RENT-2012.12.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________________________
FORM 10-Q
_________________________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2012
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number: 000-15159
_________________________________________________________________________ 
RENTRAK CORPORATION
(Exact name of registrant as specified in its charter)
_________________________________________________________________________ 
Oregon
 
93-0780536
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
7700 NE Ambassador Place,
Portland, Oregon
 
97220
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 503-284-7581
 _________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
  
Accelerated filer
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock $0.001 par value
  
11,857,221
(Class)
  
(Outstanding at February 1, 2013)


RENTRAK CORPORATION
FORM 10-Q
INDEX
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1A.
 
 
 
Item 6.
 
 

1
Table of Contents

PART I
ITEM 1.
FINANCIAL STATEMENTS
Rentrak Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share amounts)
 
December 31,
2012
 
March 31,
2012
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
4,685

 
$
5,526

Marketable securities
21,483

 
22,227

Accounts and notes receivable, net of allowances for doubtful accounts of $712 and $649
12,354

 
14,260

Deferred tax assets, net
53

 
48

Other current assets
1,118

 
985

Total Current Assets
39,693

 
43,046

Property and equipment, net of accumulated depreciation of $18,868 and $17,032
12,493

 
10,846

Goodwill
5,085

 
5,101

Other intangible assets, net of accumulated amortization of $2,213 and $1,579
12,647

 
13,165

Other assets
777

 
723

Total Assets
$
70,695

 
$
72,881

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
6,476

 
$
5,291

Accrued liabilities
4,991

 
3,093

Accrued compensation
4,940

 
8,781

Deferred revenue and other credits
1,860

 
2,037

Total Current Liabilities
18,267

 
19,202

Deferred rent, long-term portion
1,670

 
1,819

Taxes payable, long-term
678

 
731

Deferred tax liability, long-term
71

 
79

Note payable and accrued interest
544

 
525

Total Liabilities
21,230

 
22,356

Commitments and Contingencies
—

 
—

Stockholders’ Equity:
 
 
 
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued
—

 
—

Common stock, $0.001 par value; 30,000 shares authorized; shares issued and outstanding: 11,844 and 11,078
11

 
11

Capital in excess of par value
73,751

 
55,125

Accumulated other comprehensive income
255

 
341

Accumulated deficit
(25,541
)
 
(4,952
)
Total Stockholders’ Equity attributable to Rentrak Corporation
48,476

 
50,525

Noncontrolling interest
989

 
—

Total Stockholders’ Equity
49,465

 
50,525

Total Liabilities and Stockholders’ Equity
$
70,695

 
$
72,881

See accompanying Notes to Condensed Consolidated Financial Statements.

2
Table of Contents

Rentrak Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
2012
 
2011
 
2012
 
2011
Revenue
$
24,948

 
$
22,211

 
$
70,662

 
$
66,471

Cost of sales
13,847

 
11,590

 
37,343

 
35,229

Gross margin
11,101

 
10,621

 
33,319

 
31,242

Operating expenses:
 
 
 
 
 
 
 
Selling and administrative
12,870

 
11,595

 
54,150

 
32,354

Loss from operations
(1,769
)
 
(974
)
 
(20,831
)
 
(1,112
)
Other income:
 
 
 
 
 
 
 
Interest income, net
41

 
133

 
390

 
348

Loss before income taxes
(1,728
)
 
(841
)
 
(20,441
)
 
(764
)
Provision for income taxes
117

 
1,106

 
179

 
1,046

Net loss
(1,845
)
 
(1,947
)
 
(20,620
)
 
(1,810
)
Net loss attributable to noncontrolling interest
(31
)
 
—

 
(31
)
 
—

Net loss attributable to Rentrak Corporation
$
(1,814
)
 
$
(1,947
)
 
$
(20,589
)
 
$
(1,810
)
Basic net loss per share
$
(0.15
)
 
$
(0.18
)
 
$
(1.77
)
 
$
(0.16
)
Diluted net loss per share
$
(0.15
)
 
$
(0.18
)
 
$
(1.77
)
 
$
(0.16
)
Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
11,996

 
11,102

 
11,634

 
11,205

Diluted
11,996

 
11,102

 
11,634

 
11,205

See accompanying Notes to Condensed Consolidated Financial Statements.


3
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Rentrak Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands, except footnote reference)

 
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
 
 
 
 
2012
 
2011
 
2012
 
2011
Net loss
 
$
(1,845
)
 
$
(1,947
)
 
$
(20,620
)
 
$
(1,810
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
93

 
(239
)
 
(6
)
 
(521
)
Unrealized holding (gains) losses on available for sale securities (1)
 
(30
)
 
(25
)
 
(8
)
 
60

Recognition of previously unrealized gains on available for sale securities included in net loss(2)
 
—

 
(14
)
 
(72
)
 
(21
)
Other comprehensive income (loss)
 
63

 
(278
)
 
(86
)
 
(482
)
Comprehensive loss
 
(1,782
)
 
(2,225
)
 
(20,706
)
 
(2,292
)
Comprehensive loss attributable to noncontrolling interest
 
(31
)
 
—

 
(31
)
 
—

Comprehensive loss attributable to Rentrak Corporation
 
$
(1,751
)
 
$
(2,225
)
 
$
(20,675
)
 
$
(2,292
)

(1) For the three months ended December 31, 2012 and 2011, the amounts are net of deferred taxes of $15,000 and $18,000, respectively, and for the nine months ended December 31, 2012 and 2011, the amounts are net of deferred taxes of zero and $44,000, respectively.

(2) For the three months ended December 31, 2012 and 2011, the amounts are net of deferred tax benefit of zero and $11,000, respectively, and for the nine months ended December 31, 2012 and 2011, the amounts are net of deferred tax benefit of $53,000 and $15,000, respectively.

See accompanying Notes to Condensed Consolidated Financial Statements.
















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Rentrak Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
For the Nine Months Ended December 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net loss
$
(20,620
)
 
$
(1,810
)
Adjustments to reconcile net loss to net cash flows provided by operating activities:
 
 
 
Depreciation and amortization
3,607

 
3,233

Stock-based compensation
17,781

 
813

Deferred income taxes
(3
)
 
1,407

(Gain) loss on disposition of assets
(26
)
 
2

Realized gain on marketable securities
(196
)
 
(37
)
Interest on note payable
19

 
19

Adjustment to allowance for doubtful accounts
63

 
125

(Increase) decrease in:
 
 
 
Accounts and notes receivable
1,906

 
3,433

Taxes receivable and prepaid taxes
—

 
923

Other assets
(291
)
 
304

Increase (decrease) in:
 
 
 
Accounts payable
1,185

 
(2,827
)
Taxes payable
(78
)
 
(596
)
Accrued liabilities and compensation
(1,918
)
 
(10
)
Deferred revenue
(178
)
 
299

Deferred rent
(148
)
 
407

Net cash provided by operating activities
1,103

 
5,685

Cash flows from investing activities:
 
 
 
