie library content for a new title.

Our wholesale partners are broadcast, digital outlets and major retailers in the United States, Canada, United Kingdom and Australia, including, among others, Amazon, Walmart, Target, Costco, Barnes & Noble, iTunes, Netflix, BET, Showtime, DirectTV, and Hulu. We have a catalog of owned and long term licensed content in excess of 5,300 titles, segmented into genre-based franchise content program lines such as Acorn (British drama/mystery, including content produced by ACL), Image (independent feature films, stand-up comedy), On-Cue, One Village (urban), Acacia (fitness), Slingshot Pictures (faith), Athena (educational), Criterion (art films) and Madacy (uniquely packaged collections of historical footage/documentaries). Our owned content includes 25 Foyle’s War made for TV films; multiple instructional Acacia titles; and through our 64% ownership interest in ACL, a majority share of the Agatha Christie branded library.

Index

RESULTS OF OPERATIONS

Our unaudited consolidated financial information for the three and nine months ended September 30, 2013, should be read in conjunction with our consolidated financial statements and the notes thereto and the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Annual Report on Form 10-K filed on April 10, 2013 (or 2012 Form 10-K) .

The financial results for the three and nine months ended September 30, 2013 reflect the operating activities of RLJE and its subsidiaries (referred to as the “Successor” periods). The results for the three and nine months ended September 30, 2012, reflect the operations of only Acorn Media and its subsidiaries businesses (referred to as the “Predecessor” periods). The comparative discussion below for these periods is based on accounting principles generally accepted in the United States (or US GAAP ) and the results for the 2012 Predecessor periods are not indicative of, or comparable to, results for the 2013 Successor periods.

A proforma presentation which combines the Image business with the Acorn Media business for 2012 follows the discussion below.

Revenue

Revenue increased $12.2 million for the three months ended September 30, 2013 compared to 2012. The increase in the third quarter 2013 was due to Image revenues included in the Successor’s results. Image’s third quarter 2013 revenues were $13.0 million. Acorn’s (Predecessor) revenue was down $786,000 for the third quarter 2013 compared to the prior year due to (i) higher than expected product returns from a former distribution partner that we terminated in the second quarter of 2013 and (ii) higher than expected product returns from our Canadian distributor. These declines were partially offset by solid growth in both our direct-to-consumer segment, which increased 7.7% or $549,000 for the quarter, and our UK wholesale distribution business which increased 12.6% or $283,000. We experienced growth in our proprietary network, Acorn TV. As of October 31, 2013, the pay subscribers for Acorn TV have grown by 100% to over 40,000 compared to December 2012.

Revenue increased $49.9 million for the nine months ended September 30, 2013 compared to 2012. The increase was due to Image revenues included in the Successor’s results. For the nine months ended September 30, 2013, Image revenues were $46.2 million. Acorn (Predecessor) revenue increased by 6.4% or $3.7 million for the nine months ended September 30, 2013 versus 2012. The increase was the result of (i) the release and performance of season 8 of our franchise series “Foyle’s War,” which contributed $8.0 million of revenues, (ii) year-over-year increases in our direct-to-consumer segment of 9.6% or $2.1 million, (iii) year-over-year increases in our UK wholesale distribution business of 7.3% or $546,000 and (iv) increased revenue generated from our proprietary network, Acorn TV, of $485,000. These increases were partially offset by declines in our U.S. wholesale distribution business of $8.1 million, which resulted from (i) higher than expected returns from a former distributor that we terminated in the second quarter of 2013, (ii) timing of a high-profile franchise series title released in the second quarter of 2012 (“Doc Martin 5”) for which the current year’s release of “Doc Martin 6” will occur in the fourth quarter of 2013, and (iii) higher than expected returns from our Canadian distributor.

Cost of Goods Sold (“COGS”)

COGS increased by $12.6 million and $57.0 million for the three and nine months ended September 30 2013, respectively, compared to the same periods in 2012. The increase in COGS is primarily related to the inclusion of Image’s costs with Acorn’s (Predecessor) costs. Image’s COGS was $12.6 million and $48.9 million for the three and nine month periods ended September 30, 2013. During the current quarter and year-to-date results, we recorded COGS charges of $3.2 million and $11.4 million, respectively, for impairments of content rights and write-downs of inventories from shrinkage and obsolescence. We do not believe these impairments and inventory write-downs are indicative of future performance of ongoing business impairment and write-down charges. Our gross margin for the three and nine months ended September 30, 2013 was 24.4% and 17.4%. Excluding the impairment and write-down charges discussed above, the gross margin was 34.1% and 28.0% for the three and nine months, respectively.

Index

Acorn’s COGS increased by $28,000 and $8.1 million for the three and nine months ended September 30, 2013. Acorn’s increase in COGS for the year-to-date period was driven by: (i) increased content amortization resulting from a step-up in recorded basis due to the Business Combination, (ii) content amortization from the release of “Foyle’s War 8” primarily in the first quarter of 2013, and (iii) non-cash impairment charges on certain content rights and related inventory as management refines its investment strategy.

Selling, General and Administrative Expenses (“SG&A”)

SG&A increased by $2.9 million and $13.1 million for the three and nine month periods ended September 30, 2013, compared to the same periods in 2012. The increase in SG&A is primarily related to the inclusion of Image’s expenses with Acorn’s (Predecessor) results. Image’s SG&A totaled $3.5 million and $13.9 million for the three and nine months ended September 30, 2013. Excluding Image’s expenses, SG&A decreased for the three and nine month periods ended September 30, 2013 due to (i) one-time transaction costs incurred in 2012 related to the Business Combination, which did not repeat in 2013, and (ii) synergistic savings resulting from actions taken by management, offset by increased amortization related to intangible assets recognized in the Business Combination and severance charges. As of September 30, 2013, we have completed synergy operating changes that on an annualized basis will result in approximately $8.0 million in cash saving from reductions in operating expenses. The majority ($6.2 million) of the savings come from staffing reductions primarily in our wholesale distribution segment (from changes made in our Image legacy operations) as we consolidated operations post-merger. The remaining savings comes from operational efficiencies including but not limited to consolidation of distributors.

Loss from Operations

Loss from operations increased by $3.3 million and $20.2 million for the three and nine month periods ended September 30, 2013 versus the same periods during the prior year. The increase in loss from operations relates primarily to the inclusion of Image operating losses in the Successor results. The Image losses in the quarter and year-to-date periods were driven by (i) increased COGS from significant non-cash content impairment and inventory charges, (ii) increased content amortization and, (iii) severance charges. The details of these charges are discussed above and in the related footnotes to the consolidated financial statements.

Interest Expense

Interest expense for the three and nine month periods ended September 30, 2013, was $2.0 million and $6.0 million, respectively compared to interest expense of $261,000 and $838,000 for the three and nine month periods ended September 30, 2012. The increase in interest expense is the result of the expanded debt structure we entered into during the Business Combination. We have principal debt outstanding of $78.9 million as of September 30, 2013 compared to $31.2 million as of September 30, 2012.

Total Other Income (Expense)

Total other income (expense) for the three and nine month periods ended September 30, 2013 was an expense of $3.5 million and $6.9 million, respectively, as compared to income of $702,000, and $263,000 for the three and nine month periods ended September 30, 2012. The increase in expense during the current quarter was primarily due to (i) increases in interest expense, and (ii) change in the fair value of our warrant liability resulting in a $3.9 million charge; partially offset by (i) increased equity earning in affiliates resulting from improved profits from our 64% ownership interest in ACL, and (ii) foreign currency exchange gain. The increase in expense during the nine month period is primarily due to (i) increases in interest expense, (ii) change in the fair value of our warrant liability resulting in a $3.1 million charge, and (iii) and foreign currency exchange loss; partially offset by increased equity earning in affiliates resulting from improved profits from our 64% ownership interest in ACL.

Index

Income Taxes

We recorded income tax expense of $670,000 and $1.7 million for the three and nine month periods ended September 30, 2013 (Successor), respectively, compared to a provision of $123,000 and $203,000 for the three and nine month periods ended September 30, 2012 (Predecessor), respectively. We provide income tax expense on pre-tax income from our consolidated U.K. subsidiaries at an effective tax rate of approximately 24%. We are not providing a tax provision (benefit) on our U.S. operations as we have historically had and continue to provide a full valuation allowance on the U.S. net operating losses.

Proforma Income Statement

The following unaudited proforma financial information for the three and nine month periods ended September 30, 2013 and 2012, reflects the operating results of RLJE as if Image and Acorn Media were acquired as of January 1, 2012. The unaudited proforma financial information does not include adjustments for the Business Combination transaction costs and severance incurred and other one-time expenses, nor does it include adjustments for synergies. These combined results are not necessarily indicative of the results that may have been achieved had the companies been combined as of such historical dates or periods, or of RLJE’s future operating results.

