UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________________________________
FORM 10-K
[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Fiscal Year Ended: March 31, 2013
OR
[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
 
 
Securities Registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value per share
 
The NASDAQ Stock Market LLC (NASDAQ Global Market)
 
Securities registered pursuant to Section 12(g) of the Act:
 
None
______________________________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ¨ No ý            

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ¨ No ý

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 ý 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 (§ 229.405 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 ý No ¨
    
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. x
    
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
ý
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 ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sales price ($16.93) as reported by the NASDAQ Global Market, as of the last business day of the Registrant’s most recently completed second fiscal quarter (September 30, 2012), was $193,963,421.

The number of shares outstanding of the Registrant’s Common Stock as of June 3, 2013 was 11,891,638 shares.
_____________________________________________
Documents Incorporated by Reference
The Registrant has incorporated into Part III of Form 10‑K, by reference, portions of its Proxy Statement for its 2013 Annual Meeting of Shareholders.



RENTRAK CORPORATION
2013 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
 
 
 
 
Item 15.
 
 
 
 



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Table of Contents

Forward-Looking Statements
Certain information included in this Annual Report on Form 10-K (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 Annual Report on Form 10-K include, in particular, statements regarding:
our future results of operations and financial condition and future revenue and expenses, including possible 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 (e.g. 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;
increased spending on property and equipment in Fiscal 2014 for the capitalization of internally developed software, computer equipment, 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 March 31, 2014.

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 (e.g. DVDs, Blu-ray Discs) (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 and expand our relationships with our significant Program Suppliers;
manage and/or offset any cost increases;
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;

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Table of Contents

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 this Annual Report on Form 10-K 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.

PART I
ITEM 1.
BUSINESS

Overview

We are a global media measurement and distribution company serving the entertainment, television and advertising industries. Our technology merges television viewership, advanced demographics and actual consumer behavior information across multiple platforms, devices and distribution channels. We process and aggregate data from hundreds of billions of transactions from multiple screens wherever entertainment content is viewed, whether at the box office, on a television screen, over the internet, on a smart phone or other portable device, and whether purchased, rented, recorded, downloaded or streamed from multiple channels. These massive content databases measure viewership across every screen and are fused with third-party consumer segmentation and purchase databases. By linking multiscreen viewership information with information about the products those viewers consume and prefer, we provide our clients, such as content producers, distributors, advertisers and advertising agencies, with the knowledge necessary to more effectively manage their businesses and more precisely target their advertising.

Rentrak Corporation is an Oregon corporation and was incorporated in 1977. We are headquartered in Portland, Oregon, with additional United States and international offices.

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”) operating division includes our media measurement services. Our HE operating division includes our distribution services as well as services that measure, aggregate and report consumer rental activity on film product from traditional “brick and mortar,” online and kiosk retailers.

Our AMI Division encompasses media measurement services across multiple screens and platforms, and are primarily delivered via web-based products within our Entertainment Essentials™ lines of business. These services, offered primarily on a recurring subscription basis, provide consumer viewership information 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, on demand and “Over the Top” 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 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. By providing second- and third-tier retailers the opportunity to acquire new inventory in the same manner as major national chains, our PPT® System enables retailers, regardless of size, to increase the depth and breadth of their inventory, to more efficiently adjust ordering strategies to better satisfy consumer demand and to 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.


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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. Our systems capture consumer viewership data from multiple screens and platforms within the entertainment industry and merge that information with advanced demographics and data relating to actual consumer purchase behavior.

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 $12.7 million, or 30.7%, in the fiscal year ended March 31, 2013 (“Fiscal 2013”) compared to the fiscal year ended March 31, 2012 (“Fiscal 2012”).

The AMI Division's most significant 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.

Theatrical Box Office content:

Box Office Essentials® reports domestic and international theatrical gross receipts and attendance data combined with detailed analytics to motion picture studios and movie theater owners. Rentrak is the only provider of this key information to the motion picture industry. We provide studios with access to box office performance data pertaining to specific motion pictures and movie theater circuits, including real-time, geographic-specific and historical. Data is obtained via electronic connectivity, phone or fax to theater box offices and is collected for the majority of all movie theaters in the United States, Canada, Guam, Puerto Rico, Russia, China, Hong Kong, the United Kingdom, Ireland, Italy, Australia, New Zealand, Japan, South Korea, Taiwan, Germany, Austria, the Netherlands, France, Mexico, Colombia, Venezuela, Argentina, Brazil, Spain, Portugal, Chile, Bolivia, Costa Rica, El Salvador, Guatemala, Honduras, Malaysia, Singapore, Nicaragua, Panama, Paraguay, and Peru. Box Office Essentials® delivers box office results from more than 85,000 movie screens in 36 countries throughout the world.

We also recently launched a new exit polling service, PostTrak, which delivers additional real-time insights relating to a movie’s performance, such as audience reaction about the film, as well as specific demographic information relating to attendance, like gender, ethnicity and age.

Box Office Essentials® data is published in the Hollywood Reporter, Associated Press, USA Today, Yahoo and the LA Times and is the source for most box office reporting globally.

We have long-term relationships with each of the seven major Hollywood studios (“Global Clients”) in the United States and abroad. Currently, there are no other competitors who provide this service, and we believe that the barriers to entry are quite high because the Global Clients prefer a single provider with world-wide reporting capabilities. In particular, our service provides these Global Clients with access to information relating to all other market participants.

Television, Broadband Video and Mobile Device Content
We provide our customers with second-by-second performance metrics that demonstrate consumer viewing behavior for scheduled, interactive, video on demand (“VOD”) and digital video recorder (“DVR”) television content. We aggregate transaction-level data from large sample sizes, which in many cases is full census tracking, providing users with the competitive advantage of a more informed understanding of their viewing audience. These web-based reporting systems provide clients with instant access to the measurement tools and detailed analytics needed to track content and consumer behavior across multiple platforms. Our systems provide insights relating to how audiences respond to programming content and advertising combined with information about the products those viewers consume. The current commercially launched component products of these systems include TV Essentials®, which includes StationView Essentials™, and OnDemand Everywhere™ products, which includes OnDemand Essentials®, OnDemand AdEssentials®, Internet TV Essentials™, Digital Download Essentials™, VOD Monitor™ and Mobile Essentials™. These products are described below.

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Linear Television content:

TV Essentials® is a comprehensive suite of research tools that calculates anonymous second-by-second audience viewing patterns in all facets of television programming and advertising including linear and DVR television viewing. By providing transaction-level performance metrics from millions of televisions, TV Essentials® provides insight into programming effectiveness, enabling networks and network operators to optimize their TV advertising inventory. Developed with the potential capacity to handle data from the nation’s 115 million television households, the system can isolate individual market, network, series or telecast performances, administer national and local estimates and provide an evaluation of influencing factors such as purchase behaviors and advanced demographics for competitive, in-depth intelligence. Today, based on data from our current operator partners across multiple platforms, including cable, satellite and telco providers, we are translating viewing patterns from more than 24 million televisions into insights for our clients. Additionally, one of the biggest advantages of TV Essentials® is that it combines the stability and granularity of TV viewing information with marketing segmentation and advertiser databases, resulting in robust targeted TV viewership intelligence data. The TV Essentials® service provides advertisers, advertising agencies and networks with advanced television targeting, which enables our customers to spend their advertising dollars more efficiently. For example, advertisers are able to target consumers who typically purchase their products. In addition, TV Essentials® is able to measure the number of viewers of specific commercials, since it measures TV viewing on a second-by-second basis.

Currently, we obtain data from cable, satellite, and telco data partners with whom we have multi-year contracts. These agreements allow us to commercially integrate viewing data into TV Essentials®. We also have developed the capability to integrate segmentation and consumer purchase databases to help our clients clearly define their advertising messages to consumers. We continue to build our analytic capabilities to move our products from data- to knowledge-based products and services that interpret this data.

StationView Essentials™ is a television measurement and analytical service specifically designed to meet the unique needs of local television station sales, news and management teams. This service provides users with second-by-second viewing detail at the station level, enhancing their ability to understand viewer involvement and habits in local markets. By providing access to the linear television viewing patterns of millions, StationView Essentials™ ultimately allows television station management to better understand their audience viewing patterns and view competitive data from other local stations in their market. It also permits them to monitor daily program performance, improve audience retention by appropriately adjusting programming and selling their advertising more effectively, thus eliminating costly make good advertisements due to the stable and detailed viewing information our large database provides. The StationView Essentials™ database has been integrated with brand ratings and television household demographic ratings to provide stations with the tools they need to develop new advertising revenue streams.

VOD content:

OnDemand Essentials® (“ODE”) provides multi-channel operators, content providers (including broadcast/cable networks and studios) with a transactional tracking and reporting system to view and analyze the performance of on demand content. This web-based system provides clients throughout the United States and Canada with access to the tools needed to track on demand content, trends and consumer behavior and represents information from over 107 million televisions from every operator that offers VOD programming. Our system includes daily, census-level data of current and historical market- and title-level content performance from 41 multi-channel operators. We are expanding the capability of our ODE service to provide cross platform reporting for on demand content viewed beyond the television set (e.g., internet streaming, portable and mobile devices). We continue to work to obtain and/or incorporate data from new and existing providers relating to online, mobile and “Over the Top” content. We are well positioned to continue to grow this business by adding new clients and adjusting rates as business activity increases and as advanced advertising technology is rolled out by the industry.

OnDemand AdEssentials® measures VOD advertising across a national footprint of operators, providing analytics that allow for more effective planning and execution of VOD advertising by tracking and reporting ad campaigns across impressions, reach and frequency. With OnDemand Essentials® and AdEssentials®, programmers and agencies have a robust set of tools needed to effectively manage and optimize VOD advertising revenue.

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VOD Monitor™ tracks and reports on the availability of VOD content across numerous cable, telco and satellite systems. This service draws on an extensive pool of mystery shoppers to provide networks and studios with the tools needed to identify issues with their VOD content.

Broadband Video and Mobile Device content:

Digital Download Essentials™ is a reporting and auditing service providing performance intelligence on purchased and rented movie and television content downloaded or streamed via the internet, including royalty report tracking. It is tailored for clients who offer the majority of their online video products on a pay-per-transaction basis. The web-based system provides a single integrated solution to report electronic sell-through, internet video on demand and subscription-based streaming transactions, on a global basis. Data is collected from iTunes, Xbox, Vudu, PlayStation, Google and Amazon.