Purchase of marketable securities
(22,987
)
 
(15,903
)
Sale of marketable securities
23,793

 
15,371

Proceeds from the sale of assets
47

 
—

Payments made to develop intangible assets
(113
)
 
—

Purchase of property and equipment
(4,304
)
 
(3,355
)
Net cash used in investing activities
(3,564
)
 
(3,887
)
Cash flows from financing activities:
 
 
 
Proceeds from note payable
—

 
500

Contributions from noncontrolling interest
1,020

 
—

Issuance of common stock
551

 
60

Repurchase of common stock
—

 
(4,341
)
Net cash provided by (used in) financing activities
1,571

 
(3,781
)
Effect of foreign exchange translation on cash
49

 
(618
)
Decrease in cash and cash equivalents
(841
)
 
(2,601
)
Cash and cash equivalents:
 
 
 
Beginning of period
5,526

 
3,821

End of period
$
4,685

 
$
1,220

Supplemental non-cash information:
 
 
 
Capitalized stock-based compensation
$
348

 
$
253

Common stock used to pay for option exercises
—

 
306

See accompanying Notes to Condensed Consolidated Financial Statements.

5
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RENTRAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Rentrak Corporation have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine month periods ended December 31, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2013 (“Fiscal 2013”). The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in our 2012 Annual Report on Form 10-K (the “Form 10-K”).

The Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of Rentrak Corporation and its wholly owned subsidiaries, and those entities in which we have a controlling interest after elimination of all intercompany accounts and transactions. We have established a Chinese joint venture, Sinotrak, and hold a 49% ownership interest in this variable interest entity. Sinotrak has been included in our Condensed Consolidated Financial Statements given our significant influence over day to day operations among other factors. To date, the activities of Sinotrak have been limited primarily to initial cash contributions from both parties and costs associated with its formation. The equity interests of the noncontrolling party are reported as a noncontrolling interest in our Condensed Consolidated Balance Sheets as of December 31, 2012. The noncontrolling party’s share of the expenses for the three and nine months ending December 31, 2012 are included in “Net loss attributable to noncontrolling interests” on our Condensed Consolidated Statements of Operations.

Note 2.
Net Income (Loss) Per Share
Following is a reconciliation of the shares used for the basic earnings (loss) per share (“EPS”) and diluted EPS calculations (in thousands, except footnote reference):
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2012
 
2011
 
2012
 
2011
Basic EPS:
 
 
 
 
 
 
 
Weighted average number of shares of common stock outstanding and vested deferred stock units (“DSUs”) (1)
11,996

 
11,102

 
11,634

 
11,205

Diluted EPS:
 
 
 
 
 
 
 
Effect of dilutive stock options and unvested DSUs
—

 
—

 
—

 
—

 
11,996

 
11,102

 
11,634

 
11,205

Total outstanding options not included in diluted EPS as they would be antidilutive
2,851

 
2,078

 
2,851

 
2,078

Performance-based grants not included in diluted EPS
270

 
318

 
270

 
318

 
(1)
Includes 151,554 and 96,332 vested cumulative DSUs, respectively, for the three months ended December 31, 2012 and 2011 and 138,838 and 83,174 vested cumulative DSUs, respectively, for the nine months ended December 31, 2012 and 2011 that will not be issued until the directors holding the DSUs retire from our Board of Directors.


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Note 3.
Business Segments and Enterprise-Wide Disclosures
We operate in two business segments, our Advanced Media and Information (“AMI”) Division and our Home Entertainment (“HE”) Division, and, accordingly, we report certain financial information by individual segment under this structure. The AMI Division manages our media measurement services offered through our Entertainment Essentials™ systems primarily on a recurring subscription basis. The HE Division manages our business operations that deliver home entertainment content products and related rental and sales information for that content to our Pay-Per-Transaction (“PPT”) System retailers (“Participating Retailers”) on a revenue sharing basis. The HE Division also includes Studio Direct Revenue Sharing (“DRS”) services, which collects, tracks, audits and reports transactions and revenue data generated by DRS retailers, such as Blockbuster Entertainment, Netflix and Redbox, to studios. During the fourth quarter of Fiscal 2012, management moved Digital Download Essentials and Home Entertainment Essentials from the HE Division to the AMI Division effective April 1, 2011 as a result of a change in our internal management reporting structure. Prior period amounts have been restated to conform to this change. Corporate and other expenses not allocated to a specific segment are included as “Other” in the table below.

Assets are not specifically identified by segment as the information is not used by the chief operating decision maker to measure the segments’ performance.

Certain information by segment was as follows (dollars in thousands):
 
 
AMI
 
HE
 
Other
 
Total
Three Months Ended December 31, 2012
 
 
 
 
 
 
 
Sales to external customers
$
13,712

 
$
11,236

 
$
—

 
$
24,948

Gross margin
8,210

 
2,891

 
—

 
11,101

Income (loss) from operations
1,194

 
1,523

 
(4,486
)
 
(1,769
)
Three Months Ended December 31, 2011
 
 
 
 
 
 
 
Sales to external customers
$
10,393

 
$
11,818

 
$
—

 
$
22,211

Gross margin
6,868

 
3,753

 
—

 
10,621

Income (loss) from operations
1,100

 
2,019

 
(4,093
)
 
(974
)
Nine Months ended December 31, 2012
 
 
 
 
 
 
 
Sales to external customers
$
39,553

 
$
31,109

 
$
—

 
$
70,662

Gross margin
24,291

 
9,028

 
—

 
33,319

Income (loss) from operations
(12,555
)
 
5,016

 
(13,292
)
 
(20,831
)
Nine Months ended December 31, 2011
 
 
 
 
 
 
 
Sales to external customers
$
29,775

 
$
36,696

 
$
—

 
$
66,471

Gross margin
19,174

 
12,068

 
—

 
31,242

Income (loss) from operations
3,773

 
6,929

 
(11,814
)
 
(1,112
)
 



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Note 4.
Stock-Based Compensation
The following table summarizes our stock based grants in Fiscal 2013:
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31, 2012
 
December 31, 2012
Option grants(1):
 
 
 
 
Shares granted from 2011 Incentive Plan
 
—

 
893,674

Fair market value on date of grant - high
 
$
—

 
$
20.18

Fair market value on date of grant - low
 
$
—

 
$
16.97

Expiration period, in years
 


 
10

Vesting period, in years
 


 
5

Compensation information related to options granted in period(2) (in thousands):
 
 
 
 
Total valuation, recognized over vesting period
 
$
—

 
$
8,284

Total expected expense to be recognized in Fiscal 2013
 
$
—

 
$
1,671

Expense recognized as a component of selling and administrative expense
 
$
—

 
$
1,241

Expense capitalized in property and equipment, net (3)
 
$
—

 
$
168

 
 
 
 
 
DSUs:
 
 
 
 
DSUs granted from 2011 Incentive Plan to non-executive directors
 
—

 
34,014

Vesting period, in months
 


 
11

Compensation information related to DSUs granted in period (in thousands):
 
 
 
 
Total fair market value, recognized over vesting period
 
$
—

 
$
600

Total expected expense to be recognized in Fiscal 2013
 
$
—

 
$
382

Expense recognized as a component of selling and administrative expense
 
$
—

 
$
218

(1) Shares granted and compensation expense amounts for nine month period are shown net of cancellations.
(2) Compensation amounts based on Black-Scholes valuations.
(3) Amounts capitalized in accordance with our policies related to Capitalized Software as described in Note 2 of Notes to Consolidated Financial Statements in the Form 10-K.