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2013			2012			2013			2012
	Actual			Proforma (1)			Actual			Proforma (1)
Revenues	$	32,741		$	39,152		$	107,333		$	121,161
Costs of sales		24,747			27,007			88,627			85,206
Gross profit		7,994			12,145			18,706			35,955
Selling, general and administrative expenses		12,345			16,202			39,181			45,961
Loss from operations		(4,351	)		(4,057	)		(20,475	)		(10,006	)
Equity earnings of affiliates		1,364			294			2,924			1,318
Interest expense, net		(2,019	)		(1,938	)		(6,027	)		(5,814	)
Other income (expense)		(2,832	)		675			(3,751	)		2,450
Provision for income taxes		(670	)		(123	)		(1,681	)		(46	)
Net loss	$	(8,508	)	$	(5,149	)	$	(29,010	)	$	(12,098	)

Adjusted EBITDA	$	3,717		$	(4,547	)	$	1,179		$	6,503

Notes to the Proforma Income Statement Table:

(1) An adjustment for interest expense has been made to the prior year three and nine month ended September 30, 2012 as if the existing debt was in place throughout the period.

Proforma Revenue

Revenue decreased by $6.4 million to $32.7 million for the three month period ended September 30, 2013 when compared to the same period in 2012. The decrease was driven by a decrease in our wholesale distribution segment as follows: (i) the timing release of one high-profile title (“The Tall Man”) released in 2012 with no equivalent release in 2013 (we have three high-profile titles releasing in the fourth quarter of 2013 including “The Colony,” “Paradise” and “Doc Martin 6”), (ii) a significant reduction in rebates and sales return reserves in 2012 that did not repeat in the same quarter of the current year, and (iii) higher than expected sales returns from a former distribution partner, which was terminated in the second quarter of 2013, and from our Canadian distributor. These declines were partially offset by solid growth in both our direct-to-consumer segment, which increased 7.7% or $549,000 for the quarter, and our UK wholesale distribution business, which increased by 12.6% or $283,000. We experienced growth in our proprietary network, Acorn TV. As of October 31, 2013, the pay subscribers for Acorn TV have grown by 100% to over 40,000 compared to December 2012.

Index

Revenue for the nine month period ended September 30, 2013, declined by $13.8 million to $107.3 million from $121.2 million compared to the same nine month period in 2012. The decrease was driven by a decrease in our wholesale distribution segment, primarily within the US market, as follows: (i) the full release of five high-profile releases in 2012 (“The Double,” “All Things Fall Apart,” “Beneath the Darkness,” “The Tall Man,” and “Doc Martin 5”) versus only two high-profile releases in 2013 year-to-date (“The Numbers Station” and “Day of the Falcon”), (ii) a significant reduction in rebates and sales return reserves in 2012, that did not repeat in the current year, and (iii) higher than expected sales returns from a former distributor and from our Canadian distributor. These declines were partially offset by solid growth in both our direct-to-consumer segment, which increased 9.6% or $2.1 million for the nine months, and our UK wholesale distribution business, which grew $7.3% or $546,000 year-to-date versus prior year. We experienced growth in our proprietary network, Acorn TV. Acorn TV contributed $485,000 in increased revenues for the nine months ended September 2013.

Proforma Cost of Goods Sold (“COGS”)

COGS decreased by $2.3 million to $24.7 million from $27.0 million for the three months ended September 30, 2013, versus the same three month period in 2012. The decrease in COGS resulted from the year-over-year decrease in revenue, partially offset by the impairment charges of certain content rights and related inventories. These impairments and inventory write-downs were across a range of branded content. Our gross margin for the three months ended September 30, 2013 was 24.4% compared to 31.0% in 2012, respectively. Excluding the significant 2013 impairment and write-down charges, the gross margin was 34.1% for the three month ended September 30, 2013.

COGS increased by $3.4 million for the nine month period ended September 30, 2013, compared to the same period in 2012. During the second quarter of 2013, management began the early termination of a multi-year content output arrangement with a content supplier. The supplier agreement was originally scheduled to expire in 2017, but is now scheduled to terminate effective December 31, 2013, with a 90-day sell off period through March 2014. After careful consideration, management terminated this arrangement because our analysis indicated we could achieve higher risk-adjusted returns on other product lines and the content did not meet several of our strategic guidelines, including prospects for growth and opportunity to distribute across multiple distribution channels. The termination agreement was executed on July 23, 2013. The impact of this management decision resulted in an accelerated amortization and an impairment of the remaining content rights and inventories totaling $4.6 million, which includes accelerated amortization of $603,000. Beginning in 2014, we intend to invest the cash historically spent on the terminated agreement on other new content rights that are expected to meet management’s return thresholds.

During the nine-month period ended September 30, 2013, we recorded additional impairment charges on our inventory and investments in content of $7.4 million compared to charges of $2.6 million during the same period in 2012. These increased impairments resulted from our refined investment strategy and adjustments to our ultimate revenue forecast for every title. These charges were partially offset by a decrease in COGS resulted from the year-over-year decrease in revenue during the nine month period. Our gross margin for the nine months ended September 30, 2013 was 17.4% compared to 29.7% in 2012. Excluding the significant 2013 impairment and write-down charges, the gross margin was 28.0% for the nine months September 30, 2013.

Proforma Selling, General and Administrative Expenses (“SG&A”)

SG&A decreased by $3.9 million to $12.3 million from $16.2 million for the three month period ended September 30, 2013, compared to the same period in 2012. The decrease relates to expense reductions from merger transactions cost recorded in 2012 totaling $2.9 million, of which $2.0 million was incurred by Acorn, and cost benefits from staff reductions and operational efficiencies of approximately $2.5 million offset by increased amortization of intangible assets of $1.2 million and an increase in severance charges of $291,000 from $60,000 in 2012 to $351,000 in 2013.

SG&A expense decreased by $6.8 million for the nine month period ended September 30 2013, compared to same period in 2012. The decrease relates to expense reductions from one-time merger transactions cost recorded in 2012 totaling $7.8 million, of which $5.2 million was incurred by Acorn, and cost benefits from staff reductions and operational efficiencies of approximately $5.0 million offset by increased amortization of intangible assets of $3.7 million and an increase in severance charges of $2.3 million from $60,000 in 2012 to $2.4 million in 2013.

Proforma Loss from Operations

Operating loss increased by $294,000 and $10.5 million, respectively, for the three and nine months ended September 30, 2013, compared to the same periods in 2012. The increase for the three months ended September 30, 2013, is due to a $6.4 million decrease in revenue offset by decreases in COGS of $2.3 million and in SG&A of $3.9 million. The increase in operating losses of $10.5 million for the nine month period ended September 30, 2013, is due to a $13.8 million decrease in revenue and a $3.4 million increase in COGS offset by a decrease in SG&A expenses.

Index

Proforma Adjusted EBITDA

Unaudited proforma financial information reflects the operating results of RLJE as if Image and Acorn Media were acquired as of the periods indicated. These combined results are not necessarily indicative of the results that may have been achieved had the combined companies been combined as of such dates or periods, or of our future operating results.

Management believes Adjusted EBITDA to be a meaningful indicator of our performance that provides useful information to investors regarding our financial condition and results of operations because it removes material noncash items that allows investors to analyze the operating performance of the business using the same metric management uses. The exclusion of noncash items better reflects our ability to make investments in the business and meet obligations. Presentation of Adjusted EBITDA is a non-GAAP financial measure commonly used in the entertainment industry and by financial analysts and others who follow the industry to measure operating performance. The Company uses this measure to assess operating results and performance of its business, perform analytical comparisons, identify strategies to improve performance and allocate resources to its business segments. While management considers Adjusted EBITDA to be important measures of comparative operating performance, it should be considered in addition to, but not as a substitute for, net income and other measures of financial performance reported in accordance with US GAAP. Not all companies calculate Adjusted EBITDA in the same manner and the measure as presented may not be comparable to similarly-titled measures presented by other companies.

The following table includes the reconciliation of our consolidated Adjusted EBITDA to consolidated US GAAP net loss:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2013			2012			2013			2012
	Actual			Proforma			Actual			Proforma
Net loss	$	(8,508	)	$	(5,149	)	$	(29,010	)	$	(12,098	)

Amortization of content		13,947			15,513			50,535			49,508
Cash investment in content		(10,346	)		(21,756	)		(38,276	)		(50,163	)
Depreciation and amortization		1,388			1,413			4,308			4,246
Interest expense		2,019			1,938			6,027			5,814
Provision for income tax		670			123			1,681			46
Transactions costs and severance		351			2,901			2,369			7,786
Warrant liability fair value adjustment		3,884			—			3,082			—
Stock-based compensation		312			470			463			1,364
Adjusted EBITDA	$	3,717		$	(4,547	)	$	1,179		$	6,503

SUBSEQUENT EVENTS

We have performed an evaluation of subsequent events through the date we issued these financial statements and had the following subsequent events since September 30, 2013 through our filing date.