Internet TV Essentials™ processes online usage data to help clients manage their ad-supported and subscription-based television programming streamed online. The service filters massive amounts of raw, disparate usage data and presents it to our clients in a uniform, easy-to-use format. Data is collected from many websites, including Hulu and network owned sites and apps. Internet TV Essentials™ provides multi-platform content providers the tools necessary to analyze trends and track online video usage information for their decision-making.

Mobile Essentials™ services can be customized to fit the specific needs of our clients, with applications for both on demand and live content accessed via any mobile device. Mobile Essentials™ uses functionality from ODE and TV Essentials®, and gives users access to the data needed to monitor content accessed via any mobile device including mobile web, video clips, games, small message servicing (“SMS”) data (also known as text messaging), ring tones, wallpaper and music downloads. Data is collected from mobile content providers such as AT&T, T-Mobile and Mobi.tv. The Mobile Essentials™ services enable users to perform in-depth analysis of their mobile content and its viewers, including near real-time viewership, demographics analysis, geographic analysis and audience sharing and overlap, which provides our clients with insights relating to viewers that simultaneously watch more than one channel. Rentrak was selected to provide the first-ever, mobile broadcast TV measurement tool for local markets by Mobile Content Venture (“MCV”), a joint venture consisting of 12 major broadcast groups that operate the Dyle™ mobile TV service. MCV leverages Rentrak’s Mobile Essentials™ solution in combination with the StationView Essentials™ solution to help MCV members align traditional TV ratings with broadcast mobile TV performance.

Multiple Platform and Enhancements to Existing Services
We are investing significant resources in the continued development and expansion of a comprehensive service that will provide business insights, research and analytics across multiple media platforms to provide our clients with insight into movies and TV from every viewing device (“TV Everywhere”). Our services for TV Everywhere will include TV, DVR, internet TV, mobile, digital and on demand. This system will be designed to compile usage data, using common metrics, to illustrate each platform’s individual contribution and compare it against other media platforms. With the ability to track records across various media, this new multiscreen service will be designed to allow users to comprehend how content is being consumed by end users, interpret the effect such consumption has on other media platforms, understand consumer adoption of new platforms, visualize cross-platform consumption and support more complex advertising models.

We are also making significant investments in our systems which support our existing service lines. We continue to integrate various third-party segmentation databases with our data, which we believe will help advertisers get the right message at the right time to the right consumer group. We continue to build our analytic capabilities, which enable us to move our products from data-based to more comprehensive and applicable knowledge-based products and services. These expenditures will likely increase our costs over the next twelve months. Longer-term, we believe we will be able to leverage these investments and generate revenue and earnings streams that contribute to our overall success.

Competition

Our primary competitors in these markets are Nielsen, Kantar (a subsidiary of WPP Group) and TiVo, which are companies with significantly greater resources than Rentrak. Nielsen’s services are based on a sampling methodology used to measure television viewing data, and are currently the television industry’s standard measurement of consumer viewing behavior for advertising purposes. Kantar and TiVo also use various sampling methodologies.


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Our services and systems differ in that we use a large database approach, which is more far-reaching compared to the smaller sampling approach used by most of our competitors. We refer to our approach as “the database currency” and project the results to a national level across multiple platforms. This method results in granular levels of processing from millions of transactions and establishes us as one of the only companies that provide a television ratings database currency. We believe this positions us to offer a comprehensive, more targeted, user-friendly system that networks, agencies and advertisers are demanding and, consequently, that the market will accept our measurement product as an alternative to competitors’ products.

HE Division

For the many regional chains and independent retailers who rent Units to consumers, it is more effective to acquire “new release” rental inventory on a lease basis instead of purchasing the inventory. Our PPT® System provides 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.

Under the PPT® System, Participating Retailers have Units delivered to their locations for a low, one-time upfront fee (ranging from $0 to $2 per Unit; most Units are $1.50 or less). Leased movie rental revenue is then shared between the lessee (Participating Retailer), Rentrak and the Program Supplier. After 28 to 31 days, Participating Retailers can begin selling leased Units as “previously viewed” inventory and the “sell-through” revenue is generally shared between the Participating Retailer, Rentrak and the Program Supplier. Most of our programs have a six-month lease term and once this period has concluded, Participating Retailers can either return the remaining Units or buy them at a fraction of the retail cost (typically $0 to $1.75 per Unit). Under the PPT® System, Participating Retailers can rent Units on the day of release and the average cost per Unit over the leasing term typically ranges between $8 to $12 per Unit, which is a fraction of the cost of using a wholesale distributor where Units generally cost between $18 and $20 per Unit.

Many of our arrangements are structured so that the 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).

Marketing and Relationships with Program Suppliers

We currently market our PPT® System throughout the United States and Canada. This system greatly simplifies the landscape for each Program Supplier by consolidating the thousands of individual independent retailers participating in our PPT® System into one business partner. Program Suppliers negotiate one lease/service arrangement with Rentrak, and our PPT® System manages the rest, including marketing and sales of content to Participating Retailers, order fulfillment, collection of point-of-sale (“POS”) data, analytics, audit, billing of revenue sharing fees and collection of payments.

During Fiscal 2013, we offered titles from a number of Program Suppliers including: Alliance Films Inc.; Anchor Bay Entertainment, LLC; Lionsgate Films, Inc.; Millennium Media Services; Paramount Home Entertainment, Inc.; Sony Pictures Home Entertainment, Inc.; Twentieth Century Fox Home Entertainment, Inc. (“Fox”); Universal Studios Home Entertainment LLC (“Universal”); Vivendi Entertainment; and Warner Home Video, a division of Warner Bros. Home Entertainment Inc. (“Warner Bros.”). Our arrangements with our Program Suppliers are of varying duration, scope and formality. In some cases, we have obtained Units pursuant to contracts or arrangements with Program Suppliers on a title-by-title basis and, in other cases, the contracts or arrangements provide that all titles released for distribution by the Program Supplier will be provided to us for the PPT® System. Many of our agreements with Program Suppliers may be terminated upon relatively short notice. Therefore, there is no assurance that any of the Program Suppliers will continue to distribute Units through the PPT® System. Even if titles are otherwise available from Program Suppliers, there is no assurance that they will be made available on terms acceptable to us or the Participating Retailers. A loss of any one of our significant Program Suppliers could have an adverse effect on our financial condition and results of operations.

During Fiscal 2013, 2012 and 2011, we had several Program Suppliers that supplied product in excess of 10% of our total revenue as follows:
 
2013
 
2012
 
2011
Program Supplier 1
10%
 
7%
 
10%
Program Supplier 2
9%
 
10%
 
9%
Program Supplier 3
6%
 
9%
 
10%

Certain Program Suppliers have requested, and we have provided, financial or performance commitments, including advances or guarantees, as a condition of obtaining certain titles. We determine whether to provide such commitments on a case-by-case basis,

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depending upon the Program Supplier’s success with such titles in theatrical release and our assessment of expected success in the home video rental market. At March 31, 2013, we had such guarantees with 21 Program Suppliers in amounts totaling approximately $0.9 million. We expect to make these payments during the first quarter of Fiscal 2014. All of these amounts were included in cost of sales during Fiscal 2013, since we recognize these costs on each title’s release date.

Relationships with Participating Retailers

None of our Participating Retailers provided revenue of more than 10% of our total revenue during Fiscal 2013, and we believe our relationships with our existing Participating Retailers remain strong.

The number of active Participating Retailers, excluding the addition of a major rental chain described below, has declined during the past year as a result of store closures, which are, in part, due to the economic climate, as well as an increase in use by consumers of kiosks and other forms of content delivery, which is more fully described in the “Competition” section below. We currently anticipate that this trend will continue as other entertainment content delivery channels gain a larger share of the market.

The popularity of the other choices from which a consumer can obtain entertainment content has been growing, and our Participating Retailers’ market share has been negatively affected, contributing to a decline in our revenue. However, during the third quarter of Fiscal 2013, we added a major rental chain to our list of PPT customers and are providing Units to that retailer from at least one major Program Supplier.

The landscape of the home video rental market for “brick and mortar” retailers continues to see significant changes, and some major retailers, such as Movie Gallery, have exited the market entirely, while others, such as Blockbuster Entertainment (“Blockbuster”) have closed a significant number of stores. 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.

Ordering and Distribution of Units

Our proprietary Rentrak Profit Maker Software (the “RPM® Software”) and Video Retailer Essentials Software (the “VRE Software”) allow Participating Retailers to order Units through these systems and provide the Participating Retailers with substantial analytical information regarding all offered titles. Ordering occurs via a networked computer interface (for RPM® Software) or over the internet (for VRE Software). To further assist the Participating Retailers in ordering, we also produce a monthly product catalog (“Ontrak®”) both in print and electronic media format.

To be competitive, Participating Retailers must be able to rent their Units on the “street date” announced by the Program Supplier for the title. We contract with third-party fulfillment providers to distribute the Units via both ground, which is our primary method, and overnight air courier to assure delivery to Participating Retailers on or prior to the street date. The handling and freight costs of such distribution for those Units were 2.4%, 3.0% and 3.1% of our consolidated cost of sales in Fiscal 2013, 2012 and 2011, respectively.

Computer Operations

To participate in our PPT® System, Participating Retailers must have Rentrak-approved computer software and hardware to process all of their rental and sale transactions. Our RPM® Software resides on the Participating Retailer’s POS computer system and transmits a record of PPT® transactions to us over a telecommunications network. The RPM® Software or web-based VRE Software also assists the Participating Retailer in ordering newly released titles and in managing its inventory of Units.

Our PPT® information system processes these transactions and prepares reports for Program Suppliers and Participating Retailers. In addition, it identifies variations from statistical norms for potential audit action. This information system also transmits information on new titles available and analytic information on active leased Units and sends confirmation of orders made via the RPM® Software or VRE system.

Auditing of Participating Retailers

From time to time, we audit Participating Retailers in order to verify that they are reporting all rentals and sales of Units in a consistent, accurate and timely manner. Several different types of exception reports are produced weekly. These reports are designed to identify any Participating Retailers whose PPT® business activity varies from our statistical norms. Depending upon the results of our analysis of these reports, we may conduct an in-store audit. Audits may be performed with or without notice and any refusal to allow an audit can be cause for immediate termination from the PPT® System. If audit violations are found,

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the Participating Retailer is subject to penalties, audit fees, immediate removal from the PPT® System and/or repossession of all leased Units.