Cancellation of Performance-Based Stock Options
During the first quarter of Fiscal 2013, the Compensation Committee of our Board of Directors determined that performance requirements relating to vesting of certain stock-based awards would not be achieved. Accordingly, 47,450 performance-based stock option awards were canceled at the direction of our Board of Directors. The cancellation of these awards had no effect on our results of operations.

Amendment to Stock-Based Award Agreement

In October 2012, the expiration date of a restricted stock unit (“RSU”) award granted to an executive officer was extended by two years. The fair value of the modification to the RSU award was $0.4 million, based on a Monte Carlo simulation and will be recognized over the requisite service period. Approximately $0.1 million related to this modification will be recognized in Fiscal 2013, of which $44,000 was recognized during the third quarter of Fiscal 2013. We allocated $26,000 of that cost to selling and administrative expense and capitalized the remainder as part of IT development costs associated with our AMI Essentials™ lines of business.

Note 5.
Fair Value Disclosures
We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring the fair value of our financial assets and liabilities as follows:
•
Level 1 – quoted prices in active markets for identical securities;

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•
Level 2 – quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose significant inputs are observable; and
•
Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

Following are the disclosures related to our financial assets (dollars in thousands):
 
 
December 31, 2012
 
March 31, 2012
 
Fair Value
 
Input Level
 
Fair Value
 
Input Level
Available-for-sale marketable securities
 
 
 
 
 
 
 
Municipal tax exempt bond funds
$
—

 
 
 
$
22,227

 
Level 1
Adjustable rate government funds
$
21,483

 
Level 1
 
$
—

 
 

The fair value of our “available-for-sale” marketable securities is determined based on quoted market prices for identical securities on a quarterly basis. There were no changes to our valuation methodologies during the first nine months of Fiscal 2013.

Marketable securities, all of which were classified as “available-for-sale” at December 31, 2012 and March 31, 2012, consisted of the following (dollars in thousands):
 
 
December 31,
2012
 
March 31,
2012
Available-for-sale marketable securities
 
 
 
Amortized cost
$
21,491

 
$
22,101

Gross unrecognized holding gains
—

 
126

Gross unrecognized holding losses
(8
)
 
—

Fair value
$
21,483

 
$
22,227


Note 6.
Goodwill and Other Intangible Assets
Goodwill
The roll-forward of our goodwill was as follows (dollars in thousands):
 
 
Nine Months Ended December 31, 2012
 
AMI
 
HE
 
Total
Beginning balance
$
4,570

 
$
531

 
$
5,101

Currency translation
(16
)
 
—

 
(16
)
Ending balance
$
4,554

 
$
531

 
$
5,085

 
 
Year Ended March 31, 2012
 
AMI
 
HE
 
Total
Beginning balance
$
4,691

 
$
531

 
$
5,222

Currency translation
(121
)
 
—

 
(121
)
Ending balance
$
4,570

 
$
531

 
$
5,101







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Other Intangible Assets
Other intangible assets and the related accumulated amortization were as follows (dollars in thousands):

 
Amortization
Period
 
December 31,
2012
 
March 31,
2012
Local relationships
7 to 10 years
 
$
7,170

 
$
7,167

Accumulated amortization
 
 
(2,090
)
 
(1,475
)
 
 
 
5,080

 
5,692

Tradenames
1 to 3 years
 
50

 
50

Accumulated amortization
 
 
(49
)
 
(36
)
 
 
 
1

 
14

Existing technology
6 months
 
66

 
66

Accumulated amortization
 
 
(66
)
 
(66
)
 
 
 
—

 
—

Patents
20 years
 
174

 
61

Accumulated amortization
 
 
(8
)
 
(2
)
 
 
 
166

 
59

Global relationships
Indefinite
 
7,400

 
7,400

Total
 
 
$
12,647

 
$
13,165


Amortization expense and currency translation were as follows (dollars in thousands):

 
Nine Months Ended December 31,
 
2012
 
2011
Local relationships
$
604

 
$
626

Tradenames
13

 
13

Existing technology
—

 
33

Patents
5

 
1

Currency translation
12

 
(57
)
 
$
634

 
$
616


Expected amortization expense is as follows over the next five years and thereafter (dollars in thousands):

Fiscal
Local
Relationships
 
Tradenames
 
Patents
Remainder of Fiscal 2013
$
210

 
$
1

 
$
4

2014
840

 
—

 
8

2015
841

 
—

 
8

2016
841

 
—

 
8

2017
851

 
—

 
8

Thereafter
1,497

 
—

 
130

 
$
5,080

 
$
1

 
$
166


Note 7.
Amendment to DISH Network, L.L.C. (”DISH”) Agreement
In the second quarter of Fiscal 2013, we amended and extended our agreement with DISH. Under the terms of the previous arrangement, we provided DISH with a stock-based compensation arrangement which entitled DISH to a cash payment based on the increase in price of our common stock over a strike price of $15.48 (the “SAR”). The arrangement provided that DISH would receive three equal annual installments of 200,000 SARs. We revalued this award at the end of every reporting period. Additionally,

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the previous agreement contained a provision that provided for payment of a percentage of predefined net profits of the TV Essentials™ line of business. However, no amounts were earned under the previous net profit sharing arrangement. In exchange for canceling the SAR and to compensate DISH for past services, in August 2012, we paid DISH $5.8 million and issued DISH 700,000 shares of common stock valued at $13.2 million. As of March 31, 2012, we had accrued $3.2 million as a component of accrued compensation in our Condensed Consolidated Balance Sheets relating to the SAR. In the nine month period ended December 31, 2012, the additional expense related to the amendment was $15.8 million and is reflected in selling and administrative expense in our Condensed Consolidated Statements of Operations.

The new amendment extends the agreement through at least February 2016, includes predefined net profit sharing provisions of portions of our TV Essentials™ line of business, and specifies minimum payments relating to those provisions, which will be expensed as a component of cost of sales in our Condensed Consolidated Statements of Operations as they are earned by DISH.

Note 8.
Line of Credit
We currently have a revolving line of credit for $15.0 million, that matures on December 1, 2013. Interest accrues on outstanding balances under the line of credit at a rate equal to LIBOR plus 1.5 percent. The credit line is secured by substantially all of our assets and includes certain financial covenants. In August 2012, the agreement was amended to allow for letters of credit to be issued, provided that at any time the amount of outstanding letters of credit shall not exceed $1.0 million. The letters of credit are reserved under the line of credit and will reduce the amount available for borrowing. At December 31, 2012, issued and outstanding letters of credit of $0.3 million were reserved against the line of credit, and we had no outstanding borrowings under the agreement.