Credit Facility

On November 6, 2013, we entered into an amendment for our Credit Facility. The details of this amendment are disclosed in Note 8, Debt of our consolidated financial statements.

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Lease Commitments

In October 2013, we entered into a seven lease agreement for new office space in Woodland Hills, California. All employees currently located in Chatsworth, California will move to the new location in Woodland Hills, California. The anticipated move will occur in February 2014. Total lease commitment is approximately $3.3 million plus a portion of the building operating expenses.

On October 2013, we entered into a four and a half year lease agreement for new office space in London, England. All employees currently located in two separate offices located in London will move to the new location in London, England. The anticipated move will occur in January 2014. Total lease commitment is approximately $1.5 million plus a portion of the building operating expenses.

Other Debt

Repurchase of shares by RLJ SPAC Acquisition LLC

As disclosed in Note 15, Related Party Transactions , RLJ SPAC Acquisition LLC, continues to repurchase our shares in the open market.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

At September 30, 2013, our cash and cash equivalents was approximately $2.6 million. As of December 31, 2012, our cash and cash equivalents was approximately $4.7 million and $7.4 million was available under our revolving credit facility. During the first nine months of 2013, liquidity tightened for the following reasons:

We incurred higher than expected transaction costs associated with the closing of the Business Combination.

The legacy Image business has significant short-term vendor debts that are past due, which resulted in increased payments and modified business relationships in the short term.

The business is seasonal similar to consumer/wholesale retail and the earlier quarters are historically lower in terms of revenues and operating profits than the fourth quarter.

Beginning in the fourth quarter of 2013, we believe the deficit in our cash used in operating activities will be positively impacted by:

The seasonal fourth quarter sales, which generate 35-40% of our annual sales revenue;

The full realization of approximately $8.0 million in synergy changes that will be realized in 2014;

Improved gross margin from re-allocating $15.0 million of capital into higher yielding content; and

Revenue expansion and continued positive EBITDA results from operating improvements.

Index

We have agreed in our second amendment ( Second Amendment ) to the credit facility entered into on November 6, 2013, to use a portion of our projected 2014 cash flow to make accelerated principal payments to our lenders to reduce our leverage. As a result of this agreement, we have classified $15.0 million of principal payments as current liabilities versus $4.0 million as of December 31, 2012 (Note 8, Debt ). We are forecasting that the incremental principal reduction will be paid from our 2014 free cash flows. These incremental payments are not expected to affect our ability to increase content investment or meet normal operating commitments. We believe that our current financial position combined with our forecasted operational results, will be sufficient to meet our commitments.

The cash used in operating activities during the nine months ended September 30, 2013, was provided by our cash reserves as of December 31, 2012 and cash provided by our investing activities. During the first nine months of 2013, significant factors affecting cash provided by investing and used in financing activities were:

dividends received from ACL ($4.0 million);

net borrowing under our revolving credit facility ($7.4 million); and

repayment of long term debt ($11.5 million).

Capital Resources

Cash

As of September 30, 2013, we had cash of $2.6 million, as compared to $4.7 million as of December 31, 2012.

Borrowing Availability

At September 30, 2013, there was $51,000 of remaining borrowing capacity under the revolving line of credit, which became available on November 6, 2013, once receiving a waiver curing certain financial covenant defaults.

Credit Facility

On November 6, 2013, we entered into a second Amendment and Waiver (the Second Amendment ) with respect to the Credit Facility. As of June 30, 2013 and September 30, 2013, we triggered a technical default of our financial covenants resulting from the negative impact on our EBITDA (as defined by the Credit Facility) of certain significant impairment and severance charges that totaling $10.5 million recognized during the second quarter of 2013. The covenants impacted include: (1) senior debt-to-adjusted EBITDA, (2) total debt-to-adjusted EBITDA and (3) our interest coverage ratio. Each covenant is calculated on a trailing twelve month (or TTM ) basis. The significant second quarter impairment and severance charges were not contemplated in the covenant threshold determination when setting the covenant requirements in the first amendment (see below). The Second Amendment provides for (a) a full waiver of the second and third quarter financial covenant technical defaults and (b) modifies the Credit Facility to increase the maximum permitted Leverage Ratios (as defined in the Credit Facility) through December 31, 2014, which is intended to cover on a TTM basis all future periods impacted by the charges recognized during the second quarter. Based on our projected operating results, we believe that we will meet the revised covenants. We did not incur any fees or default interest as a result of these technical defaults or waivers. We are in compliance with all other aspects of the Credit Facility, including having made all debt service payments on time since inception.

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The modified Leverage Ratios, as amended, are presented below:

	December 31,	March 31,	June 30,	September 30,	December 31,
	2013	2014	2014	2014	2014
Leverage Ratios:
Senior debt-to-adjusted EBITDA	4.58 to 1.00	4.02 to 1.00	2.00 to 1.00	2.00 to 1.00	1.50 to 1.00
Total debt-to adjusted EBITDA	7.54 to 1.00	6.90 to 1.00	3.40 to 1.00	2.50 to 1.00	2.05 to 1.00
Interest coverage ratio	1.31 to 1.00	1.44 to 1.00	2.84 to 1.00	3.00 to 1.00	3.00 to 1.00

As of June 28, 2013, the Borrowers and the lenders entered into an Amendment and Waiver (the First Amendment ) with respect to the Credit Facility. The First Amendment has been superseded by the Second Amendment as discussed above for the maximum permitted leverage ratios and the requirement to make incremental principal payments of $7.5 million by December 31, 2015. The First Amendment modified the Credit Facility (a) to increase the maximum permitted Leverage Ratio (as defined in the Credit Facility) from 3.0 to 1.0 to 3.8 to 1.0 for the quarter ended June 30, 2013, (b) to permit the Borrowers to retain (and not apply to debt service) dividends received from ACL and its subsidiaries between June 25, 2013 and December 31, 2013 and (c) to exclude aged trade payables from the Leverage Ratios until 2015. In addition, the Amendment requires that the Borrowers, for at least one business day of each calendar year, beginning with calendar year 2015, cause the principal amount of the revolving loans outstanding to be $7.5 million or less. After any repayment required by this provision, the Borrowers may re-borrow all or any part of the revolving loans to the extent they are otherwise permitted to do so under the terms of the Credit Facility.

The covenants related to total debt and senior debt are predicated on the actual amounts of obligations calculated against a EBITDA base, as defined in the Credit Facility. For covenant purposes, EBITDA is defined as net income before income taxes and interest expense plus noncash items such as depreciation and amortization and certain other cash and noncash movements within the balance sheet. Additional covenants restrict the level of production spending, prints and advertising spending for theatrical releases, disposal of fixed assets and entering into new lease obligations. At September 30, 2013, we were in default of our financial covenants and on November 6, 2013, received waivers that cured the events of default.

Index

Our senior term loans have final maturities ranging from five to five and one-half years from issuance (October 2012), bear interest at rates that range from prime rate plus 5.0% to 6.25% or LIBOR plus 6.0% to 7.25%, payable quarterly. The term loan - C bears additional interest at a rate of 3% per annum paid-in-kind at maturity. On December 10, 2012, RLJE entered into a forward interest rate cap agreement that effectively caps the LIBOR rate of interest at 1.25%. The interest rate cap has a notional amount of $30.0 million and has a maturity date of November 30, 2014. We paid a one-time fixed fee of $22,750 for this rate cap agreement. The fair value of this interest rate cap agreement is insignificant.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Critical Accounting Policies and Procedures

There have been no significant changes in the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed on April 10, 2013.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. “Disclosure controls and procedures” refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our system of disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, we have evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes occurred to our internal control over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no such changes during the period covered by this Quarterly Report.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, we are subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations relating to employment and tax 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.

ITEM 1A. RISK FACTORS

Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K filed on April 10, 2013. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of September 30, 2013, there have been no material changes to the risk factors set forth in that Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

RLJ SPAC Acquisition LLC, an affiliate of the Company, has purchased shares of our common stock in the open market and through block purchases pursuant to a 10b5-1 plan. Robert L. Johnson, the Chairman of the Board of the Company, is the sole manager and sole voting member of RLJ SPAC Acquisition LLC. The table below sets forth information regarding purchases of our common stock by RLJ SPAC Acquisition LLC during the quarter ended September 30, 2013:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs

July 1, 2013 to July 31, 2013		34,096	$	5.53		60,596	$	1,682,392
August 1, 2013 to August 31, 2013		33,561	$	5.79		94,157	$	1,487,978
September 1, 2013 to September 30, 2013		11,441	$	5.49		105,598	$	1,425,152

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of June 30, 2013 and September 30, 2013, we triggered a technical default of our financial covenants (see Note 8, Debt of our Consolidated Financial Statements). On November 6, 2013, we entered into a second Amendment and Waiver (the Second Amendment ) with respect to the Credit Facility. The Second Amendment provides for (a) a full waiver of the second and third quarter financial covenant technical defaults and (b) modifies the Credit Facility to increase the maximum permitted Leverage Ratios (as defined in the Credit Facility) through December 31, 2014. The Second Amendment also provides for certain accelerated principal repayments.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. Exhibits

10.1 † *	Employment Agreement, dated as of July 18, 2013, by and between Miguel Penella and RLJ Entertainment, Inc.