Seasonality

We believe that the home video industry is somewhat seasonal because Program Suppliers tend to theatrically release their most promising movies during two periods of the year: early summer and during the holidays in the fourth calendar quarter. Since the release of movies to home video usually follows the theatrical release by approximately three to five months (although significant variations occur on certain titles), the seasonal peaks of movies for home video generally occur just prior to and/or during the fourth calendar quarter holidays and in late winter/early spring. We believe our volume of rental transactions and resulting revenue and earnings for the HE Division, reflect, in part, this seasonal pattern. However, changes in the release of Units available to us for Participating Retailers and Units offered with minimum guarantees may obscure any seasonal effect. See also Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Formovies.com

Formovies.com™ is a website designed and hosted by us, dedicated to providing our Participating Retailers with an effective online marketing tool. The site is filled with entertainment content such as top rentals, upcoming releases, DVD of the week, theatrical show times, movie trivia and more. Each site is individually branded to contain the store name of a Participating Retailer, allowing it to promote its store with coupons or special promotions it enters and controls on its custom site. Participating Retailers collect e-mail addresses from their customers, and the site sends a weekly newsletter announcing new releases and promotions.

Competition

The HE Division continues to be affected by the changing dynamics in the home video rental market. This market is highly competitive, constantly changing 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 product 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, telco or cable provider. Our PPT® System focuses on the traditional “brick and mortar” retailer serviced by a distributor on a wholesale basis. Accordingly, we face competition from all of the wholesale distributors, including Ingram Entertainment, Inc., Video Product Distributors, Inc. and Entertainment One. These and other wholesale distributors have extensive distribution networks, long-standing relationships with Program Suppliers and retailers, and, in some cases, significantly greater financial resources. These wholesale distributors do not offer retailers content on a revenue sharing basis.

During the past three years, our Participating Retailers have experienced intense competition from kiosks operated by Redbox that offer significantly lower prices on Units rented for one day. We have seen a dramatic increase in consumer use of this alternate delivery method. Currently, we believe that the timing, depth and breadth of Units available via kiosks are not as favorable as those available through our systems. Also, as Redbox formalizes revenue sharing agreements with certain studios, our DRS services, which are described below, benefit from this shift since we typically process that activity on behalf of these studios.

We also face direct competition from the Program Suppliers. Most major Program Suppliers work directly with major retailers, including Blockbuster, Netflix and Redbox. Many of the major Program Suppliers have direct revenue sharing arrangements with one or more of these retailers, and also possibly one or two mid-size retailers. We do not believe that the Program Suppliers have executed direct revenue sharing agreements with smaller retailers, but there is no assurance that they will not do so in the future. During the last quarter, we have seen an increased interest in our offerings as Program Suppliers look for ways to reduce expenses. It is too soon to tell what impact, if any, this will have on our revenue in the future.

Growth in kiosks and by-mail subscription activity has shifted consumer behavior from purchase to rental, causing studios to emphasize retail sales and VOD activity, both of which provide them with greater earnings per transaction than the rental methods. Approximately three years ago, three Program Suppliers (Warner Bros., Fox and Universal) created a 28-day retail window that delays the availability of their product in kiosks and by-mail subscription offerings. This delay creates an opportunity for our “brick and mortar” retailers to maximize rental and sales activity prior to competing with the lower cost rental alternatives. To compensate Redbox and Netflix for agreeing to receive product nearly a month after “brick and mortar” retailers, product costs for Redbox and Netflix were reduced. Netflix was also given improved access to digital streaming content. Other studios may

9


decide to implement similar “windows” in the future. A decrease or increase in the length of delay of product for any of these rental distributors could have a positive or negative impact on our Participating Retailers.

We also compete with businesses that use alternative distribution methods to provide video entertainment directly to consumers, including the following: (1) online movie rental subscription services, such as Netflix; (2) direct broadcast satellite providers, such as DIRECTV and DISH Network LLC (“DISH”); (3) cable providers, such as Time Warner and Comcast, which offer “pay-per-view” and VOD content; (4) telecommunication providers, such as AT&T and Verizon; and (5) delivery of programming via the internet, such as Apple’s iTunes, Hulu and Google. Technological improvements in any of these distribution methods, perceived greater convenience by customers, as well as potential lower pricing models, may make these options more attractive to consumers and thereby materially diminish the demand for Unit rentals in “brick and mortar” locations. Such a reduction could have an adverse effect on our results of operations and financial condition.

Studio Direct Revenue Sharing (DRS)

Our DRS services include entertainment content relating to physical Units rented and/or purchased by large “brick and mortar” retailers, online retailers and kiosks, such as Blockbuster, Netflix and Redbox (“DRS Retailers”). Our services are tailored to meet the needs of content providers, which include major studios and independent program suppliers, such as Twentieth Century Fox Home Entertainment, Inc., Warner Home Video, and Sony Pictures Home Entertainment, Inc. For each DRS client we collect, process, audit, summarize and report the number of transactions and corresponding revenue generated on each title distributed to DRS Retailers on a revenue sharing basis. We also provide in-depth inventory tracking by title, retailer and location. Additionally, we conduct numerous periodic physical audits of DRS Retailers, combined with actual testing of transactions processed through their POS systems, and electronic auditing, using multiple methods of validation and recovery, to ensure all DRS inventory is utilized in a manner consistent with the terms of its revenue sharing arrangement with our DRS clients.

A number of risks may adversely affect the size and profitability of our DRS services. For example, if the overall size of the home entertainment rental market contracts significantly, and/or the large “brick and mortar,” kiosks and online retailers’ share of the overall rental market declines significantly, a major content provider discontinues the use of our services, the amount of data we process and audit on behalf of our DRS clients would also be reduced, resulting in a corresponding decrease in our DRS revenue.

Trademarks, Copyrights, Proprietary Rights and Patents

In the United States, we have registered our RENTRAK®, PPT®, Pay Per Transaction®, Box Office Essentials®, Home Video Essentials®, OnDemand Essentials®, Retail Essentials®, AdEssentials®, Business Intelligence Essentials®, TV Essentials®, Mobile TV Essentials®, ForMovies®, Ontrak®, Answers In Real Time®, Filmscope®, Filmsource®, Supercomm®, The Release Schedule®, The Worldwide Box Office Authority®, Theater Atlas® and RPM® trademarks and applied to register other marks under federal trademark laws. We have applied to register and obtained registered status in several foreign countries for many of our trademarks. We believe our Entertainment Essentials™ software is entitled to copyright protection. We believe that our intellectual property is important to our marketing efforts and the competitive value of our services, and we intend to take appropriate action to halt infringement and protect against improper usage.

We own two patents directed to techniques for extracting revenue information from point-of-sale terminals and a number of patent pending applications covering various aspects of our technology. We have applied for additional patents related to certain of our proprietary technologies, primarily for our Entertainment Essentials™ Suite of products. We believe our proprietary technologies, in combination with our ability to innovate and our personnel, provide us with advantages over our competitors’ technologies. There is no assurance, however, that we will be able to obtain patents covering such proprietary technologies.

Employees

As of March 31, 2013, we employed 352 full-time associates and 119 part-time associates. We consider our relations with our associates to be good.

Financial Information About Industry Segments, Enterprise-Wide Data and Geographic Information

See Note 17 of Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.


10


Available Information

We file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). We also make available, free of charge on our website at www.rentrak.com, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC.  Information on our website does not constitute part of this report or of any other report we file or furnish with the SEC. You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SEC’s Public Reference Room located at 100 F Street, NE, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of Public Reference Rooms. The SEC also maintains an internet website at http://www.sec.gov/ where you can obtain most of our SEC filings. You can also obtain paper copies of these reports, without charge, by contacting Investor Relations at (503) 284-7581.

ITEM 1A.
RISK FACTORS

Our HE Division is challenged by the combined effects of technological advancements, changing consumer behaviors and demand, and fundamental changes affecting the industries in which the division operates.

The markets in which our HE Division operates are highly competitive, rapidly changing and influenced greatly by consumer spending patterns and behaviors. The end consumer has a wide variety of choices in entertainment generally and video entertainment content in particular, and can easily shift from one provider to another and from one technology to another. Some examples of options available to consumers include renting product from our Participating Retailers or other retailers, ordering product directly via online subscriptions or distributors (mail delivery), renting or purchasing product from kiosk locations, subscribing to at-home movie channels, downloading or streaming content via the internet, purchasing product directly, selecting an at-home “pay-per-view” or “video-on-demand” option, or relying on cable or satellite programming exclusively. Our systems primarily rely on the end consumer choosing to rent Units from traditional “brick and mortar” retailers, a practice that is decreasing in popularity. Technological advancements, changes in distribution methods and pricing reductions have made other options more attractive to consumers in recent years and materially diminished the demand for obtaining Units via traditional retailers. This trend is likely to continue and is expected to result in lower revenue from our HE Division, which could have a material adverse effect on our results of operations, financial condition and cash flows.

Certain Entertainment Essentials™ services face various obstacles to widespread market adoption, including competition from companies with significantly greater resources than ours.

Our Entertainment Essentials services are dependent on several factors for long-term success, including our ability to compete with larger and more seasoned competitors in this market. Our primary competitors currently are Nielsen, Kantar and TiVo. Each of these competitors has significantly greater resources than we do, which could allow them to become more formidable competitors with enhanced technology service solutions. Additionally, we face other obstacles. For instance, we may be unable to reasonably obtain the data and/or data providers may be reluctant or ultimately decide not to grant us adequate access to their digital transaction data, which is a key component of our systems. The owners of the data may also impose greater restrictions on the use and reporting of data, which may make it difficult to realize fully the opportunities we anticipate for our products and related services. Further, the marketplace (such as advertisers, advertising agencies and television networks) may be reluctant to adopt a new standard of viewership measurement. These factors could have an adverse effect on our ability to grow these services, which could lead to a material adverse effect on our results of operations, financial condition and cash flows.

We may be unable to obtain requisite data and other content to source our systems which provide our Entertainment Essentialsservices.

Our Entertainment Essentialsservices rely on data collected from a wide variety of sources. Once received, the data must be reviewed, processed, integrated and, at times, converted to our required file format. If we are unable to obtain quality data feeds and process that data in a timely manner, we may not be able to meet the needs of our clients, and we could lose clients. The loss of a significant number of Entertainment Essentials clients would have an adverse impact on our ability to grow our Entertainment Essentialslines of business, which could result in a material adverse effect on our results of operations, financial condition and cash flows.