On February 5, 2013, the agreement was amended, extending its maturity to December 1, 2014. Also, as of January 1, 2013, the fee we will incur on the unused portion will be 0.2 percent per annum. The remaining terms are effective as of December 1, 2012, and interest will accrue on outstanding balances under the line of credit at a rate equal to LIBOR plus 2.0 percent. The amendment contains certain liquidity, asset and financial covenants and, as of December 31, 2012, we were in compliance with those covenants.

Note 9.
Income Taxes
Our effective tax rate for the first nine months of Fiscal 2013 was determined by excluding certain jurisdictions with net losses. As a result, the tax provision for the first nine months of Fiscal 2013 was 0.9% and was due to taxable income in profitable jurisdictions.
 
Our effective tax rate for the first nine months of Fiscal 2012 was a provision of 136.9% and was negatively affected by the recording of a $1.2 million valuation allowance to fully reserve against our deferred tax assets.

Note 10.
New Accounting Guidance
ASU 2012-02

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). ASU 2012-02 amends the guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the new guidance, an entity testing an indefinite-lived asset for impairment has the option of performing a qualitative assessment before calculating the fair value of an asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not impaired, the entity would be required to calculate the fair value of the asset. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. We do not expect the adoption of ASU 2012-02 to have a material effect on our financial position, results of operations, or cash flows.

ASU 2011-08

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 simplifies the goodwill impairment assessment by permitting a company to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the company would be required to conduct the current two-step goodwill impairment test. Otherwise, it would not need to apply the two-step test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The adoption of this guidance, effective April 1, 2012, did not have a material effect on our financial position, results of operations, or cash flows.


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Note 11.
Subsequent Events
We have considered all events that have occurred subsequent to December 31, 2012 and through the date of this filing and, except as set forth below, determined that no additional disclosure is required.

On February 5, 2013, we amended our line of credit. Please refer to Note 8 of the Notes to Condensed Consolidated Financial Statements.
 


 

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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain information included in this Quarterly Report on Form 10-Q (including Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding revenue growth, gross profit margin and liquidity) constitute forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking words such as “could,” “should,” “plan,” “depends on,” “predict,” “believe,” “potential,” “may,” “will,” “expects,” “intends,” “anticipate,” “estimates” or “continues” or the negative thereof or variations thereon or comparable terminology. Forward-looking statements in this Quarterly Report on Form 10-Q include, in particular, statements regarding:
•
our future results of operations and financial condition and future revenue and expenses, including declines in Home Entertainment (“HE”) Division revenue and increases in our Entertainment Essentials™ revenue as a result of further investments, the addition of new retailers and development and expansion of new and existing services, both domestically and internationally;
•
the future growth prospects for our business as a whole and individual business lines in particular, including adding new clients, adjusting rates and increasing business activity, and using funds in our foreign bank accounts to fund our international expansion and growth;
•
increases in our costs over the next twelve months;
•
continued contraction in the major “brick and mortar” retailers’ share of the home video rental market;
•
continued increases in end consumers’ usage of non “brick and mortar” options for obtaining entertainment content, such as kiosks;
•
the impact of changes in the timing of when major studios make their new movie releases available to “brick and mortar” rental outlets versus all other retail and rental options (mass merchants, kiosk, by-mail);
•
future acquisitions or investments;
•
our plans or requirements to hold or sell our marketable securities;
•
our relationships with our customers and suppliers;
•
our ability to attract new customers;
•
market response to our products and services;
•
the impact of changes in the timing of movie releases and the relation between the timing of the release of movies to home video to their theatrical release;
•
increased spending on property and equipment in Fiscal 2013 for the capitalization of internally developed software, computer equipment, renovations to our corporate offices and other purposes;
•
expected amortization of our deferred rent; and
•
the sufficiency of our available sources of liquidity to fund our current operations, the continued current development of our business information services and other cash requirements through at least December 31, 2013.

These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied by such forward-looking statements. These risks and uncertainties include, in no particular order, whether we will be able to:
•
successfully develop, expand and/or market new services to new and existing customers, including our media measurement services, in order to increase revenue and/or create new revenue streams;
•
timely acquire and integrate into our systems various third party databases;
•
compete with companies that may have financial, marketing, sales, technical or other advantages over us;
•
successfully deal with our data providers, who are much larger than us and have significant financial leverage over us;
•
successfully manage the impact on our business of the economic environment generally, both domestic and international, and in the markets in which we operate, including the financial condition of any of our suppliers or customers or the impact of the economic environment on our suppliers’ or customers’ ability to continue their services with us and/or fulfill their payment obligations to us;
•
effectively respond to rapidly changing technology and consumer demand for entertainment content in various media formats;
•
retain and grow our base of retailers (“Participating Retailers”);
•
continue to obtain home entertainment content products (DVDs, Blu-ray Discs, etc.) (collectively “Units”) leased/licensed to home video specialty stores and other retailers from content providers, generally motion picture studios and other licensors or owners of the rights to certain video programming content (“Program Suppliers”);
•
retain our relationships with our significant Program Suppliers;
•
manage and/or offset any cost increases;

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•
add new clients or adjust rates for our services;
•
adapt to government restrictions;
•
leverage our investments in our systems and generate revenue and earnings streams that contribute to our overall success;
•
enhance and expand the services we provide in our foreign locations and enter into additional foreign locations; and
•
successfully integrate business acquisitions or other investments in other companies, products or technologies into our operations and use those acquisitions or investments to enhance our technical capabilities, expand our operations into new markets or otherwise grow our business.

Please refer to Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 (“Fiscal 2012”) as filed with the Securities and Exchange Commission on June 8, 2012 for a discussion of reasons why our actual results may differ materially from our forward-looking statements. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our expectations change.

Business Overview
We have two operating divisions within our corporate structure and, accordingly, we report certain financial information by individual segment under this structure. Our Advanced Media and Information (“AMI”) Division includes our media measurement services. Our HE Division includes our distribution services as well as services that measure, aggregate and report consumer rental and retail activity on film and video game product from traditional “brick and mortar”, online and kiosk retailers. During the fourth quarter of Fiscal 2012, management moved Digital Download Essentials and Home Entertainment Essentials from the HE Division to the AMI Division effective April 1, 2011 as a result of a change in our internal reporting structure and all prior periods have been restated to reflect this change.

Our AMI Division encompasses media measurement services across multiple screens and platforms and is delivered via web-based products within our Entertainment Essentials™ lines of business. These services, offered primarily on a recurring subscription basis, capture consumer viewing data, which is integrated with consumer segmentation and purchase behavior databases. We provide film studios, television networks and stations, cable, satellite and telecommunications company (“telco”) operators, advertisers and advertising agencies insights into consumer viewing and purchasing patterns through our thorough and expansive databases of box office results and local, national and on demand television performance.