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

Filed herewith.

†

Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		RLJ ENTERTAINMENT, INC.

Date:	November 7 , 2013	By:	/S/ MIGUEL PENELLA
			Miguel Penella
			Chief Executive Officer
			(Principal Executive Officer)


Date:	November 7 , 2013	By:	/S/ ANDREW S. WILSON
			Andrew S. Wilson
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

10.1 † *	Employment Agreement, dated as of July 18, 2013, by and between Miguel Penella and RLJ Entertainment, Inc.

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

Filed herewith.

†

Management contract or compensatory plan or arrangement.

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”), is made and entered into this 18th day of July, 2013 (the “Effective Date”), by and between RLJ Entertainment, Inc. (the “Company”), and Miguel Penella (“Executive”) (each, a “Party,” and collectively, the “Parties”).

Recital :

The Company desires to employ Executive as an employee of the Company, and Executive desires to be employed as an employee, on the terms and conditions provided in this Agreement.

NOW, THEREFORE , in consideration of the mutual representations, warranties, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties hereto agree as follows:

Section 1. Term. The Company will employ Executive, and Executive will serve the Company, as an employee under the terms of this Agreement until terminated pursuant to Section 4. The term of this Agreement, as in effect from time to time in accordance with the foregoing, shall be referred to herein as the “Term.” The period of time between the commencement and the termination of Executive’s employment hereunder shall be referred to herein as the “Employment Period.”

Section 2. Employment.

(a) Position and Reporting . The Company hereby employs Executive as the Chief Executive Officer (“CEO”) and President of the Company, for the Employment Period on the terms and conditions set forth in this Agreement. Executive represents and warrants that (i) his employment with the Company does not and will not breach any agreements with or duties to any former employer or any other third party; and (ii) Executive has no obligations inconsistent with the terms of this Agreement or with his undertaking a relationship with the Company, and Executive will not enter into any agreement in conflict with this Agreement.

(b) Authority and Duties . Executive shall exercise such authority, perform such financial and executive duties and functions and discharge such responsibilities as are reasonably associated with Executive’s position as CEO, commensurate with the authority vested in Executive’s position, pursuant to this Agreement and consistent with the direction provided by the Board of Directors of the Company (the “Board”). During the Employment Period, Executive shall devote his full business time, skill and efforts to the business of the Company, and to no other economic endeavor. Notwithstanding the foregoing, Executive may make and manage passive personal business investments of his choice (in the case of publicly-held corporations, not to exceed five percent (5%) of the outstanding voting stock) and serve in any capacity that does not interfere with his duties and obligations hereunder, with any civic, educational or charitable organization without seeking or obtaining prior approval by the Board.

Section 3. Compensation and Benefits.

(a) Base Salary . During the Employment Period, the Company shall pay to Executive, as compensation for the performance of his duties and obligations under this Agreement, a base salary at the rate of $500,000 per annum, less all applicable deductions required by law, payable in arrears not less frequently than monthly in accordance with the normal payroll practices of the Company (“Base Salary”). Such Base Salary shall be subject to review by the Board each year for possible increase by the Company, but shall in no event be decreased from its then-existing level during the Employment Period. Any such increase shall be in the discretion of the Board.

(b) Annual Bonus . In each year of the Employment Period, the Company shall pay to Executive, as further compensation for the performance of his duties and obligations under this Agreement, incentive compensation (the “Annual Bonus”) under the terms and conditions set forth in this Section 3(b). If the applicable performance targets are met, the Annual Bonus amount shall be $400,000 for calendar year 2013. The Annual Bonus amount for each of calendar years 2014, 2015 and any subsequent year shall be set by the Board no later than March 31 ^st of such year provided that the Annual Bonus amount for each such year shall not be less than $250,000. The Annual Bonus shall be paid upon the achievement by the Company of 97% of the EBITDA or revenue targets (the “Performance Target Levels”) proposed by management and approved and adopted by the Board, in its sole discretion, for each of calendar years 2013, 2014, 2015 and any subsequent year. Notwithstanding the failure of the Company to achieve 97% of the Performance Target Level in any year, the Board may, upon recommendation of the Compensation Committee, ta k ing into consideration all relevant facts and circumstances, determine to award Executive all or a portion of the Annual Bonus amount for such year or other incentive compensation. The Board shall use reasonable efforts to set a target bonus and performance criteria for each year after 2013 by March 31 of such year. The Annual Bonus shall be paid within 75 days following the end of a calendar year.

(c) Other Benefits . During the Employment Period, (i) Executive shall be entitled to participate in all of the employee benefit plans, programs and arrangements in effect during the Employment Period that are generally available to senior employees of the Company, including health insurance and life insurance, subject to and on a basis similar to the terms, conditions and overall administration of such plans, programs and arrangements, and (ii) Executive shall be entitled to fringe benefits and perquisites comparable to those of other senior employees of the Company (the items in (i) and (ii), collectively, “Benefits”). Executive shall be entitled to four (4) weeks’ vacation per year, subject to the accrual rate, accrual carry-over limitations and other provisions set forth in the employee handbook as amended from time to time (the “Employee Handbook”) and by which Executive hereby acknowledges he is bound.

(d) Business Expenses . During the Employment Period, the Company shall reimburse Executive for all documented reasonable business expenses actually incurred by Executive in the performance of his duties under this Agreement, in accordance with the Company’s policies as set forth in the Employee Handbook and Section 12(b) of this Agreement. All expenses for a single activity or event in excess of $10,000 shall require the advance written approval of the Board. Executive shall comply with all budget limitations, approval and reporting requirements as the Company may establish from time to time.

Section 4. Termination of Employment.

(a) Termination for Cause . The Company may, in its discretion, terminate Executive’s employment hereunder, with Cause, without prior notice. For purposes of this Agreement, the term “Cause” shall mean any one or more of the following:

(i)

Dishonesty, theft, misrepresentation, deceit, or fraud; in each case that is material, in connection with Executive’s performance of his duties or functions hereunder;

(ii)

Dishonesty, theft, misrepresentation, deceit, or fraud, other than in connection with Executive’s performance of his duties or functions hereunder, provided such actions cause material harm, or potential material harm, to the Company, including material harm to the reputation or functioning of the Company, or to Executive’s ability to fully perform all duties or functions hereunder;

(iii)

Executive’s negligence or insubordination, as determined in the good faith, reasonable discretion of the Company, to perform the duties and functions reasonably assigned to Executive by the Company, provided however , that if the failure is such as may, in the reasonable opinion of the Company, be of the nature that Executive may cure such breach, the Company shall give notice of such failure, and the Executive shall have up to thirty (30) calendar days to remedy the deficiency to the Company’s reasonable satisfaction.

(iv)

at any time prior to or after the execution of this Agreement, Executive’s conviction for, or plea of nolo contendere to, a charge or commission of a felony;

(v)

any material breach by Executive of the provisions of Sections 6-9 of this Agreement; provided however , that if the breach is such as may, in the reasonable opinion of the Company, be of the nature that Executive may cure such breach, Executive shall have thirty (30) days following written notice from the Company to Executive to fully cure the same.

(b) Termination Upon Death or Permanent and Total Disability . Executive’s employment shall be terminated immediately and automatically upon the death of Executive. Executive’s employment may be terminated, at the option of the Board, if Executive shall be rendered incapable of performing the normal duties and functions of his employment, as determined in the reasonable discretion of the Company, by reason of a Disability (as defined herein). For purposes of this Agreement, “Disability” shall mean any mental or physical condition either: (i) defined to be a “disability” for purposes of eligibility to receive long term disability benefits under the Company’s long term disability insurance policy or contract as may be in effect from time to time for the benefit of employees of the Company, or (ii) that impairs the ability of the Executive to perform the normal duties and functions of his employment and which can be expected to last, or which has lasted, for a period of six (6) or more consecutive months from the first date of first onset. If the Employment Period is terminated by reason of the Disability of Executive, the Company shall give thirty (30) days’ advance written notice to that effect to Executive.