11


Our business model continues to shift from the HE Division to the AMI Division, which has a limited history and may not be able to grow as quickly as we expect.

Our business has historically focused on the HE Division, which represented 45.4%, 54.5%, 64.4% of our total revenue for Fiscal 2013, 2012 and 2011, respectively. Revenue has been steadily declining in this division, and, while we are attempting to slow that revenue decline, our future success depends upon the growth and success of the AMI Division, which has a limited history. An inability to grow revenue in the AMI Division and/or achieve our expected operating results could have a material adverse effect on our results of operations, financial condition and cash flows.

We have operations outside of the United States that subject us to legal, business, political, cultural and other risks of international operations.

We operate globally, which subjects us to a number of risks and burdens, including:

staffing and managing international operations across different geographic areas;
multiple, conflicting and changing governmental laws and regulations;
the possibility of protectionist laws and business practices that favor local companies;
price and currency exchange rates and controls;
taxes and tariffs;
different business practices and legal standards, particularly with respect to intellectual property;
difficulties in collecting accounts receivable, including longer payment cycles;
political, social, and economic instability;
designing and maintaining effective operating and financial controls;
the possibility of failure of internal controls, including any failure to detect unauthorized transactions; and
increased costs relating to personnel management as a result of government and other regulations.

In addition, economic conditions in our overseas markets may negatively impact the demand for our products abroad and benefits we receive from those operations.

We may acquire or invest in other companies, products or technologies, which may be costly, dilutive to shareholders and, in the event we experience difficulties in assimilating and integrating the personnel, technologies, operating systems and products and services of acquired businesses, less beneficial than we anticipate.

As part of our business strategy, we may acquire or invest in other companies, products or technologies that complement our current product offerings, enhance our technical capabilities, expand our operations into new markets or offer other growth opportunities. Such acquisitions may be costly and potentially dilutive to existing shareholders in the event we offer capital stock as consideration in an acquisition. Acquisitions could also pose risks to our operations and operating results, including the possibilities of:

increased costs relating to the integration of acquired businesses or technologies;
difficulties assimilating the acquired operations, personnel, technologies or products into our company;
loss of key personnel at an acquired business who decide not to work for us;
diversion of management’s attention from our existing operations;
adverse effects on relationships with our existing suppliers, customers or partners;
a need for additional capital or debt financing to complete acquisitions; and
the impairment of intangible assets acquired.

The described risks would be magnified as the size of an acquisition increases or if the acquisitions are in geographic or business markets in which we have little or no prior experience. As a result of these and other challenges, we may not realize any anticipated

12


benefits from acquisitions even if we can find suitable acquisition opportunities at what we believe to be attractive valuations, which cannot be assured.

Economic conditions could negatively impact our business.

We primarily operate within the entertainment industry. Our overall success depends on the success of national networks and local stations, studios, cable operators, data providers, advertisers, advertising agencies and others within our AMI Division and our Participating Retailers and Program Suppliers within our HE Division. The success of these businesses is dependent on consumer economic activity. For example, our Participating Retailers rely on their customers to rent Units, which is a discretionary activity for most consumers. Also, our Box Office Essentials® clients depend on consumers being interested in, and financially able to attend, movies in theaters. Changes in the economic climate and consumer spending could impact the financial condition of our Participating Retailers, Program Suppliers, customers, studios and others. Such changes that affect our customers could, in turn, decrease the demand for our products, which could have a material adverse effect on our results of operations, financial condition and cash flows.

Additionally, if customers of our Entertainment Essentials™ services and our Participating Retailers experience financial difficulties, they may be unable to continue to purchase our services or pay for services in a timely manner, if at all. This could have a material adverse affect on our results of operations, financial condition and cash flows.

We face intense competition in the markets in which we operate and those in which we are currently developing new service offerings.

Some of our competitors have extensive distribution networks, long-standing relationships with our suppliers and customers, stronger brand name recognition and significantly greater financial resources than us. These factors may enable our competition to have increased bargaining and purchasing power relating to resources that could enable them to operate in a more cost effective manner and/or to surpass our technological advancements. This could have a material adverse effect on our ability to grow our lines of business.

Our Participating Retailers may lose a competitive advantage if Program Suppliers change the timing of the release of movies to the various distribution channels.

Historically, after the initial release of a movie to theaters, studios would then exclusively distribute the movie to the home video retail market (typically three to five months after the theatrical release) prior to distributing it in other forms throughout the industry, such as video-on-demand. This created a competitive advantage for our Participating Retailers due to the early distribution window. Some studios have started testing the simultaneous release of their movies to the home video market and through cable, satellite and internet video-on-demand channels. Approximately two years ago, three Program Suppliers (Warner Bros., Fox and Universal) created a 28-day retail window that delays the availability of their product in kiosks and by-mail subscription offerings. During the last half of Fiscal 2012, Warner Bros. decided not to release product to Redbox or Netflix for the first 56 days after the initial release and to any of its rental distributors for the first 28 days after the initial release in an effort to stimulate retail sales. During the third quarter of Fiscal 2013, Warner Bros. reverted back to its previous distribution strategy, and our Participating Retailers are now receiving product again on the initial release date. Should studios change the timing of their release windows, or eliminate the exclusive distribution window for the home video retail market, our Participating Retailers may experience reduced revenue as consumers would have simultaneous access to movies via additional distribution channels. Since we share in our Participating Retailers' revenue, this would negatively affect our results of operation, financial condition and cash flows.

If we lose a significant Program Supplier or large number of smaller Program Suppliers, our Program Suppliers fail to maintain the quality and volumes of content, or there are adverse changes in the terms of our revenue sharing agreements with Program Suppliers, our revenue may decline.

We rely on our Program Suppliers for Units we sublease to Participating Retailers. A decrease in the number of Program Suppliers participating in our system, a decline in the financial stability of our Program Suppliers, or a decline in the quality (rental appeal) and quantity (number of titles) of content they produce, would result in a reduction in overall Units available to Participating Retailers, which could decrease our revenue. Additionally, many of our agreements with Program Suppliers may be terminated upon relatively short notice. Therefore, there is no assurance that any of the Program Suppliers will continue to distribute Units through the PPT® System, continue to have titles available which we can distribute on a profitable basis, or continue to remain in business. Even if titles are otherwise available from Program Suppliers, there is no assurance that they will be made available on terms acceptable to us. A loss of any of our significant Program Suppliers or a change in any one of the above conditions could have a material adverse effect on our results of operations, financial condition, and cash flows.


13


Our Participating Retailers could establish relationships with Program Suppliers and enter into direct revenue sharing agreements.

If our Participating Retailers formed direct revenue sharing relationships with Program Suppliers, the need for our PPT® System would be greatly reduced, which could have an adverse impact on our business, financial condition and cash flows.

Our DRS business is dependent on the studios maintaining direct revenue sharing relationships with “brick-and-mortar,” kiosks and online retailers.

We currently collect, process, audit, summarize and report transactional data relating to rental and sales activity of Units at very large traditional and online retailers and kiosk locations that have revenue sharing agreements directly with major studios. There are a number of risks that may adversely affect the size and profitability of this DRS business. First and foremost, our business is dependent on the DRS clients maintaining DRS relationships with the DRS Retailers. Should these clients end those relationships, they would have no need for our services. Second, our clients could decide to invest the resources necessary to provide these services internally. Lastly, if the overall size of the home entertainment rental market contracts significantly, or the large “brick-and-mortar” and online retailers’ share of the overall rental market declines substantially, the amount of data we process and audit on behalf of our clients would also be reduced, resulting in a corresponding decrease in our revenue. These and other factors could potentially reduce the demand for our services and the quantity of data we process, which would negatively affect our results of operations, financial condition and cash flows.

If our efforts to attract and retain our base of Participating Retailers are not successful, our operations may be adversely affected.

The success of our HE Division business primarily depends on traditional “brick and mortar” retailers actively participating in our PPT® System. Declines in the numbers of Participating Retailers and the volumes of Units leased from us by Participating Retailers could ultimately lead to reductions in revenue and have an adverse impact on our results of operations, financial condition and cash flows.

The future success of our company is highly dependent on our ability to maintain and grow our base of clients who subscribe to our Entertainment Essentials suite of services.

The success of our AMI Division depends on effective software solutions, marketing, sales and customer relations for our current services, as well as acceptance of future enhancements and new services by our existing and prospective clients. If we are unable to both retain existing clients and secure new clients for our Entertainment Essentials services, our results of operations, financial condition and cash flows will be adversely affected.

We have voluntarily applied for accreditation from the Media Rating Council (“MRC”) for certain TV Essentials® products and services within our Entertainment Essentials™ lines of business and we cannot predict when we will receive such accreditation.
We have voluntarily applied for accreditation from the MRC for our TV Essentials® products and services. The MRC is a third party nonprofit industry association whose members consist of companies within our industry including television broadcasters, cable casters, advertisers, internet organizations, advertising agencies and industry trade associations. The MRC's goal is to ensure measurement services are valid, reliable and effective. While we believe we will be successful in achieving this accreditation, and we have made significant investments and progress towards this initiative, we cannot predict the economic impact this accreditation will have, and there is no assurance we will receive it.

Our Entertainment Essentials™ services are highly dependent on employees who are skilled and experienced in information technologies.

If we are unable to attract, hire and retain high quality information technology personnel at a reasonable cost, we may not be able to meet the needs of existing clients, enhance existing services, or develop new lines of business. This could have a material adverse effect on our results of operations, financial condition and cash flows.

The market for on demand advertising has been slow to develop and may grow slowly or not at all.

We have made significant investments in developing our tracking module for advertisements in on demand programming. The success of our on demand ad tracking module is dependent on several uncertain factors, including market adoption of on demand

14


advertising, rollout of dynamic ad insertion technologies, and the automation of files regarding the location of advertising in on demand content. If the market does not develop, we may be unable to recoup our investments.

Measurement services are receiving a high level of consumer group and government scrutiny relating to the privacy issues around the methodologies used in targeted advertising.

Although we are confident that our anonymous data aggregation methodologies are compliant with all current privacy laws, it is possible that privacy trends and market perceptions of the transparency of data could result in additional government restrictions or limitations on the use of that data, which would adversely affect many of our products. We believe it is unlikely that we will be required to change or limit our products. Nonetheless, if additional government restrictions are imposed, such restrictions could slow our ability to realize a return on our investments in new data-driven products or result in additional costs not currently anticipated.