Our HE Division services incorporate a unique set of applications designed to help clients maintain and direct their business practices relating to home video products. Entertainment content is distributed to various retailers primarily on behalf of motion picture studios. We track and report performance of home entertainment products leased directly to video retailers or through our Pay-Per-Transaction (“PPT”) System. Within this system, video retailers are given access to a wide selection of box office hits, independent releases and foreign films from the industry’s leading suppliers on a revenue sharing basis. We provide second- and third-tier retailers, as well as a few major national chains, the opportunity to acquire new inventory, and our PPT System enables retailers everywhere, regardless of size, the ability to increase both the depth and breadth of their inventory, better satisfy consumer demand and more effectively compete in the marketplace. We lease product from our Program Suppliers; Participating Retailers sublease that product from us and rent it to consumers. Participating Retailers then share a portion of the revenue from each retail rental transaction with us and we share a portion of the revenue with the Program Suppliers. Our PPT System supplies both content providers and retailers with the intelligence and infrastructure necessary to make revenue sharing a viable and productive option.

Our HE Division also includes our rental Studio Direct Revenue Sharing (“DRS”) services, which grant content providers constant, clear feedback and data, plus valuable checks and balances on how both their video products and retailers are performing. Data relating to rented entertainment content is received on physical product under established agreements on a fee for service basis.

AMI Division
Our media measurement services, offered primarily on a recurring subscription basis, are distributed to clients through patent pending software systems and business processes, and capture data and other intelligence viewed on multiple screens across various platforms within the entertainment industry.

Our current spending, investments and long-term strategic planning are heavily focused on the development, growth and expansion of our AMI Division, both domestically and internationally. As such, we continue to allocate significant resources to our Entertainment Essentials™ services and product lines. Our AMI Division revenue increased $9.8 million, or 32.8%, in the first nine months of Fiscal 2013 compared to the first nine months of Fiscal 2012.


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The AMI Division lines of business, which we refer to as Entertainment Essentials™ services, are:
•
Box Office Essentials™,
•
OnDemand Everywhere, which includes OnDemand Essentials™ and related products, and
•
TV Essentials™, which includes StationView Essentials.
Typical clients subscribing to our services include motion picture studios, television networks and stations, cable and telco operators, advertisers and advertising agencies.

HE Division
The financial results from the HE Division continue to be negatively affected by the changing dynamics in the home video rental market. This market is highly competitive and influenced greatly by consumer spending patterns, behaviors and technological advancements. The end consumer has a wide variety of choices from which to select his or her entertainment content and can easily shift from one provider to another. Some examples include renting Units from our Participating Retailers or other retailers, purchasing previously viewed Units from our Participating Retailers or other retailers, renting or purchasing Units from kiosk locations, ordering Units via online subscriptions and/or online distributors (mail delivery), subscribing to at-home movie channels, downloading or streaming content via the Internet, purchasing and owning the Unit directly or selecting an at-home “pay-per-view” or “on demand” option from a satellite or cable provider. Our PPT System focuses primarily on the traditional “brick and mortar” retailer and provides those Participating Retailers the opportunity to increase both the depth and breadth of their inventory, better satisfy consumer demand and more effectively compete in the marketplace. Many of our arrangements are structured so that Participating Retailers pay reduced upfront fees and lower per transaction fees in exchange for ordering Units of all titles offered by a particular Program Supplier (referred to as “output” programs). These programs offer Participating Retailers a way to more effectively acquire “new release” rental inventory on a lease basis instead of purchasing and owning the inventory directly.

The landscape of the home video rental market for “brick and mortar” retailers has seen significant changes, and some major retailers, such as Movie Gallery, have exited the market entirely, while others, such as Blockbuster Entertainment (“Blockbuster”) have seen significant store closures. Blockbuster also recently announced more closures which would bring the chain to approximately 500 retail locations. As a result of these market changes, we believe the major “brick and mortar” retailers’ share of the overall industry is contracting. It is difficult to predict what effect, if any, this will have on our Program Suppliers and/or the performance of our Participating Retailers.

Also, end consumers’ usage of non “brick and mortar” options for obtaining entertainment content, such as kiosks, continues to increase and our Participating Retailers’ market share has been negatively affected, contributing to a decline in our revenue. However, during the quarter, we added a major rental chain to our list of PPT customers and will provide units to that retailer from at least one major Program Supplier. While we expect to see additional revenue in upcoming quarters as a result of adding this new Participating Retailer, it is too soon to predict what impact, if any, this will have on total revenue in the future.

In general, we continue to be in good standing with our Program Suppliers, and we make ongoing efforts to strengthen those business relationships through enhancements to our current service offerings and the development of new service offerings. During the quarter, a former Program Supplier, Warner Bros., returned to the PPT System, and we were able to begin offering their content to our Participating Retailers again. We are also continually seeking to develop business relationships with new Program Suppliers. Our relationships with Program Suppliers may typically be terminated without cause upon thirty days written notice by either party.

Sources of Revenue
Revenue by segment includes the following:

AMI Division
Subscription fee and other revenue, primarily relating to custom reports, from our Entertainment Essentials™ services.
HE Division
•
PPT revenues include fees generated when Participating Retailers rent Units or sell previously-viewed rental Units to consumers and upfront fees generated when Units are distributed to Participating Retailers. Additionally, certain arrangements include guaranteed minimum revenue from our customers, which are recognized on the street (release) date, provided all other revenue recognition criteria are met; and
•
DRS fees, which are generated from data tracking and reporting services provided to Program Suppliers.
Results of Operations
Certain information by segment was as follows (dollars in thousands):
 
AMI
 
HE
 
Other (1)
 
Total
Three Months Ended December 31, 2012
 
 
 
 
 
 
 
Sales to external customers
$
13,712

 
$
11,236

 
$
—

 
$
24,948

Gross margin
8,210

 
2,891

 
—

 
11,101

Income (loss) from operations
1,194

 
1,523

 
(4,486
)
 
(1,769
)
Three Months Ended December 31, 2011
 
 
 
 
 
 
 
Sales to external customers
$
10,393

 
$
11,818

 
$
—

 
$
22,211

Gross margin
6,868

 
3,753

 
—

 
10,621

Income (loss) from operations
1,100

 
2,019

 
(4,093
)
 
(974
)
Nine Months Ended December 31, 2012
 
 
 
 
 
 
 
Sales to external customers
$
39,553

 
$
31,109

 
$
—

 
$
70,662

Gross margin
24,291

 
9,028

 
—

 
33,319

Income (loss) from operations
(12,555
)
 
5,016

 
(13,292
)
 
(20,831
)
Nine Months Ended December 31, 2011
 
 
 
 
 
 
 
Sales to external customers
$
29,775

 
$
36,696

 
$
—

 
$
66,471

Gross margin
19,174

 
12,068

 
—

 
31,242

Income (loss) from operations
3,773

 
6,929

 
(11,814
)
 
(1,112
)
(1)
Includes corporate and other expenses that are not allocated to a specific segment.