(c) Termination for Good Reason . Executive may terminate his employment hereunder for “Good Reason.” For purposes of this Agreement, the term “Good Reason” shall mean either: (i) a material diminution in the Executive's duties or responsibilities (considered as a whole) as set forth herein, including removing Executive as CEO or President of the Company; (ii) a material breach by the Company of this Agreement, including of the compensation and benefits provision set forth in Section 3 hereof or a material reduction in the base compensation (or the amount of performance based target bonus for 2013, 2014, or 2015) or benefits payable or available to Executive as the case may be; subject in either event (i) or (ii), to the Company’s thirty (30) day right to cure after notification from Executive; or (iii) Executive is required by the Company to relocate to an office or facility on a regular basis that is more than fifty (50) miles from the Company’s present location at 8518 Georgia Avenue, Silver Spring, Maryland.

(d) Termination without Cause . The Company may terminate Executive’s employment without Cause, at any time, on thirty (30) days’ prior written notice.

(e) Termination by Executive . Executive may terminate the Executive’s employment for any reason, at any time, upon thirty (30) days’ prior written notice to the Company.

Section 5. Consequences of Termination.

(a) Termination without Cause or for Good Reason . In the event of termination of Executive’s employment hereunder by the Company without Cause or by the Executive for Good Reason (other than upon death or Disability), Executive shall be entitled to the following exit pay and benefits:

(i) Exit Pay - For a period of twelve (12) months following termination of employment (the “Severance Period”), Executive shall continue to receive payment of Executive’s Base Salary as in effect immediately prior to such termination. In addition, Executive shall be entitled, based upon the date of termination of employment, to a pro rata portion of the entire bonus to which he would have been entitled for the year in which the termination occurs, if 97% of the Performance Target Levels for such year are achieved, payable as provided for in Section 3 (a). Executive shall receive a lump sum payment for all accrued but unused vacation earned up to the date of termination of his employment (in accordance with Company policy) and to any other compensation or other benefits as may be required by applicable laws, rules or regulations or the compensation or benefit plans and arrangements in which Executive participates or as set forth in the Employee Handbook (such benefits to be paid, except as otherwise provided by Company policy, not later than thirty (30) days after the date of termination of Executive’s employment). For the avoidance of doubt, no exit pay shall be due or payable in the event of death or disability.

(ii) Benefits Continuation - Executive shall continue all Benefits through the Severance Period (Benefits, however, shall not be deemed to include participation in new grants or awards under incentive compensation or bonus plans.)

(iii) As a condition to payment, Exit Pay and Benefits Continuation, Executive shall, within thirty (30) days following the date of termination of employment, execute a general release in favor of the Company in the form attached to this Agreement as Exhibit A, and shall resign as director of the Company and as an officer or director of any affiliate of the Company.

(b) Other Terminations . In the event of termination of Executive’s employment hereunder for any reason other than those specified in Section 5(a)(i) hereof, including but not limited to Executive’s voluntary termination without Good Reason, Executive shall not be entitled to any compensation, or other benefits provided hereunder, except as may otherwise be required by applicable laws, rules or regulations or the compensation or benefit plans and arrangements in which Executive participates or as set forth in the Employee Handbook (such benefits to be paid, except as otherwise provided by Company policy, not later than thirty (30) days after the date of termination of Executive’s employment) .

Section 6. Confidentiality.

(a) Generally . All Confidential and Proprietary Information, as defined herein, shall be and remain the sole and exclusive property of the Company, without regard to any involvement Executive may have (or have had) in the conception, development, creation, and/or modification of same. Executive agrees that he will not at any time during the Term or at any time thereafter (regardless of the reason for termination), in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any Person, in any manner whatsoever, any Confidential and Proprietary Information. For purposes of this Agreement, a “Person” means any legal person, including, any natural person, corporation, partnership, joint venture, association, limited liability company, joint-stock company, business trust, unincorporated organization, governmental entity or any other entity of every nature, kind and description whatsoever.

(b) “Confidential and Proprietary Information” Defined . “Confidential and Proprietary Information” means any and all information or material: (i) disclosed or communicated by the Company to Executive; (ii) developed, learned, or otherwise acquired by Executive and relating, directly or indirectly, to his employment with the Company; (iii) entrusted to the Company by third parties; and/or (iv) disclosed or communicated to the Executive during his employment with the Company by any third party that owes a duty of confidentiality with respect to the information and/or material so disclosed or communicated. Confidential and Proprietary Information includes, but is not limited to, inventions, confidential information, trade secrets, copyrighted works (registered, unregistered, and/or common law), product ideas, techniques, processes, formulas, computer software source and/or object code and documentation, algorithms, system design, architecture, logic, structure, software, mask works, data and/or any other information of any type relating to research, development, marketing, forecasts, sales, profit margins, costs, pricing, non-public financial or accounting information, lists of actual or potential clients suppliers or partners, and/or personnel data, including the salaries, duties, qualifications, performance levels, and terms of compensation of other Company employees, without regard in any event to whether such information or material is or is not marked as “proprietary” and/or “confidential.” Confidential and Proprietary Information may (but need not) be contained in material such as drawings, samples, procedures, specifications, reports, studies, analyses, client or supplier lists, budgets, cost or price lists, compilations and/or computer programs, or may be in the nature of unwritten knowledge or know-how, without regard to whether such knowledge or know-how is protected by the law of trade secrets.

(c) Exclusions . The provisions of this Section 6 shall not apply to: (i) information that is public knowledge or available to the public other than as a result of disclosure by Executive in breach of this Section 6; (ii) information disseminated by the Company to third parties in the ordinary course of business; (iii) information lawfully received by Executive from a third party who, based upon inquiry by Executive, is not bound by a confidential relationship to the Company or any of its Affiliates (as defined herein); or (iv) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over Executive. For purposes of this Agreement, an “Affiliate” of any Person means any Person, directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to have control when such Person possesses the power, directly or indirectly, or has the power to direct or to cause the direction of, the management and policies of a Person through the ownership of voting securities, by contract or otherwise.

Section 7. Ownership of Company Documents. All Company Documents (as defined herein) shall be and remain the sole and exclusive property of the Company without regard to any involvement Executive may have (or have had) in the conception, development, creation, and/or modification of such Company Documents. All Company Documents, materials, and property in Executive’s possession or under his control shall be returned to the Company as and when requested, excepting only his personal copies of records relating to his compensation (“Personal Documents”). Even if the Company does not so request, Executive shall return all Company Documents, materials, and property immediately upon the termination of employment without regard to the reason for the termination, and, except for his Personal Documents, will not take with him or give to any third party any Company Documents, materials, or property or any reproduction thereof upon said termination of employment. “Company Documents” means documents or other media that contain or relate to Confidential and Proprietary Information or any other information concerning the business, operations, or plans of the Company, whether such documents have been prepared by Executive or by others. Company Documents include, but are not limited to, papers, drawings, photographs, charts, graphs, notebooks, client lists, sound recordings and other printed, typewritten or handwritten documents.

Section 8. Inventions; Copyrights; Further Assurances.

(a) Inventions . Executive hereby transfers, assigns, and conveys to the Company any and all rights he presently has or may acquire in any and all Inventions (as defined herein) conceived, made, developed, or first reduced to practice or learned by him and/or others during the term of his employment with the Company. This assignment shall include: (i) the right to file and prosecute patent applications on such Inventions in any and all countries, (ii) the patent applications filed and patents issuing thereon, and (iii) the right to obtain copyright, trademark or trade name protection for any related work product. Executive shall promptly and fully disclose all such Inventions to the Company conceived, made, developed, or first reduced to practice or learned, either alone or jointly with others, during the term of his employment with the Company and assist the Company in obtaining and protecting the rights therein (including patents thereon) in any and all countries (at the Company’s sole cost and expense); provided, however, that said Inventions will be the sole property of the Company, whether or not patented or registered for copyright, trademark or trade name protection, as the case may be, and which relate, directly or indirectly, to his work for the Company. Such disclosure shall be made promptly after each Invention is conceived, made, developed, or first reduced to practice or learned, whichever is earliest in time. “Invention(s)” means any and all discoveries, developments, concepts, designs, ideas, improvements, inventions and/or works of authorship (including interim work product, modifications, and derivative works), whether or not patentable, copyrightable, or otherwise legally protectable. This includes, but is not limited to, any new product, method, procedure, process, formulation, algorithm, computer program, software, technique, use, equipment, device, apparatus, system, compound, composition of matter, design or configuration of any kind, and/or any improvement(s) thereon.