Our services are highly dependent on the effective and efficient use of technology and our overall information management infrastructure.

If we are unable to acquire, establish and maintain our information management systems to ensure accurate, reliable and timely data processed in an efficient and cost effective manner, we may not be able to meet the needs of existing clients and may not be able to enhance existing services or develop new lines of business. This inability could have an adverse effect on our business and long-term growth prospects.

Interruption or failure of our information technology and communications systems could hurt our ability to effectively provide our products and services, which could damage our reputation and harm our operating results.

The availability of our products and services depends on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks, terrorist attacks, or other attempts to harm our systems. Our data centers are located in areas with potential risk of earthquakes. Our data centers are also subject to break-ins, sabotage, and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons, or other unanticipated problems at our data centers could result in lengthy interruptions in our service. In addition, our products and services are highly technical and complex and may contain errors or vulnerabilities. Any errors or vulnerabilities in our products and services, or damage to or failure of our systems, could result in interruptions in our services, which could reduce our revenue and results of operations.

The loss of our executive officers and key employees could have an adverse impact on our business and development initiatives.

We believe that the development of our business has been, and will continue to be, dependent on certain key executives and employees of Rentrak. The loss of any of these individuals could have a material adverse effect upon our business and development, and there is no assurance that adequate replacements could be found in the event of their unavailability.

Our stock is subject to price and volume fluctuations due to a number of factors, many of which are beyond our control and may prevent our shareholders from reselling our common stock at a profit.

The trading price of our common stock has, at times, experienced substantial price volatility and may continue to be volatile. For example, our common stock price has fluctuated from a high of $22.09 to a low of $15.56 for the 52 weeks ended March 31, 2013. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock. The trading price of our common stock may fluctuate widely in response to various factors, some of which are beyond our control. These factors include:

quarterly variations in our results of operations or those of our competitors;
announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships, or capital commitments;
recommendations by securities analysts or changes in earnings estimates;
announcements about our earnings that are not in line with analyst expectations;
announcements by our competitors of their earnings that are not in line with analyst expectations;

15


the volume of shares of our common stock available for public sale;
sales of stock by us or by our shareholders (including sales by our directors, executive officers and other employees); and
short sales, hedging and other derivative transactions on shares of our common stock.

Oregon law and our shareholder rights plan may have anti-takeover effects.

The Oregon Control Share Act and the Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control over us. These provisions may have the effect of lengthening the time required to acquire control of us through a proxy contest or the election of a majority of the Board of Directors. In May 2005, we adopted a shareholder rights plan, which has the effect of making it more difficult for a person to acquire control of us in a transaction not approved by our Board of Directors. The provisions of the Oregon Control Share Act and the Business Combination Act and our shareholder rights plan could have the effect of delaying, deferring or preventing a change of control of us, could discourage bids for our common stock at a premium over the market price of our common stock and could materially adversely impact the market price of, and the voting and other rights of the holders of, our common stock.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

Our most significant locations, all of which are leased under operating leases, include the following:
Location
 
Use
Portland, Oregon
 
Corporate headquarters
Los Angeles, California
 
AMI Division
New York, New York
 
AMI Division
Fort Lauderdale, Florida
 
AMI Division
Munich, Germany
 
Box Office Essentials®
Madrid, Spain
 
Box Office Essentials®
London, England
 
Box Office Essentials®
Paris, France
 
Box Office Essentials®
Sydney, Australia
 
Box Office Essentials®
Mexico City, Mexico
 
Box Office Essentials®
Buenos Aires, Argentina
 
Box Office Essentials®
Rio de Janeiro, Brazil
 
Box Office Essentials®

See Note 14 of Notes to Consolidated Financial Statements for additional information.

ITEM 3.
LEGAL PROCEEDINGS

We currently have no material outstanding litigation.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


16


PART II

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Price and Dividends

Our common stock, $0.001 par value, is traded on the NASDAQ Global Market, where its prices are quoted under the symbol “RENT.” The closing price of our common stock on the NASDAQ Global Market on June 3, 2013 was $23.74. As of June 3, 2013 there were 190 holders of record of our common stock.
 
The following table sets forth the reported high and low closing sales prices of our common stock for each of the quarters in the last two fiscal years as regularly quoted on the NASDAQ Global Market:

Fiscal 2013
 
High
 
Low
Quarter 1
 
$
22.05

 
$
15.56

Quarter 2
 
21.40

 
16.73

Quarter 3
 
21.03

 
16.67

Quarter 4
 
22.09

 
19.30

Fiscal 2012
 
High
 
Low
Quarter 1
 
$
27.00

 
$
16.56

Quarter 2
 
19.29

 
11.52

Quarter 3
 
14.78

 
11.57

Quarter 4
 
23.03

 
14.15


Holders of our common stock are entitled to receive dividends if, as, and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend and liquidation rights of any preferred stock that may be issued.

No cash dividends have been paid or declared during the last 14 fiscal years. The present policy of the Board of Directors is to retain earnings to provide funds for operation and expansion of our business. We do not intend to pay cash dividends in the foreseeable future.

Securities Authorized for Issuance

Information regarding securities authorized for issuance under equity compensation plans is included in Item 12 of this Annual Report on Form 10-K.



17


Stock Performance Graph

This chart compares the five-year cumulative total return on our common stock with that of the NASDAQ Composite index and a custom peer group, which was selected by us. The chart assumes $100 was invested on March 31, 2008, in our common stock, the NASDAQ Composite index and the peer group, and that any dividends were reinvested. The Peer Group is composed of: Acxiom Corp., Arbitron Inc., comScore, Inc., Harris Interactive Inc., Hastings Entertainment, Inc. and Nielsen Holdings N.V. The peer group index utilizes the same method of presentation and assumptions for the total return calculation as does Rentrak and the NASDAQ Composite index. All companies in the peer group index are weighted in accordance with their market capitalizations.

 
 
Base
 
Indexed Returns
 
 
Period
 
Year Ended
Company/Index
 
3/31/2008
 
3/31/2009
 
3/31/2010
 
3/31/2011
 
3/31/2012
 
3/31/2013
Rentrak Corporation
 
$
100.00

 
$
74.38

 
$
178.10

 
$
222.48

 
$
187.60

 
$
181.65

NASDAQ Composite
 
100.00

 
67.15

 
105.79

 
124.53

 
139.51

 
150.61

Peer Group
 
100.00

 
47.42

 
94.30

 
110.47

 
116.50

 
138.72



18


ITEM 6.
SELECTED FINANCIAL DATA

(In thousands, except per share amounts)
Year Ended March 31,
Statement of Operations Data
2013
 
2012
 
2011
 
2010
 
2009
Revenue:
 
 
 
 
 
 
 
 
 
AMI Division
$
54,110

 
$
41,415

 
$
34,584

 
$
19,979

 
$
12,656

HE Division
45,067

 
49,656

 
62,504

 
71,097

 
82,310

Total revenue
99,177

 
91,071

 
97,088

 
91,076

 
94,966

Cost of sales
53,631

 
48,125

 
54,853

 
58,277

 
62,575

Gross margin
45,546

 
42,946

 
42,235

 
32,799

 
32,391

Operating expenses:
 
 
 
 
 
 
 
 
 
Selling and administrative expense
67,757

 
48,854

 
44,838

 
33,723

 
27,145

Income (loss) from operations
(22,211
)
 
(5,908
)
 
(2,603
)
 
(924
)
 
5,246

Other income:
 
 
 
 
 
 
 
 
 
Investment income, net
406

 
478

 
470

 
1,151

 
1,108

 Other income (expense), net
(29
)
 
(1
)
 
125

 

 

Income (loss) before income taxes
(21,834
)
 
(5,431
)
 
(2,008
)
 
227

 
6,354

Income tax provision (benefit)
844

 
995

 
(1,241
)
 
(349
)
 
991

Net income (loss)
(22,678
)
 
(6,426
)
 
(767
)
 
576

 
5,363

Net loss attributable to noncontrolling interest
(61
)
 

 

 

 

Net income (loss) attributable to Rentrak Corporation
$
(22,617
)
 
$
(6,426
)
 
$
(767
)
 
$
576

 
$
5,363

Net income (loss) per share attributable to Rentrak Corporation common stockholders:
 
 
 
 
 
 
 
 
 
Basic
$
(1.93
)
 
$
(0.57
)
 
$
(0.07
)
 
$
0.05

 
$
0.51

Diluted
$
(1.93
)
 
$
(0.57
)
 
$
(0.07
)
 
$
0.05

 
$
0.49

Shares used in per share calculations:
 
 
 
 
 
 
 
 
 
Basic
11,733

 
11,197

 
10,962

 
10,527

 
10,561

Diluted
11,733

 
11,197

 
10,962

 
11,013

 
11,047



 
March 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and marketable securities
$
20,423

 
$
27,753

 
$
26,377

 
$
19,925

 
$
34,475

Working capital
20,560

 
23,844

 
28,460

 
30,627

 
43,244

Total assets
71,779

 
72,881

 
76,175

 
64,806

 
59,878

Long-term liabilities
4,075

 
3,154

 
2,203

 
2,267

 
2,938

Stockholders’ Equity attributable to Rentrak Corporation
47,982

 
50,525

 
56,373

 
51,228

 
46,977




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Table of Contents

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 product from traditional “brick and mortar”, online and kiosk retailers.

Our AMI Division encompasses media measurement services across multiple screens and platforms, and are primarily delivered via web-based products within our Entertainment Essentials™ lines of business. These services, offered primarily on a recurring subscription basis, provide consumer viewership information, 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, on demand and “Over the Top” 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 the depth and breadth of their inventory, to more efficiently adjust ordering strategies to better satisfy consumer demand and to more effectively take advantage of trends and opportunities 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 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.

See “Forward-Looking Statements” on page 2.

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. Our systems capture consumer viewership data from multiple screens across every platform within the entertainment industry and merge that information with advanced demographics and data relating to actual consumer purchase behavior.

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 $12.7 million, or 30.7%, in Fiscal 2013 compared to Fiscal 2012.

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.


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Table of Contents

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, constantly changing 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, telco or cable provider.