Revenue
Revenue increased $2.7 million, or 12.3%, to $24.9 million in the third quarter of Fiscal 2013 compared to $22.2 million in the third quarter of Fiscal 2012. Revenue increased $4.2 million, or 6.3%, to $70.7 million in the nine month period ended December 31, 2012 compared to $66.5 million in the nine month period ended December 31, 2011. The increases in revenue were due to increases in AMI Division revenue, primarily related to growth in our existing lines of business, partially offset by declines in revenue from our HE Division. These fluctuations are described in more detail below.

AMI Division
Revenue related to our Entertainment Essentials™ business information service offerings increased primarily due to the addition of new customers, rate increases from existing customers and expansion of our systems and service offerings. We expect continued future increases in our Entertainment Essentials™ revenue as a result of further investments, development and expansion of new and existing services, both domestically and internationally.



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Revenue information related to our AMI Division is as follows (dollars in thousands):
 
 
Three Months Ended December 31,
 
Dollar
Change
 
% Change
 
2012
 
2011
 
Box Office Essentials™
$
6,089

 
$
5,473

 
$
616

 
11.3%
OnDemand Everywhere
3,066

 
2,625

 
441

 
16.8%
TV Essentials™
4,557

 
2,295

 
2,262

 
98.6%
 
$
13,712

 
$
10,393

 
$
3,319

 
31.9%
 
Nine Months Ended December 31,
 
Dollar
Change
 
% Change
 
2012
 
2011
 
Box Office Essentials™
$
17,793

 
$
15,689

 
$
2,104

 
13.4%
OnDemand Everywhere
9,318

 
8,077

 
1,241

 
15.4%
TV Essentials™
12,442

 
6,009

 
6,433

 
107.1%
 
$
39,553

 
$
29,775

 
$
9,778

 
32.8%

The increases in Box Office Essentials™ revenue in the Fiscal 2013 periods were primarily due to rate increases for existing clients and the addition of new clients.

The increases in OnDemand Everywhere revenue in the Fiscal 2013 periods were primarily due to rate increases for existing clients and increased custom reporting projects.

The increases in TV Essentials™ revenue in the Fiscal 2013 periods were primarily due to the addition of new clients and rate increases for existing clients.

HE Division
Revenue information related to our HE Division is as follows (dollars in thousands):
 
 
Three Months Ended December 31,
 
Dollar
Change
 
% Change
 
2012
 
2011
 
PPT
$
10,666

 
$
10,690

 
$
(24
)
 
(0.2)%
DRS
570

 
1,128

 
(558
)
 
(49.5)%
 
$
11,236

 
$
11,818

 
$
(582
)
 
(4.9)%
 
Nine Months Ended December 31,
 
Dollar
Change
 
% Change
 
2012
 
2011
 
PPT
$
29,051

 
$
32,513

 
$
(3,462
)
 
(10.6)%
DRS
2,058

 
4,183

 
(2,125
)
 
(50.8)%
 
$
31,109

 
$
36,696

 
$
(5,587
)
 
(15.2)%

The decreases in PPT revenue in the Fiscal 2013 periods were primarily due to fewer Participating Retailers, fewer available Units and lower box office performance from theatrical titles in the Fiscal 2013 periods compared to the Fiscal 2012 periods, in part due to consumers’ focus on the summer Olympics during the second quarter of Fiscal 2013 as well as continued changing market conditions. Also, during the third quarter of Fiscal 2012, Warner Bros. decided it would release its video content in the retail channel before offering it to the rental market. This had a negative effect on our PPT business during the first nine months of Fiscal 2013. However, during the third quarter, Warner Bros. returned to its previous distribution strategy of providing “brick and mortar” retailers with new release content on the initial street date, and we were able to offer some Warner Units to our Participating Retailers. We expect this change will have a positive impact on our revenue in the future, but it is too soon to predict the magnitude of the impact. Additionally, during the third quarter of Fiscal 2013, we added a significant Participating Retailer to our PPT System which contributed to an overall increase in Units shipped during the quarter and helped to narrow the decline in PPT revenue. We also expect higher volumes and increased revenue from this Participating Retailer going forward, but since this is dependent on various factors, like the availability and quality of Units, we are unable to estimate the how much the increase will be, if any.


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The decreases in DRS revenue in the Fiscal 2013 periods were due to fewer transactions processed as a result of Warner Bros.’ decision mentioned above, as well as a decline in the number of direct retailers from which to track content performance for Program Suppliers. We believe the modification of Warner Bros.’ distribution strategy noted above should increase our DRS revenue, but it is too soon to predict what impact, if any, this will have on our revenue in the future.
 

Cost of Sales and Gross Margins
Cost of sales represents the direct costs to produce revenue.

In the AMI Division, cost of sales includes costs relating to our Entertainment Essentials™ services, and consists of costs associated with the operation of a call center for our Box Office Essentials™ services, as well as costs associated with amortizing capitalized, internally developed software used to provide the corresponding services and direct costs incurred to obtain, cleanse and process data and maintain our systems.

In the HE Division, cost of sales includes Unit costs, transaction costs, sell-through costs and freight costs. Sell-through costs represent the amounts due to the Program Suppliers that hold the distribution rights to the Units. Freight costs represent the cost to pick, pack and ship orders of Units to the Participating Retailers. Our cost of sales can also be affected by the release dates of Units with guarantees. We recognize the guaranteed minimum costs on the release date. The terms of some of our agreements result in recognition of 100% of the cost of sales on titles in the first month in which the Unit is released, which results in lower margins during the initial portion of the revenue sharing period. Once the Unit’s rental activity exceeds the required amount for these guaranteed minimums, margins generally expand during the second and third months of the Unit’s revenue sharing period. However, since these factors are highly dependent upon the quality, timing and release dates of all new Units, margins may not expand to any significant degree during any reporting period. As a result, it is difficult to predict the effect these Program Supplier revenue sharing programs with guaranteed minimums will have on future results of operations in any reporting period.

Cost of sales increased $2.3 million, or 19.5%, in the third quarter of Fiscal 2013 compared to the third quarter of Fiscal 2012, and increased $2.1 million, or 6.0%, in the first nine months of Fiscal 2013 compared to the same period of Fiscal 2012.