(b) Copyrights . Executive agrees to promptly and fully disclose to the Company any and all copyrighted (registered, unregistered, or common law) and potentially copyrightable subject matter that Executive conceives, creates, develops, or modifies during the term of his employment by the Company and which relates, directly or indirectly, to his work as an employee, including all computer programs, documentation, technical descriptions for products, user’s guides, and/or illustrations, including any contributions to such subject matter (“Copyright Product”). All Confidential and Proprietary Information which is Copyright Product shall be considered "work made for hire" under the copyright laws of the United States, and the copyright for any and all Copyright Product shall automatically be and remain the sole and exclusive property of the Company. Furthermore, Executive hereby transfers and assigns to the Company any and all rights he presently possesses or may acquire in any and all Copyright Product which, for any reason, does not qualify as "work made for hire". If any Copyright Product embodies or reflects any of preexisting rights, Executive hereby grants to the Company an irrevocable, perpetual, nonexclusive, worldwide, royalty-free right and license to use, reproduce, display, perform, distribute copies of and prepare derivative works based upon such preexisting rights and to authorize others to do any or all of the foregoing.

(c) Further Assurances . During and at any time after employment by the Company and upon Company request, Executive will execute all papers in a timely manner and do all reasonable acts necessary or desired to apply for, secure, maintain and/or enforce patents, copyrights, trademarks and any other legal rights in the United States and any foreign countries in any and all inventions, Confidential and Proprietary Information and Copyright Product and other intangible assets owned by and/or assigned to Company under this Agreement or otherwise. Executive will execute all papers and do any and all reasonable acts necessary or desired to assign and transfer to Company, or any Person to whom Company is obligated to assign its rights, Executive’s entire right, title, and interest in and to any and all inventions, Confidential and Proprietary Information and Copyright Product and other intangible assets. In the event that Company is unable for any reason whatsoever to secure Executive’s signature to any document reasonably necessary or desired for any of the foregoing purposes (including, but not limited to, renewals, extensions, re-registrations, continuations, divisions or continuations in part), Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as his agents and attorneys-in-fact to act for and in his behalf and in his stead, but only for the purpose of executing and filing any such document(s) and doing all other lawfully permitted acts to accomplish the foregoing purposes with the same legal force and effect as if executed by Executive.

Section 9. Non-Solicitation of Executives. Executive agrees that he shall not during the Employment Period and for a period of twenty-four (24) months following the end of the Employment Period, directly or indirectly, alone or as principal, partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or stockholder, or in any other capacity whatsoever: (i) hire, solicit for hire, employ, retain, or enter into any employment, agency, consulting or other similar agreement or arrangement with, any Person who, within the twenty-four (24) month period prior to the termination of Executive’s employment by the Company, to the Knowledge of Executive, was an employee the Company or a Company Affiliate, (ii) induce or attempt to induce such Person to terminate his employment with the Company or any Company Affiliate.

Section 10. Non-Competition. Executive agrees that he shall not during the Employment Period and during the Restricted Period (as herein defined), directly or indirectly, alone or as principal, partner, joint venture, officer, director, employee, consultant, agent, independent contractor or stockholder, or in any other capacity whatsoever, engage in, provide services to, consult or assist any other entity that is engaged, or proposed to be engaged, in any material respect in (a) the sale, distribution, marketing, production and/or acquisition of video programming content for sale directly to end users or for distribution to end users by means of the internet, or (b) performing any other business activities which are the same or substantially similar to any business activity provided or performed by the Company at anytime during the Employment Period. The foregoing restriction will apply throughout North America, or such other geographical area as a court shall find reasonably necessary to protect the goodwill and business of the Company and its Affiliates (the “Restricted Territory”). For purposes of this Agreement, the term “Restricted Period” shall mean the period of time following the date of Executive’s termination equal to twelve (12) months.

Section 11. Breach of Restrictive Covenants; Specific Enforcement. The restrictions contained in Sections 6 through 11 hereof, inclusive, are necessary for the protection of the business and goodwill of the Company and its Affiliates and are considered by the Executive to be reasonable for such purposes. It is acknowledged that it may be impossible to determine the monetary damages incurred by Executive’s violation of this Agreement and that any violation of this Agreement will cause irreparable, immediate and substantial injury to the Company. Accordingly, Executive agrees that Company will be entitled, in addition to all other rights and remedies which may be available, to an injunction enjoining and restraining Executive from committing a violation of this Agreement and Executive agrees to the issuance and entry of such injunction. In addition, Company will be entitled to such damages as it can demonstrate it has sustained by reason of the violation of this Agreement by Executive.

Section 12. Compliance with Code Section 409A. All payments pursuant to this Agreement shall be subject to the provisions of this Section 12. Notwithstanding anything herein to the contrary, this Agreement is intended to be interpreted and operated to the fullest extent possible so that the payments and benefits under this Agreement either shall be exempt from the requirements of section 409A of the Internal Revenue Code of 1986, as amended ("Code Section 409A") or shall comply with the requirements of such provision; provided however that notwithstanding anything to the contrary in this Agreement, in no event shall the Company be liable to the Executive for or with respect to any taxes, penalties or interest which may be imposed upon the Executive pursuant to Code Section 409A.

(a) Payments to Specified Executives . To the extent that any payment or benefit pursuant to this Agreement constitutes a “deferral of compensation” subject to Code Section 409A (after taking into account to the maximum extent possible any applicable exemptions) (a “409A Payment”) treated as payable upon a “separation from service” pursuant to Code Section 409A (“Separation from Service”), then, if on the date of the Executive’s Separation from Service, the Executive is a Specified Executive, then to the extent required for Executive not to incur additional taxes pursuant to Code Section 409A, no such 409A Payment shall be made to the Executive earlier than the earlier of (i) six (6) months after the Executive’s Separation from Service; or (ii) the date of his death. Should this Section 12 result in a delay of payments or benefits to Executive, on the first day any such payments or benefits may be made without incurring additional tax pursuant to Code Section 409A (the “409A Payment Date”), the Company shall make such payments and provide such benefits as provided for in this Agreement, provided that any amounts that would have been payable earlier but for the application of this Section 12, shall be paid in lump-sum on the 409A Payment Date. For purposes of this Section 12, the terms “Specified Executive” and “Separation from Service” shall have the meaning set forth in Code Section 409A as determined in accordance with the methodology established by the Company. For purposes of determining whether a Separation from Service has occurred for purposes of Code Section 409A, a Separation from Service is deemed to include a reasonably anticipated permanent reduction in the level of services performed by the Executive to less than twenty (20%) of the average level of services performed by the Executive during the immediately preceding 12-month period (or period of service if less than 12 months).

(b) Reimbursements . For purposes of complying with Code Section 409A and without extending the payment timing otherwise provided in this Agreement, taxable reimbursements under this Agreement, subject to the following sentence and to the extent required to comply with Code Section 409A, will be made no later than the end of the calendar year following the calendar year the expense was incurred. To the extent required to comply with Code Section 409A, any taxable reimbursements and any in-kind benefit under this Agreement will be subject to the following: (a) payment of such reimbursements or in-kind benefits during one calendar year will not affect the amount of such reimbursement or in-kind benefits provided during any other calendar year (other than for medical reimbursement arrangements as excepted under Treasury Regulations §1.409A-3(i)(1)(iv)(B) solely because the arrangement provides for a limit on the amount of expenses that may be reimbursed under such arrangement over some or all of the period the arrangement remains in effect); (b) such right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another form of compensation to the Executive and (c) the right to reimbursements under this Agreement will be in effect for the lesser of the time specified in this Agreement or ten years plus the lifetime of the Executive. Any taxable reimbursements or in-kind benefits shall be treated as not subject to Code Section 409A to the maximum extent provided by Treasury Regulations §1.409A-1(b)(9)(v) or otherwise under Code Section 409A.

(c) Release . The requirements for a release in Section 5(a)(i) shall be construed in accordance with this Section 12 and Code Section 409A, and the Executive shall not have the ability to determine the timing of any 409A Payments by virtue of the time the Executive executes and delivers the release.

(d) No Acceleration; Separate Payments; Termination of Employment. No 409A Payment payable under this Agreement shall be subject to acceleration or to any change in the specified time or method of payment, except as otherwise provided under this Agreement and consistent with Code Section 409A. If under this Agreement, a 409A Payment is to be paid in two or more installments, for purposes of Section 409A, each installment shall be treated as a separate payment. Notwithstanding anything contained in this Agreement to the contrary, the date on which a Separation from Service occurs shall be treated as the termination of employment date for purposes of determining the timing of payments under this Agreement to the extent necessary to have such payments and benefits under this Agreement be exempt from the requirements of Code Section 409A or comply with the requirements of Code Section 409A.

(e) Cooperation. If the Company or Executive determines that any provision of this Agreement is or might be inconsistent with the requirements of Code Section 409A, the parties shall attempt in good faith to agree on such amendments to this Agreement as may be necessary or appropriate to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A without changing the basic economic terms of this Agreement. Notwithstanding the foregoing, no provision of this Agreement shall be interpreted or construed to transfer any liability for failure to comply with Code Section 409A from Executive or any other individual to the Company. This Section 12 is not intended to impose any restrictions on payments or benefits to Executive other than those otherwise set forth in this Agreement or required for Executive not to incur additional tax under Code Section 409A and shall be interpreted and operated accordingly.