Our PPT® System focuses primarily on the traditional “brick and mortar” retailer and provides those Participating Retailers the opportunity to increase the depth and breadth of their inventory, to more efficiently adjust ordering strategies to better satisfy consumer demand and to more effectively take advantage of trends and opportunities 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 continues to see significant changes, and some major retailers, such as Movie Gallery, have exited the market entirely, while others, such as Blockbuster have closed a significant number of stores. 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 third quarter of Fiscal 2013, we added a major rental chain to our list of PPT® customers and are providing Units to that retailer from at least one major Program Supplier. During Fiscal 2013, we generated revenue of $3.9 million from this retailer.

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. In the third quarter of Fiscal 2013, 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 and in the last quarter, we have seen an increased interest in our offerings as Program Suppliers look for ways to reduce expenses. It is too soon to tell what impact, if any, this will have on total revenue in the future. 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® revenue includes 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.

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Table of Contents

Results of Operations
Certain information by segment was as follows (dollars in thousands):
 
Year Ended March 31, (1)
 
2013
 
2012
 
2011

(Dollars in thousands)

Dollars
 
% of revenue
 

Dollars
 
% of revenue
 

Dollars
 
% of revenue
Revenue:
 
 
 
 
 
 
 
 
 
 
 
AMI Division
$
54,110

 
54.6
 %
 
$
41,415

 
45.5
 %
 
$
34,584

 
35.6
 %
HE Division
45,067

 
45.4

 
49,656

 
54.5

 
62,504

 
64.4

Total revenue
99,177

 
100.0

 
91,071

 
100.0

 
97,088

 
100.0

Cost of sales
53,631

 
54.1

 
48,125

 
52.8

 
54,853

 
56.5

Gross margin
45,546

 
45.9

 
42,946

 
47.2

 
42,235

 
43.5

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling and administrative
67,757

 
68.3

 
48,854

 
53.6

 
44,838

 
46.2

Loss from operations
(22,211
)
 
(22.4
)
 
(5,908
)
 
(6.5
)
 
(2,603
)
 
(2.7
)
Other income:
 
 
 
 
 
 
 
 
 
 
 
Investment income, net
406

 
0.4

 
478

 
0.5

 
470

 
0.5

Other income (expense), net
(29
)
 
(0.1
)
 
(1
)
 

 
125

 
0.1

Loss before income taxes
(21,834
)
 
(22.0
)
 
(5,431
)
 
(6.0
)
 
(2,008
)
 
(2.1
)
Income tax provision (benefit)
844

 
0.9

 
995

 
1.1

 
(1,241
)
 
(1.3
)
Net loss
(22,678
)
 
(22.9
)
 
(6,426
)
 
(7.1
)
 
(767
)
 
(0.8
)
Net loss attributable to noncontrolling interest
(61
)
 
(0.1
)
 

 

 

 

Net loss attributable to Rentrak Corporation
$
(22,617
)
 
(22.8
)%
 
$
(6,426
)
 
(7.1
)%
 
$
(767
)
 
(0.8
)%
(1)
Percentages may not add due to rounding.

Revenue
Revenue increased $8.1 million, or 8.9%, to $99.2 million in Fiscal 2013, compared to $91.1 million in Fiscal 2012. The increase in revenue was 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.

Revenue decreased $6.0 million, or 6.2%, to $91.1 million in Fiscal 2012, compared to $97.1 million in Fiscal 2011. The decrease in revenue was due to a decline in revenue from our HE Division, partially offset by an increase in AMI revenue, primarily related to growth in our existing lines of business as 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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Table of Contents

Revenue information related to our AMI Division is as follows (dollars in thousands):
 
Year Ended March 31,
 
Dollar
Change
 
% Change
 
2013
 
2012
 
Box Office Essentials®
$
23,949

 
$
21,046

 
$
2,903

 
13.8%
OnDemand Everywhere™
12,562

 
11,143

 
1,419

 
12.7%
TV Essentials®
17,599

 
9,226

 
8,373

 
90.8%
 
$
54,110

 
$
41,415

 
$
12,695

 
30.7%
 
Year Ended March 31,
 
Dollar
Change
 
% Change
 
2012
 
2011
 
Box Office Essentials®
$
21,046

 
$
18,255

 
$
2,791

 
15.3%
OnDemand Everywhere™
11,143

 
10,537

 
606

 
5.8%
TV Essentials®
9,226

 
5,792

 
3,434

 
59.3%
 
$
41,415

 
$
34,584

 
$
6,831

 
19.8%

The increase in Box Office Essentials® revenue in Fiscal 2013 compared to Fiscal 2012 was primarily due to rate increases for existing clients and the addition of new clients.

The increase in Box Office Essentials® revenue in Fiscal 2012 compared to Fiscal 2011 was primarily due to rate increases for existing clients and the addition of new clients, as well as our acquisition of Ciné Chiffres in the third quarter of Fiscal 2011, which contributed $0.1 million to the increase.

The increase in OnDemand Everywhere™ revenue in Fiscal 2013 compared to Fiscal 2012 was due to rate increases for existing clients, increased custom reporting projects, and the addition of new clients.

The increase in OnDemand Everywhere™ revenue in Fiscal 2012 compared to Fiscal 2011 was due to rate increases for existing clients, and the addition of new clients. These factors were partially offset by a reduction in custom reporting projects due to a large non-recurring custom project in Fiscal 2011.

The increase in TV Essentials® revenue in Fiscal 2013 compared to Fiscal 2012 was due primarily to the addition of new clients, and rate increases for existing clients.

The increase in TV Essentials® revenue in Fiscal 2012 compared to Fiscal 2011 was due to the addition of new clients, including local stations, networks and advertising agencies.

HE Division
Revenue information related to our HE Division is as follows (dollars in thousands):
 
Year Ended March 31,
 
Dollar
Change
 
% Change
 
2013
 
2012
 
PPT®
$
42,145

 
$
44,027

 
$
(1,882
)
 
(4.3)%
DRS
2,922

 
5,629

 
(2,707
)
 
(48.1)%
 
$
45,067

 
$
49,656

 
$
(4,589
)
 
(9.2)%
 
Year Ended March 31,
 
Dollar
Change
 
% Change
 
2012
 
2011
 
PPT®
$
44,027

 
$
56,705

 
$
(12,678
)
 
(22.4)%
DRS
5,629

 
5,799

 
(170
)
 
(2.9)%
 
$
49,656

 
$
62,504

 
$
(12,848
)
 
(20.6)%

The decrease in PPT® revenue in Fiscal 2013 compared to Fiscal 2012 was primarily due to a reduction in transaction fees of $0.8 million, and a decline in sell-through and order processing fees of $1.0 million. These decreases were primarily due to fewer Participating Retailers, fewer available Units and lower box office performance from theatrical titles in Fiscal 2013 compared to Fiscal 2012, 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

23

Table of Contents

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 of Fiscal 2013, 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 Bros. 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, 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.

The decrease in PPT® revenue in Fiscal 2012 compared to Fiscal 2011 was primarily due to a reduction in transaction fees of $9.5 million, and a decline sell-through and order processing fees of $3.1 million. These decreases were due primarily to fewer Participating Retailers, fewer available Units and lower box office performance from theatrical titles in Fiscal 2012 compared to Fiscal 2011, as well as continued changing market conditions. During the third quarter of Fiscal 2012, Warner Bros. decided to release its video content in the retail channel before offering it in the rental market, which had a negative impact on the number of Units available to us and represented 5.5% of the decline in revenue.

The decrease in DRS revenue in Fiscal 2013 compared to Fiscal 2012 was due to fewer transactions processed as a result of Warner Bros.’ decision in the third quarter of Fiscal 2012 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 in the third quarter of Fiscal 2013 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.
 
The decrease in DRS revenue in Fiscal 2012 compared to Fiscal 2011 was due to fewer transactions, primarily as a result of a decline in transactions from Blockbuster, offset by an increase in revenue of $0.8 million as a result of our acquisition of Media Salvation during the fourth quarter of Fiscal 2011.

Cost of Sales and Gross Margin
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 $5.5 million, or 11.4%, in Fiscal 2013 compared to Fiscal 2012, and decreased $6.7 million, or 12.3%, in Fiscal 2012 compared to Fiscal 2011.


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Table of Contents

AMI Division
Cost of sales information related to our AMI Division is as follows (dollars in thousands):
 
Year Ended March 31,
 
Dollar
Change
 
% Change
  
2013
 
2012
 
Costs related to:
 
 
 
 
 
 
 
Amortization of internally developed software
$
2,635

 
$
2,162

 
$
473

 
21.9%
Call center operation
5,253

 
4,793

 
460

 
9.6%
Obtaining, cleansing and processing data
13,455

 
7,814

 
5,641

 
72.2%
 
$
21,343

 
$
14,769

 
$
6,574

 
44.5%
 
Year Ended March 31,
 
Dollar
Change
 
% Change
  
2012
 
2011
 
Costs related to:
 
 
 
 
 
 
 
Amortization of internally developed software
$
2,162

 
$
1,746

 
$
416

 
23.8%
Call center operation
4,793

 
4,506

 
287

 
6.4%
Obtaining, cleansing and processing data
7,814

 
5,018

 
2,796

 
55.7%
 
$
14,769

 
$
11,270

 
$
3,499

 
31.0%

The increase in cost of sales within the AMI Division in Fiscal 2013 compared to 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 cost of sales within the AMI Division in Fiscal 2012 compared to Fiscal 2011 resulted primarily from arrangements with some of our data suppliers that provide for cost increases as our revenue increases, the conversion of a data supplier agreement from a variable arrangement to a fixed-fee arrangement in December 2010, and increases in costs related to obtaining, cleansing and processing data due to arrangements in place with data providers.

HE Division
Cost of sales information related to our HE Division is as follows (dollars in thousands):
 
Year Ended March 31,
 
Dollar
Change
 
% Change
  
2013
 
2012
 
Costs related to:
 
 
 
 
 
 
 
Transaction fees
$
22,528

 
$
22,904

 
$
(376
)
 
(1.6)%
Sell-through fees
5,544

 
5,976

 
(432
)
 
(7.2)%
Other
4,216

 
4,476

 
(260
)
 
(5.8)%
 
$
32,288

 
$
33,356

 
$
(1,068
)
 
(3.2)%
 
Year Ended March 31,
 
Dollar
Change
 
% Change
 
2012
 
2011
 
Costs related to:
 
 
 
 
 
 
 
Transaction fees
$
22,904

 
$
30,472

 
$
(7,568
)
 
(24.8)%
Sell-through fees
5,976

 
7,806

 
(1,830
)
 
(23.4)%
Other
4,476

 
5,305

 
(829
)
 
(15.6)%
 
$
33,356

 
$
43,583

 
$
(10,227
)
 
(23.5)%

The decreases in cost of sales within the HE Division in Fiscal 2013 compared to Fiscal 2012 and Fiscal 2012 compared to Fiscal 2011 were primarily related to the decreases in revenue discussed above.