AMI Division
Cost of sales information related to our AMI Division is as follows (dollars in thousands):
 
 
Three Months Ended December 31,
 
Dollar
Change
 
% Change
  
2012
 
2011
 
Costs related to:
 
 
 
 
 
 
 
Amortization of internally developed software
$
667

 
$
551

 
$
116

 
21.1%
Call center operation
1,362

 
1,177

 
185

 
15.7%
Obtaining, cleansing and processing data
3,473

 
1,797

 
1,676

 
93.3%
 
$
5,502

 
$
3,525

 
$
1,977

 
56.1%
 
Nine Months Ended December 31,
 
Dollar
Change

 
% Change
  
2012
 
2011
 
Costs related to:
 
 
 
 
 
 
 
Amortization of internally developed software
$
1,914

 
$
1,595

 
$
319

 
20.0%
Call center operation
3,872

 
3,598

 
274

 
7.6%
Obtaining, cleansing and processing data
9,476

 
5,408

 
4,068

 
75.2%
 
$
15,262

 
$
10,601

 
$
4,661

 
44.0%

The increase in cost of sales within the AMI Division in the third quarter of Fiscal 2013 compared to the third quarter of Fiscal 2012 resulted primarily from expanding market coverage with existing data supplier agreements, the addition of new data supplier agreements and the amendment to our data supplier agreement with DISH, which occurred in the second quarter of Fiscal 2013, and requires minimum payments relating to predefined net profit sharing provisions of portions of our TV Essentials™ line of business. The increase in the first nine months of Fiscal 2013 compared to the same period of Fiscal 2012 also reflects costs associated with the DISH amendment.


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HE Division
Cost of sales information related to our HE Division is as follows (dollars in thousands):
 
Three Months Ended December 31,
 
Dollar
Change
 
% Change
  
2012
 
2011
 
Costs related to:
 
 
 
 
 
 
 
Transaction fees
$
5,879

 
$
5,437

 
$
442

 
8.1%
Sell-through fees
1,239

 
1,517

 
(278
)
 
(18.3)%
Other
1,227

 
1,111

 
116

 
10.4%
 
$
8,345

 
$
8,065

 
$
280

 
3.5%
 
Nine Months Ended December 31,
 
Dollar
Change

 
% Change
 
2012
 
2011
 
Costs related to:
 
 
 
 
 
 
 
Transaction fees
$
15,339

 
$
16,775

 
$
(1,436
)
 
(8.6)%
Sell-through fees
3,771

 
4,547

 
(776
)
 
(17.1)%
Other
2,971

 
3,306

 
(335
)
 
(10.1)%
 
$
22,081

 
$
24,628

 
$
(2,547
)
 
(10.3)%

The increase in cost of sales within the HE Division in the third quarter of Fiscal 2013 compared to the third quarter of Fiscal 2012 was primarily related to an increase in the Units with guarantees. The decrease in cost of sales in the first nine months of Fiscal 2013 compared to the same period of Fiscal 2012 was primarily related to the decreases in revenue discussed above.

Gross margins as a percentage of revenue were as follows:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2012
 
2011
 
2012
 
2011
AMI Division
59.9%
 
66.1%
 
61.4%
 
64.4%
HE Division
25.7%
 
31.8%
 
29.0%
 
32.9%

The declines in gross margin in the AMI Division in the Fiscal 2013 periods compared to the same periods of Fiscal 2012 were primarily due to a shift in mix of revenue, as more revenue in the current quarter was generated from TV Essentials™, which has a lower gross margin than Box Office Essentials or On Demand Essentials.

The decreases in gross margin in the HE Division in the Fiscal 2013 periods compared to the same periods of Fiscal 2012 were primarily due to a shift in mix of revenue to less DRS revenue, which typically has higher margins.

Selling and Administrative
Selling and administrative expenses consist primarily of compensation and benefits, development, marketing and advertising costs, legal and professional fees, communications costs, depreciation and amortization of tangible and intangible assets and software, real and personal property leases, as well as other general corporate expenses.


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Selling and administrative expense information is as follows (dollars in thousands):
 
Three Months Ended December 31,
 
Dollar
Change
 
% Change
Selling and administrative
2012
 
2011
 
AMI
$
7,016

 
$
5,768

 
$
1,248

 
21.6%
HE
1,368

 
1,734

 
(366
)
 
(21.1)%
Corporate
4,486

 
4,093

 
393

 
9.6%
 
$
12,870

 
$
11,595

 
$
1,275

 
11.0%
 
Nine Months Ended December 31,
 
Dollar
Change
 
% Change
Selling and administrative
2012
 
2011
 
AMI
$
36,846

 
$
15,401

 
$
21,445

 
139.2%
HE
4,012

 
5,139

 
(1,127
)
 
(21.9)%
Corporate
13,292

 
11,814

 
1,478

 
12.5%
 
$
54,150

 
$
32,354

 
$
21,796

 
67.4%

AMI Division
The increase in selling and administrative expenses in the AMI Division in the three month period ended December 31, 2012 compared to the same period of Fiscal 2012 was primarily due to increased costs related to the expansion of our AMI Division, with approximately three-quarters of the increase related to the growth in TV Essentials™. The increase for the nine month period ended December 31, 2012 compared to the same period of Fiscal 2012 was primarily due to changes related to the cancellation of a stock award granted to DISH that had been previously revalued at the end of each reporting period and increased costs related primarily to increased headcount and other costs associated with the expansion of TV Essentials™.

In exchange for canceling the stock award and as compensation for past services, DISH was paid $5.8 million and issued 700,000 shares of our common stock during the second quarter of Fiscal 2013, and we recorded $15.8 million in expense related to this amendment and related stock award. There was no expense in the three month period ended December 31, 2012 related to this award since it was canceled. However, there were credits of $110,000 and $2.6 million in the three and nine month period ended December 31, 2011, respectively.

Excluding the impact of the DISH amendment, expenses increased $3.1 million, or 17.5%, in the nine months ended December 31, 2012 compared to the same period of Fiscal 2012.

HE Division
The decreases in selling and administrative expenses in the HE Division in the Fiscal 2013 periods compared to the same periods of Fiscal 2012 were primarily due to reductions in our overall headcount in order to better align the number of employees with current and expected future trends in this division.

Corporate
The increases in Corporate selling and administrative expenses in the Fiscal 2013 periods compared to the same periods of Fiscal 2012 were primarily due to increases in headcount in our information technology department and higher stock-based compensation costs as a result of equity awards granted in the first quarter of Fiscal 2013.


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Income (Loss) from Operations (dollars in thousands)
 
Three Months Ended December 31,
 
Dollar
Change
 
% Change
Income (loss) from operations
2012
 
2011
 
AMI
$
1,194

 
$
1,100

 
$
94

 
8.5%
HE
1,523

 
2,019

 
(496
)
 
(24.6)%
Corporate
(4,486
)
 
(4,093
)
 
(393
)
 
(9.6)%
 
$
(1,769
)
 
$
(974
)
 
$
(795
)
 
(81.6)%
 
Nine Months Ended December 31,
 
Dollar
Change
 
% Change
Income (loss) from operations
2012
 
2011
 
AMI
$
(12,555
)
 
$
3,773

 
$
(16,328
)
 
(432.8)%
HE
5,016

 
6,929

 
(1,913
)
 
(27.6)%
Corporate
(13,292
)
 
(11,814
)
 
(1,478
)
 
(12.5)%
 
$
(20,831
)
 
$
(1,112
)
 
$
(19,719
)
 
(1,773.3)%

The increase in loss from operations in the nine month period ended December 31, 2012 compared to the same period of Fiscal 2012 was primarily due to the increase in expense in our AMI Division related to the amendment of our agreement with DISH as discussed above. Operating income for the AMI Division excluding the impact of the DISH amendment would have been:

 
Nine Months Ended December 31,
 
Dollar
Change
 
% Change
Income (loss) from operations
2012
 
2011
 
AMI as reported
$
(12,555
)
 
$
3,773

 
$
(16,328
)
 
(432.8)%
Less: DISH stock-based compensation
15,864

 
(2,453
)
 
18,317

 
(746.7)%
AMI before DISH stock-based compensation
$
3,309

 
$
1,320

 
$
1,989

 
150.7%

We believe that adjusting for the expense associated with the DISH amendment gives a more useful indicator by which to compare the current financial performance of the AMI Division.