Section 13. Grant of Restricted Shares. Grant of Restricted Shares. In consideration of Executive’s employment and Executive’s execution of this Agreement, the Company and Executive have entered into a Restricted Stock Award Agreement, of even date herewith (the “Grant Agreement”), for the grant to Executive of certain shares of the Company’s stock (the “Restricted Shares”). The Restricted Shares shall be subject to the terms and conditions of the Grant Agreement, attached hereto as Exhibit B, and the RLJ Entertainment, Inc. 2012 Incentive Compensation Plan attached hereto as Exhibit C, as it may be amended from time to time.

Section 14. Use of Proprietary Information. Executive will not use in the performance of his duties any documents or materials of a former employer that are not generally available to the public or have not been legally transferred to Company. Company understands that situations may arise in the future that may require Company to discuss with his future employers the existence of this Agreement and Executive hereby expressly grants Company permission to do so.

Section 15. Notices. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be personally delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows:

If to Executive:

Miguel Penella

6039 N. 27 ^th Street

Arlington, VA 22207

With copy to:

Womble Carlyle Sandridge & Rice, LLP

8065 Leesburg Pike, Fourth Floor

Vienna, VA 22182

Attention: Keith J. Mendelson, Esquire

If to the Company:

RLJ Entertainment, Inc.

8515 Georgia Avenue, Suite 650

Silver Spring, Maryland 20910

Attention: ___________________

With copy to:

The RLJ Companies

3 Bethesda Metro Center

Suite 1000,

Bethesda, MD 20814

Attention: H. Van Sinclair

and

Image Entertainment, Inc.

20525 Nordhoff Street Suite 200

Chatsworth, California 91311

Attention: Michael Bayer

or to such other address as a Party hereto shall designate to the other Party by like notice, provided that notice of a change of address shall be effective only upon receipt thereof. Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by registered or certified mail shall be deemed to have been duly given three (3) days from date of deposit in the United States mails, unless sooner received.

Section 16. Waiver of Breach. Any waiver of any breach of the Agreement shall not be construed to be a continuing waiver or consent to any subsequent breach on the part of either Executive or of the Company.

Section 17. Assignment. Executive may not assign his rights or delegate his duties under this Agreement; provided, however, that this Agreement shall inure to the benefit of and be binding upon the heirs, assigns or designees of Executive to the extent of any payments due to Executive hereunder. Notwithstanding anything to the contrary contained herein, the Company shall be free to assign its rights and delegate its duties under this Agreement, and this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company, all as though such successors and assigns of the Company and their respective successors and assigns were the Company. As used in this Agreement, the term “Company” shall be deemed to refer to any such successor or assign of the Company referred to in the preceding sentence.

Section 18. Withholding of Taxes. All payments required to be made by the Company to Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation.

Section 19. Severability. To the extent any provision of this Agreement or portion thereof shall be invalid or unenforceable, it shall be considered deleted therefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect.

Section 20. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

Section 21. Governing Law. This Agreement has been entered into within the State of Maryland and shall be deemed performed therein. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Maryland, without regard to conflicts of law principles. The Company and Executive hereby agree that any suit, action or proceeding arising out of or based upon any claim under this Agreement shall be instituted against Executive in state or federal court in Maryland, and Executive and Company waive any objection they may have to the laying of venue of such suit, action or proceeding therein. EACH OF THE PARTIES HERETO HEREBY VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT.

Section 22. Amendments. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and an officer of the Company. No waiver by either Party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either Party which are not set forth expressly in this Agreement.

Section 23. No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns.

Section 24. Press Releases. Executive shall not issue any press release or make any public announcement relating to the subject matter of this Agreement without the prior written approval of the Company. The Company may use Executive’s name, photograph, likeness, voice, other personal attribute, and biographical and other information in any media during his employment for any business purpose.

Section 25. Headings; Explanatory Note. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. The explanatory appearing at the beginning of this Agreement are not mere recitals but are an integral part of the agreement embodied hereby.

Section 26. Expenses. Each of the Parties will bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby; provided however, the Company will reimburse Executive up to $30,000 for legal fees incurred by Executive in connection with the negotiations and drafting of this Agreement. Notwithstanding the foregoing, the Parties agree that in the event that a Party is successful in whole or in part in any legal action against the other Party under this Agreement (including, without limitation, an action to enforce the restrictions contained in Sections 6 through 9 hereof, inclusive), the prevailing Party will be entitled to recover all costs associated with such action, including reasonable attorneys’ fees, from the other Party.

Section 27. Construction.

(a) Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. Words in the singular shall be held to include the plural and vice versa, and words of one gender shall be held to include the other genders as the context requires. The terms “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless otherwise specified. The word “or” shall not be exclusive, and references to a Person are also references to its permitted successors and assigns.

(b) This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the Party drafting or causing any instrument to be drafted.

Section 28. Entire Agreement. This Agreement and the Award Agreement constitutes the entire agreement by the Company (and its affiliates) and Executive with respect to the subject matter hereof and supersedes any and all prior agreements or understandings between Executive and the Company with respect to the subject matter hereof, whether written or oral, including, but not limited to, that certain Retention Bonus and Severance Agreement between Acorn Media Group and Executive dated June 22, 2010, which agreement shall be of no further force or effect. This Agreement may be amended or modified only by a written instrument executed by Executive and the Company.

Section 29. Survival. The obligations of Sections 5 through 11, 13, 15, 21, 24, 25, 28 and 30 inclusive, and this Section 29, shall survive any termination or expiration of this Agreement.

Section 30. Arbitration. Whenever a “dispute” arises between the Parties concerning this Agreement (other than a dispute arising out of Executive’s violation of Sections 6-10 in which case the Company may elect to utilize the options available in Section 11), or any other matter arising out of Executive’s employment with the Company, the Parties shall use their best efforts to resolve the “dispute” by mutual agreement. If such a “dispute” cannot be so resolved within fifteen (15) calendar days, it shall be submitted to final and binding arbitration to the exclusion of all other avenues of relief and adjudicated pursuant to the American Arbitration Association’s Rules for Employment Arbitration then in effect, except as otherwise provided herein. The parties agree that the hearing in any such arbitration shall be held as soon as practicable in Washington, D.C., and that a written decision shall be rendered by the arbitrator within a reasonable time period after the conclusion of the hearing. The Parties may submit written requests for relevant documents and a written list of witnesses to the other Party. Such requests must be served no later than for forty-five (45) days prior to the hearing and responses to such requests must be made no later than fifteen (15) days prior the hearing. Neither Party may introduce any documents or witnesses at the hearing if omitted from such a response. The decision of the arbitrator must be in writing and shall be final and binding on the Parties, and judgment may be entered on the arbitrator’s award in any court having jurisdiction thereof. For any federal equal employment claims or for any claims which would require the Company to bear the administrative costs of the arbitration for the claim to be arbitrable, the administrative cost of the arbitration and the arbitrator’s compensation shall be borne by the Company and each party shall be responsible for his or its own costs and attorneys’ fees, unless otherwise agreed to by the parties. Otherwise, the parties shall bear the cost of the arbitration and the arbitrator’s compensation equally and shall be responsible for his or its own attorneys’ fees. This section shall survive the termination of this Agreement.

[ Signature page follows ]

IN WITNESS WHEREOF , the parties have executed this Agreement under seal as of the date first set forth above.

	RLJ ENTERTAINMENT, INC.

	By:	/s/ TYRONE BROWN
	Name: Tyrone Brown
	Title: Director

	EXECUTIVE

	/s/ MIGUEL PENELLA
	Miguel Penella

[ Signature Page to Employment Agreement

between RLJ Entertainment, Inc. and Miguel Penella]

EXHIBIT A

WAIVER AND RELEASE AGREEMENT

THIS WAIVER AND RELEASE AGREEMENT (this “Agreement”) is made and entered into this _____ day of __________________, 20__, by and between ________________ (“Executive”) and RLJ Entertainment, Inc. (the “Company”).

Recitals :

WHEREAS , Executive is currently employed by the Company in the role of ______________________________, pursuant to that certain Employment Agreement, dated _________________, 20___ (the “Employment Agreement”);

WHEREAS , [____________________________________________________].

WHEREAS , Executive acknowledges that, but for Executive’s agreement to execute this Waiver and Release Agreement, Executive would not be eligible for the severance benefits set forth in the Employment Agreement;

NOW THEREFORE , the parties hereby agree as follows:

Agreement

1. Separation of Employment. Executive’s last day of employment with the Company shall be ________________________, 20___ (the “Termination Date”). On and after the Termination Date, Executive shall no longer be employed by the Company or any of its affiliates in any capacity, nor shall Executive serve the Company as an officer or director of the Company or any of its affiliates and the Employment Agreement shall terminate and be of no further force or effect.