25

Table of Contents

Gross margins as a percentage of revenue were as follows:
 
Year Ended March 31,
 
2013
 
2012
 
2011
AMI Division
60.6%
 
64.3%
 
67.4%
HE Division
28.4%
 
32.8%
 
30.3%

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

The decrease in gross margin in the AMI Division in Fiscal 2012 compared to Fiscal 2011 was primarily due to increased costs associated with one of our data provider agreements, which converted to a fixed fee agreement in the third quarter of Fiscal 2011, and higher costs associated with amortization of our internally developed systems.

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

The increase in gross margin in the HE Division in Fiscal 2012 compared to Fiscal 2011 was primarily due to fewer total available and rented Units including minimum guarantees. As noted previously, guarantee Units can result in 100% cost of sales on the titles in the first month in which they are released.

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.

Selling and administrative expense information is as follows (dollars in thousands):
 
Year Ended March 31,
 
Dollar
Change
 
% Change
Selling and administrative
2013
 
2012
 
AMI
$
44,315

 
$
25,918

 
$
18,397

 
71.0%
HE
5,703

 
6,705

 
(1,002
)
 
(14.9)%
Corporate
17,739

 
16,231

 
1,508

 
9.3%
 
$
67,757

 
$
48,854

 
$
18,903

 
38.7%
 
Year Ended March 31,
 
Dollar
Change
 
% Change
Selling and administrative
2012
 
2011
 
AMI
$
25,918

 
$
21,310

 
$
4,608

 
21.6%
HE
6,705

 
7,497

 
(792
)
 
(10.6)%
Corporate
16,231

 
16,031

 
200

 
1.2%
 
$
48,854

 
$
44,838

 
$
4,016

 
9.0%

AMI Division
The increase in selling and administrative expense in the AMI Division in Fiscal 2013 compared to Fiscal 2012 was primarily due to $15.3 million of increased expense related to the cancellation of a stock award granted to DISH that had been previously revalued at the end of each reporting period. 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 $15.9 million in expense related to this amendment and related stock award.

Excluding the impact of the DISH amendment, expenses increased $3.0 million primarily related to increased headcount and other costs associated with the expansion of TV Essentials®.

  


26

Table of Contents

The increase in selling and administrative expense in the AMI Division in Fiscal 2012 compared to Fiscal 2011 was primarily due to an increase in the number of employees and other costs associated with the expansion of our AMI Division of $5.3 million and reorganization costs of $1.1 million related to our international operations, offset by a reduction of $1.9 million of expense related to the value of the stock award granted to DISH that was revalued at the end of each reporting period.

Our long-term strategic plan is heavily focused on the development, growth and expansion of our AMI Division, both domestically and internationally, and we consider these expenses to be investments which will leverage this business.

HE Division
The decrease in selling and administrative expense in the HE Division in Fiscal 2013 compared Fiscal 2012 was primarily due to a reduction in overall headcount in order to better align the number of employees with current and expected future trends in this division.

The decrease in selling and administrative expense in the HE Division in Fiscal 2012 compared to Fiscal 2011 was primarily due to a reduction in overall headcount for the year.

Corporate
The increase in Corporate selling and administrative expenses in Fiscal 2013 compared to Fiscal 2012 was 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.

The increase in Corporate selling and administrative expenses in Fiscal 2012 compared to Fiscal 2011 was primarily due to higher maintenance, occupancy and general operating costs, offset by lower stock-based compensation expense, lower costs for fringe benefits and increases in capitalized software development costs.

Income (Loss) from Operations

Income (loss) from operations information is as follows (dollars in thousands):
 
Year Ended March 31,
 
Dollar
Change
 
% Change
Income (loss) from operations
2013
 
2012
 
AMI
$
(11,548
)
 
$
728

 
$
(12,276
)
 
(1,686.3)%
HE
7,076

 
9,595

 
(2,519
)
 
(26.3)%
Corporate
(17,739
)
 
(16,231
)
 
(1,508
)
 
(9.3)%
 
$
(22,211
)
 
$
(5,908
)
 
$
(16,303
)
 
(275.9)%
 
Year Ended March 31,
 
Dollar
Change
 
% Change
Income (loss) from operations
2012
 
2011
 
AMI
$
728

 
$
2,004

 
$
(1,276
)
 
(63.7)%
HE
9,595

 
11,424

 
(1,829
)
 
(16.0)%
Corporate
(16,231
)
 
(16,031
)
 
(200
)
 
(1.2)%
 
$
(5,908
)
 
$
(2,603
)
 
$
(3,305
)
 
(127.0)%

The increase in loss from operations in Fiscal 2013 compared to 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 loss for the AMI Division includes the impact of a non-recurring compensation expense of $15.9 million relating to the DISH amendment.

Other Income (Expense), Net

Other income of $0.1 million in Fiscal 2011 represented a gain on the liquidation of a long-term, cost-based investment.

Income Taxes
Our effective tax rate was an expense of 3.9% for Fiscal 2013 and was driven by taxable income in some jurisdictions. The expected benefit from losses in other jurisdictions did not benefit the rate due to the recording of a valuation allowance.


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Primarily due to our investments in acquisitions, as well as expansion of our AMI Division and our equity compensation structure, we have cumulative operating losses over the past three fiscal years. As a result, we evaluated various factors relating to these assets and determined in Fiscal 2012 that it was not more likely than not that all of our deferred tax assets would be realized and, accordingly, we recorded a full valuation allowance. This position did not change in Fiscal 2013. In the future, if we generate taxable income, we would re-evaluate our ability to utilize these deferred tax assets and the need for the valuation allowance, which could reduce future tax expense.

Our effective tax rate was an expense of 18.3% in Fiscal 2012. The rate was negatively affected by the recording of a $4.0 million valuation allowance to fully reserve our deferred tax assets.

Our effective tax rate was a benefit of 61.8% in Fiscal 2011. The rate was positively impacted by federal and state research and experimentation credits of $0.8 million, earnings on marketable securities that are exempt from federal income taxes of $0.2 million and the tax impact of income in foreign locations of $0.1 million, offset by increases in reserves on tax positions of $0.3 million.

Inflation

We believe that the impact of inflation was minimal on our business in Fiscal 2013, 2012 and 2011.

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 April 1, 2014.

Cash and cash equivalents and marketable securities decreased $7.3 million to $20.4 million at March 31, 2013 from March 31, 2012. This decrease resulted primarily from $7.1 million used for the purchase of equipment and capitalized information technology costs and $1.6 million used in operating activities, which includes a $5.8 million payment related to the amendment of our agreement with DISH, offset by $0.8 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 March 31, 2013, we had $2.9 million in foreign bank accounts, of which we plan to use $0.9 million to fund our international expansion and growth. The remaining cash is held by Sinotrak, our Chinese joint venture, and will be used to support growth for that operation.

We had $16.6 million invested in an adjustable-rate governmental bond fund as of March 31, 2013. 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 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, increased $2.4 million to $16.7 million at March 31, 2013 from March 31, 2012, primarily due to higher revenue in the HE Division in the fourth quarter of Fiscal 2013 compared to the fourth quarter of Fiscal 2012 and growth in our AMI Division.

Other current assets increased $1.2 million to $2.2 million at March 31, 2013 from March 31, 2012 primarily due to a $0.6 million receivable from our landlord for a portion of the costs related to renovations made to our New York office. This amount is treated as a lease incentive, the value of which will reduce rent expense over the remaining lease term.

During Fiscal 2013, we spent $7.1 million on property and equipment, including $4.2 million for the capitalization of internally developed software for our business information service offerings. We anticipate spending a total of approximately $8.3 million on property and equipment in all of Fiscal 2014, of which approximately $6.0 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 primarily purchases of computers, servers and networking equipment.

Accrued liabilities increased $1.3 million to $4.4 million at March 31, 2013 from March 31, 2012, primarily due to increased expenses incurred related to our data suppliers.


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Accrued compensation decreased $2.9 million to $5.9 million at March 31, 2013 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 $0.8 million decrease in severance accruals relating to payments made during Fiscal 2013 as a result of the reorganization of our foreign operations, offset by $1.0 million in increases in payroll and bonus related accruals.

Deferred revenue and other credits increased $0.6 million to $2.6 million at March 31, 2013 from March 31, 2012, primarily due to the growth in our AMI Division. This balance includes amounts related to quarterly and annual subscriptions for our services, as well as the current portion of our deferred rent credits.

Deferred rent of $2.4 million at March 31, 2013, which includes both the current and long-term portion, represents amounts received for qualified renovations to our corporate headquarters and our offices in New York, as well as free rent for a portion of the lease terms. The deferred rent related to qualified renovations is being amortized against rent expense over the remaining lease terms, which extend through June 30, 2023, at the rate of approximately $43,000 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 2014.

In January 2006, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock. As of March 31, 2013, 276,633 shares remained available for repurchase under this plan at a per share price not to exceed $12.75. This plan does not have an expiration date. Common stock repurchases may be made from time to time in the open market at prevailing market prices or through privately negotiated transactions. The amount and timing of all repurchase transactions are contingent upon market conditions, regulatory requirements and alternative investment opportunities. We did not repurchase any shares in Fiscal 2013.

We currently have a revolving line of credit for $15.0 million that matures December 31, 2014. Interest accrues on outstanding balances under the line of credit at a rate equal to LIBOR plus 2.0% per annum, and we incur fees on the unused portion at 0.2% per annum. The credit line is secured by substantially all of our assets and includes certain financial covenants. At March 31, 2013, 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. The agreement contains certain liquidity, asset and financial covenants and, as of March 31, 2013, 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 March 31, 2013, we were on schedule toward meeting those requirements and, on April 3, 2013, the loan was forgiven in full. The balance of this loan will be recorded as an offset to leasehold improvements and will be amortized as an offset to depreciation expense over the life of the related lease.