Income Taxes
Our effective tax rate for the first nine months of Fiscal 2013 was determined by excluding certain jurisdictions with net losses. As a result, the tax provision was 0.9% and was due to taxable income in profitable jurisdictions, compared to a tax provision of 136.9% in the first nine months of Fiscal 2012, which was negatively affected by the recording of a $1.2 million valuation allowance to fully reserve against our deferred tax assets.

Liquidity and Capital Resources
Our sources of liquidity include our cash and cash equivalents, marketable securities, cash expected to be generated from future operations and investments and our ability to borrow on our $15.0 million line of credit. Based on our current financial projections and projected cash needs, we believe that our available sources of liquidity will be sufficient to fund our current operations, the continued current development of our business information services and other cash requirements through at least December 31, 2013.

Cash and cash equivalents and marketable securities decreased $1.6 million to $26.2 million at December 31, 2012 from March 31, 2012. This decrease resulted primarily from $4.3 million used for the purchase of equipment and capitalized information technology costs offset by $1.1 million provided by operating activities, $0.6 million in proceeds from the issuance of our common stock and a $1.0 million contribution from noncontrolling interests. Portions of our cash and cash equivalents are held in our foreign subsidiaries. In the event the foreign subsidiaries repatriate these earnings, the earnings may be subject to United States federal, state and foreign income taxes. As of December 31, 2012, we had $3.3 million in foreign bank accounts, of which we plan to use $1.3 million to fund our international expansion and growth.

We had $21.5 million invested in an adjustable rate government fund as of December 31, 2012. Bond fund values fluctuate in response to the financial condition of individual issues, general market and economic conditions and changes in interest rates. In general, when interest rates rise, bond fund values fall and investors may lose principal value. While we currently have no plans

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or requirements to sell the securities in the foreseeable future, we are exposed to market risks and cannot predict what impact fluctuations in the market may have on the value of these funds.

Accounts and notes receivable, net of allowances, decreased $1.9 million to $12.4 million at December 31, 2012 from March 31, 2012, primarily due to lower revenue in the HE Division in the third quarter of Fiscal 2013 compared to the fourth quarter of Fiscal 2012.

During the first nine months of Fiscal 2013, we spent $4.3 million on property and equipment, including $3.0 million for the capitalization of internally developed software for our business information service offerings. We anticipate spending a total of approximately $6.0 million on property and equipment in all of Fiscal 2013, of which approximately $4.0 million is for the capitalization of internally developed software, primarily for the development of systems for our Entertainment Essentials™ lines of business. The remaining amounts include purchases of computer equipment and renovations to our corporate offices.

Accrued liabilities increased $1.9 million to $5.0 million at December 31, 2012 from March 31, 2012, primarily due to increased payments related to our data suppliers.

Accrued compensation decreased $3.8 million to $4.9 million at December 31, 2012 from March 31, 2012, primarily due to a $3.2 million decrease in accrued stock-based compensation for DISH’s award that was canceled and settled in cash during the second quarter of Fiscal 2013, and a $0.7 million decrease in severance accruals relating to payments made during the first nine months of Fiscal 2013 as a result of the reorganization of our foreign operations.

Deferred revenue and other credits of $1.9 million at December 31, 2012 included amounts related to quarterly and annual subscriptions for our services, as well as the current portion of our deferred rent credits.

Deferred rent of $1.8 million at December 31, 2012 represents amounts received for qualified renovations to our corporate headquarters and free rent for a portion of the lease term. The deferred rent related to qualified renovations is being amortized against rent expense over the remaining lease term, which is expected to end December 31, 2021, at the rate of approximately $29,000 per quarter. The deferred rent related to free rent is also being amortized against rent expense over the remaining lease term and is expected to be approximately $13,000 per quarter for Fiscal 2013.

We currently have a revolving line of credit for $15.0 million that matures December 1, 2013. Interest accrues on outstanding balances under the line of credit at a rate equal to LIBOR plus 1.5 percent. The credit line is secured by substantially all of our assets and includes certain financial covenants. At December 31, 2012, issued and outstanding letters of credit of $0.3 million were reserved against the line of credit and we had no outstanding borrowings under this agreement. On February 5, 2013, the agreement was amended, extending its maturity to December 1, 2014. Also, as of January 1, 2013, the fee we will incur on the unused portion will be 0.2 percent per annum. The remaining terms are effective as of December 1, 2012, and interest will accrue on outstanding balances under the line of credit at a rate equal to LIBOR plus 2.0 percent. The amendment contains certain liquidity, asset and financial covenants and, as of December 31, 2012, we were in compliance with those covenants.

In the first quarter of Fiscal 2012, we received a loan from the State of Oregon for $0.5 million for the purpose of facility renovations. The loan bears interest at 5% per annum and contains provisions relating to forgiveness if we meet certain requirements. As of December 31, 2012, we are on schedule toward meeting those requirements. The loan is due on January 31, 2014 if it is not forgiven.

Critical Accounting Policies and Estimates
We reaffirm the critical accounting policies and estimates as reported in our Fiscal 2012 Annual Report on Form 10-K.

New Accounting Guidance
See Note 10 of Notes to Condensed Consolidated Financial Statements.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There have been no material changes in our reported market risks since the filing of our Fiscal 2012 Annual Report on Form 10-K.
 

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ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.


PART II – OTHER INFORMATION
ITEM 1A.
RISK FACTORS
Our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 includes a detailed discussion of our risk factors. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K. Accordingly, the information in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Fiscal 2012 Form 10-K.
 
ITEM 6.
EXHIBITS
The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
 
10.1
 
Fifth Amendment to Credit Agreement, dated December 1, 2012 between Rentrak Corporation and Wells Fargo Bank, National Association
 
 
 
10.2
 
Revolving Line of Credit Note dated December 1, 2012 between Rentrak Corporation and Wells Fargo Bank, National Association
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
 
 
101.INS
  
XBRL Instance Document.
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE
  
XBRL Taxonomy Extension Label Linkbase Document



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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
 
Date:
February 7, 2013
 
RENTRAK CORPORATION
 
 
 
 
 
 
 
By:
 
/s/ David I. Chemerow
 
 
 
David I. Chemerow
Chief Operating Officer and Chief Financial Officer

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