2. Severance Benefits. In consideration for the promises set forth in this Agreement, the Company agrees that, following the Company’s receipt of a duly executed original of this Agreement, the Company shall continue to pay Executive’s base salary, minus all applicable federal, state and local taxes, in accordance with the Company’s regular payroll practices, through ________________________, 20___, and Executive shall be entitled to receive such bonus payment and benefits continuation coverage, if any, expressly provided in the Employment Agreement.

3. Warranty. Executive acknowledges that, other than the Severance Benefits set forth in Section 2, above, Executive has received all wages, accrued but unused vacation pay, equity interests and other benefits due Executive as a result of Executive’s employment with and termination from the Company.

Exhibit A - page 1

4. Release of Known and Unknown Claims By Executive. In exchange for the Severance Benefits set forth in Section 2 above, and in consideration of the further agreements and promises set forth herein, Executive agrees unconditionally and forever to release and discharge the Company, including, without limitation, the Company’s current and former officers, directors, shareholders, employees, representatives, attorneys and agents, as well as all of their predecessors, parents, subsidiaries, affiliates, successors in interest and assigns (collectively, the “Releasees”) from any and all claims, actions, causes of action, demands, rights, or damages of any kind or nature which Executive may now have, or ever have, whether known or unknown, including any claims, causes of action or demands of any nature arising out of or in any way relating to Executive’s employment with, or termination from the Company on or before the date Executive signs this Agreement.

This release specifically includes, but is not limited to, any claims for fraud; breach of contract; breach of implied covenant of good faith and fair dealing; inducement of breach; interference with contract; wrongful or unlawful discharge or demotion; violation of public policy; assault and battery; invasion of privacy; intentional or negligent infliction of emotional distress; intentional or negligent misrepresentation; conspiracy; failure to pay wages, benefits, vacation pay, severance pay, attorneys’ fees, or other compensation of any sort; wrongful termination; retaliation; wrongful demotion; discrimination or harassment on any basis protected by federal, state or local law including, but not limited to race, color, sex, gender identity, national origin, ancestry, religion, disability, handicap, medical condition, marital status, and sexual orientation; any claim under Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, or Section 1981 of Title 42 of the United States Code; violation of any safety and health laws, statutes or regulations; or any other wrongful conduct, based upon events occurring prior to the date of execution of this Agreement.

The parties intend this release by Executive to be a full and comprehensive general release waiving and releasing all claims, demands, and causes of action, known or unknown, to the fullest extent permitted by law. Nothing in this Agreement is intended to nor shall it be interpreted to release any claim which, by law, may not be released.

5. Additional Representations and Warranties By Executive. Executive represents that Executive has no pending complaints or charges against the Releasees, or any of them, with any state or federal court, or any local, state or federal agency, division, or department based on any event(s) occurring prior to the date Executive signs this Agreement. Executive further represents that Executive will not in the future file, participate in, encourage, instigate or assist in the prosecution of any claim, complaints, charges or in any lawsuit by any party in any state or federal court against the Releasees, or any of them, unless such aid or assistance is ordered by a court or government agency or sought by compulsory legal process, claiming that the Releasees, or any of them, have violated any local, state or federal laws, statutes, ordinances or regulations based upon events occurring prior to the execution of this Agreement. Nothing in this Agreement shall be construed as prohibiting Executive from making a future claim with the Equal Employment Opportunity Commission or any similar state agency; provided, however , that should Executive pursue such an administrative action against the Releasees, or any of them, to the maximum extent allowed by law, Executive agrees and acknowledges that Executive will not seek, nor shall Executive be entitled to recover, any monetary damages from any such proceeding.

Exhibit A - page 2

6. Knowing and Voluntary. Executive represents and agrees that, prior to signing this Agreement, Executive has had the opportunity to discuss the terms of this Agreement with legal counsel of Executive’s choosing. Executive further represents and agrees that Executive is entering into this Agreement knowingly and voluntarily. Executive affirms that no promise was made to cause Executive to enter into this Agreement, other than what is promised in this Agreement. Executive further confirms that Executive has not relied upon any other statement or representation by anyone other than what is in this Agreement as a basis for Executive’s agreement.

7. No Admission of Liability. By entering into this Agreement, neither the Company nor Executive suggests or admits to any liability to one another nor that they violated any law or any duty or obligation to one another.

8. Confidentiality. Executive represents, warrants and agrees that neither Executive nor any of Executive’s agents or representatives has already disclosed or publicized, nor will at any time in the future disclose or publicize or cause or permit to be disclosed or publicized, the existence of this Agreement, any of the terms of this Agreement, or the facts underlying this Agreement, to any person, corporation, association or governmental agency or other entity except: (a) to the extent necessary to report income to appropriate taxing authorities; (b) to members of Executive’s immediate family; (c) in response to an order of a court of competent jurisdiction or subpoena issued under the authority thereof; or (d) in response to any inquiry or subpoena issued by a state or federal governmental agency; provided, however , that notice of receipt of such judicial order or subpoena shall be immediately communicated by Executive to the Company telephonically, and confirmed immediately thereafter in writing, so that the Company will have the opportunity to assert what rights it has to non-disclosure prior to Executive’s response to the order, inquiry or subpoena. Executive further represents, warrants and agrees that Executive has to date maintained and will continue to maintain all non-public information regarding the Releasees, or any of them, as strictly confidential and has not disclosed and shall not disclose such information to any person or entity or cause such information to be disclosed to any person or entity, either directly or indirectly, specifically or generally.

9. Cooperation. Executive agrees to consult with the Company regarding on-going matters that commenced during Executive’s employment with the Company and to cooperate with the Company in connection with disputes between the Company and third parties (including, but not limited to, current or former employees) when requested by the Company. This cooperation may include, but is not limited to, conferring with and assisting the Company in preparatory work in litigation matters, providing factual information to the Company, and giving depositions and testimony in judicial and administrative proceedings. Executive agrees that Executive will not be paid by the Company for Executive’s cooperation, except that the Company will reimburse Executive for Executive’s reasonable out-of-pocket expenses incurred in connection therewith, provided that such expenses are approved in advance by the Company.

10. No Disparagement. Executive represents, warrants and agrees that on or after the Termination Date Executive has not disparaged or made derogatory or negative comments, nor will Executive at any time in the future disparage or make derogatory or negative comments, to any third party (including but not limited to employees of the Company) concerning the Releasees, or any of them, at any time. Nothing in this Section shall preclude Executive from testifying truthfully in any deposition or judicial or administrative proceeding.

Exhibit A - page 3

11. Return of Property. By signing below, Executive represents and warrants that Executive has returned to the Company all of the Company’s property, documents (hard copy or electronic files) and information prior to signing this Agreement and that Executive has not, nor will Executive, copy or transfer any Company information, nor will Executive maintain any Company information, after the Termination Date.

12. Assignment. The Company may assign this Agreement and/or any of its rights or privileges hereunder, in one or more assignments, and this Agreement shall inure to the benefit of all such successors and assigns.

13. Governing Law. This Agreement shall be governed by the laws of the State of Maryland as applied to agreements made and wholly to be performed in State of Maryland.

14. Entire Agreement. This Agreement constitutes the entire understanding between the parties with respect to its subject matter, superseding all prior agreements and understandings, written or oral, with respect to its subject matter; provided, however that this agreement shall not be deemed to supersede the Company’s Code of Conduct and/or any agreements between the Company and Executive with respect to the protection of the Company’s confidential, proprietary and/or trade secret information all of which survives. This Agreement may not be amended or modified, nor any provision hereof waived, other than by a writing signed by Executive and an authorized representative of the Company.

15. Ambiguities. The general rule that ambiguities are to be construed against the drafter shall not apply to this Agreement. In the event that any language of this Agreement is found to be ambiguous, all parties shall have the opportunity to present evidence as to the actual intent of the parties with respect to any such ambiguous language.

16. Severability. If any sentence, phrase, paragraph, subparagraph or portion of this Agreement is found to be illegal or unenforceable, such action shall not affect the validity or enforceability of the remaining sentences, phrases, paragraphs, subparagraphs or portions of this Agreement.

17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, all of which together shall constitute one and the same instrument.

Exhibit A - page 4

PLEASE READ CAREFULLY. THIS AGREEMENT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

THE UNDERSIGNED AGREE TO THE TERMS OF THIS AGREEMENT AND VOLUNTARILY ENTER INTO IT WITH THE INTENT TO BE BOUND THEREBY.

	EXECUTIVE:


	Name:

	Date:

	RLJ ENTERTAINMENT, INC.

	By:
		Name:
		Title:

	Date:

Nevada		45-4950432
(State or other jurisdiction of incorporation)		(IRS Employer Identification Number)

8515 Georgia Avenue, Suite 650 Silver Spring, Maryland		20910
(Address of principal executive offices)		(Zip Code)

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