Contractual Payment Obligations

A summary of our contractual commitments and obligations as of March 31, 2013 follows (dollars in thousands):
 
 
Payments Due By Fiscal Period

Contractual Obligations
 

Total
 
2014
 
2015 and 2016
 
2017 and 2018
 
2019 and beyond
Operating lease obligations
 
$
18,404

 
$
2,499

 
$
4,648

 
$
4,023

 
$
7,234

Purchase obligations
 
25,143

 
10,878

 
14,265

 

 

Total Contractual Obligations
 
$
43,547

 
$
13,377

 
$
18,913

 
$
4,023

 
$
7,234


Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Following is a discussion of our critical accounting policies and estimates.

Revenue Recognition

We recognize revenue for all of our services when all of the following conditions are met:


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Persuasive evidence of an arrangement exists;
The products or services have been delivered; for Units released within our HE Division, we believe this condition is met when the film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery;
The license period has begun (which is referred to as the “street date” for a HE product);
The fee is fixed or determinable; and
Collection of the fee is reasonably assured based on our collection history.

Within our AMI Division, subscription fees are recognized ratably over the period of service. We also generate revenue by providing information obtained from our database in the form of custom reports. Revenue related to custom reports is recognized as value is delivered to the customer. The pattern of revenue recognition for these reports varies depending on the terms of the individual contracts and may be recognized proportionally or deferred until the end of the contract term and recognized when the information has been delivered and accepted by the customer.

Within our HE Division, our agreements generally provide for an initial order processing fee and continuing transaction fees based on a percentage of rental revenue earned by the Participating Retailer upon renting the Units to their customers. Initial order processing fees cover the direct costs of accessing Units from Program Suppliers and handling, packaging and shipping of the Units to the retailer. Once the Units are shipped, we have no further obligation to provide services to the Participating Retailer.

We recognize order processing fees as revenue on the street date and recognize transaction fees when the Units are rented to the consumers, provided all other revenue recognition criteria have been met. Certain arrangements include guaranteed minimum revenue from our customers as well as our suppliers, which vary by studio and relate to single films, typically major motion picture releases. These guarantees, which totaled $11.3 million, $13.0 million and $15.8 million, respectively, in Fiscal 2013, 2012 and 2011, are contractually fixed on the street date and are nonrefundable. We follow Accounting Standards Codification 926-605-25-19, which applies to the Entertainment-Films industry, and requires that the entire amount of these minimum guarantees be recognized as revenue, along with the corresponding cost, on the street date, provided all other revenue recognition criteria are met.

Accounts and Notes Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit limits are established through a process of reviewing the financial history and stability of each customer. We regularly evaluate the collectibility of accounts receivable by monitoring past due balances. If it is determined that a customer may be unable to meet its financial obligations, a specific reserve is established based on the amount we expect to recover. An additional general reserve is provided based on aging of accounts receivable and our historical collection experience. If circumstances change related to specific customers, overall aging of accounts receivable or collection experience, our estimate of the recoverability of accounts receivable could materially change. Our allowance for doubtful accounts totaled $0.9 million and $0.6 million at March 31, 2013 and 2012, respectively. See also Schedule II, Valuation and Qualifying Accounts included in Item 8 of this Annual Report on Form 10-K.

Deferred Taxes

Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet deducted for tax purposes, from tax credits which have not been utilized, and from net operating loss carry-forwards. We calculate deferred tax assets and liabilities using enacted laws and tax rates that will be in effect when we expect the differences to reverse and be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A deferred tax asset is not recorded for net operating loss carryforwards created by excess tax benefits from the exercise of stock options. To the extent such net operating loss carryforwards are utilized, stockholders’ equity will increase. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined the recoverability of the deferred tax assets is not more likely than not, we will record a valuation allowance against deferred tax assets. As of March 31, 2013 and 2012, we had a valuation allowance of $14.1 million and $4.1 million, respectively, recorded against our federal net operating and capital loss carry-forwards, as well as those net operating and capital loss carry-forwards in various state and foreign jurisdictions. As of March 31, 2013 and 2012, net deferred tax liabilities totaled $610,000 and $31,000, respectively.


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Accounting for Unrecognized Tax Benefits

We record a benefit for uncertain tax positions only when we determine that those tax positions are more-likely-than-not to be sustained on audit, based on the technical merits of the position. As of March 31, 2013 and 2012, the total amount of unrecognized tax benefits was $1.1 million and $1.0 million, respectively, including penalties and interest of $124,000 and $91,000, respectively. All unrecognized tax benefits at March 31, 2013 would affect the effective tax rate if recognized. See Note 11 of Notes to Consolidated Financial Statements.

Capitalized Software

Capitalized software, which is included in property and equipment, net, consists of costs to purchase and develop internal-use software, as well as costs to develop internal software, which is used by us to provide various services to clients. The internal and external costs to develop the internal software used to support these services are capitalized after the technological and business feasibility of the project is determined and the preliminary project stage is completed. We continue to develop our internal software systems in order to expand our service offerings. Once this software is ready for use in our products, these costs are amortized on a straight-line basis over the estimated economic life of the software, which is five years from the date of utilization. Capitalized software is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Based on these reviews, we recorded impairment charges of $8,000 in Fiscal 2011. No impairment charges were recorded in Fiscal 2013 or 2012. Changes in technology could affect our estimate of the useful life of those assets. Capitalized software costs, net of accumulated amortization, totaled $7.8 million and $6.8 million at March 31, 2013 and 2012, respectively. We also had $1.9 million and $1.5 million as of March 31, 2013 and 2012, respectively, of capitalized costs associated with software projects which are still in the application development stage.

Stock-Based Compensation

We are required to measure and recognize compensation expense for all stock-based awards granted to our employees and directors, including employee stock options, deferred stock units (“DSUs”), stock appreciation rights (“SARs”), stock-settled stock appreciation rights (“SSARs”), restricted stock units (“RSUs”) and employee stock purchase plan (“ESPP”) shares, based on the estimated fair value of the award on the grant date.  We utilize the Black-Scholes options pricing model and Monte Carlo simulations for valuing our stock-based awards with a conversion or exercise price.

The use of the Black-Scholes and Monte Carlo valuation models to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award.  The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

Compensation expense is only recognized on awards that ultimately vest and market-based awards.  However, we have not reduced the stock-based compensation expense for estimated forfeitures because there is no basis for estimating future forfeitures since most unvested awards are held by members of senior management.  We update for forfeitures as they occur and recognize any changes to accumulated compensation expense in the period of change.  If actual forfeitures are significant, our results of operations could be materially affected.

Stock-Based Compensation Agreements with Non-Employees

We are required to recognize compensation expense for stock-based compensation agreements with non-employees based on the estimated fair value of the award on the grant date and at the end of each reporting period.  We utilize the Black-Scholes valuation model to determine the end of period fair value of these awards and record the cumulative incremental change in value as compensation expense over the life of the award.

Marketable Securities

We classify our marketable securities as “available for sale” securities and, accordingly, they are marked to market on a quarterly basis, with unrealized gains and losses being excluded from earnings and reflected as a component of other comprehensive income (loss). Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.


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Goodwill and Intangible Assets

We account for our goodwill under the authoritative guidance for goodwill and other intangible assets of Accounting Standards Codification 350 and the provisions of Accounting Standards Update 2011-08, Testing Goodwill for Impairment, which permits us 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, after completing our qualitative assessment, we determine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to our carrying value (including goodwill). If the estimated fair value is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value, resulting in goodwill impairment. We test goodwill for impairment during the fourth quarter every fiscal year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist.

The qualitative analysis included assessing the impact of changes in certain factors including: (1) changes in forecasted operating results and a comparison of actual results to projections, (2) changes in the industry or our competitive environment since the acquisition date, (3) changes in the overall economy, our market share and market interest rates since the acquisition date, (4) trends in the stock price and related market capitalization and enterprise values, (5) trends in peer companies’ total enterprise value metrics, and (6) additional factors such as management turnover and changes in regulations.

Based on our qualitative assessment performed during the fourth quarter of Fiscal 2013, we concluded that it was more likely than not that the estimated fair values of our reporting units exceeded their carrying values as of March 31, 2013 and, therefore, determined it was not necessary to perform the two-step goodwill impairment test.

We amortize intangible assets with definite lives over their estimated useful lives using the straight-line method. We evaluate the estimated remaining lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. We test these assets for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, based on undiscounted cash flows attributable to that asset or group of assets. There were no impairment charges related to intangible assets during the years ended March 31, 2013, 2012 and 2011.

New Accounting Guidance
See Note 3 of Notes to Consolidated Financial Statements for a discussion of the impact of new accounting guidance.
 
Off-Balance Sheet Arrangements

Other than as disclosed above under “Contractual Payment Obligations,” we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We operate globally and have exposure to market risk from changes in foreign exchange rates. In most markets, we generate revenue and expenses in local currencies. Foreign currency translation risk is the risk that exchange rate gains or losses arise from translating foreign entities’ statements of operations and balance sheets from functional currency to our reporting currency (the United States Dollar) for consolidation purposes. Our most significant foreign currency risks relate to the Euro, the Argentine Peso and the Canadian Dollar. We have evaluated and assessed the potential effect of this risk and concluded that near-term changes in currency rates should not materially adversely affect our financial position, results of operations or cash flows. We performed a sensitivity analysis, assuming a 10% decrease in the value of foreign currencies in which we operate. Our analysis has determined that a 10% decrease in value would have resulted in a $50,000 increase to our operating loss for the year ended March 31, 2013.

We have exposure to interest rate risk related to our marketable securities and, to a lesser extent, our cash deposits. Our marketable securities are investments in an adjustable-rate governmental bond fund. We monitor this account regularly and have evaluated and assessed the potential effect of this risk and concluded that near-term changes in interest rates should not materially adversely affect our financial position, results of operations or cash flows. Unrealized gains and losses on these investments will fluctuate and, historically, have not been significant. Our unrealized loss on this investment as of March 31, 2013 was immaterial.

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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rentrak Corporation

We have audited the accompanying consolidated balance sheets of Rentrak Corporation and subsidiaries (the “Company”) as of March 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2013. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rentrak Corporation and subsidiaries as of
March 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of
March 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 13, 2013 expressed an unqualified opinion thereon.


/s/ GRANT THORNTON LLP

Portland, Oregon
June 13, 2013

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Table of Contents

Rentrak Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
 
March 31,
 
2013
 
2012
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
3,835

 
$
5,526

Marketable securities
16,588

 
22,227

Accounts and notes receivable, net of allowances for doubtful accounts of $866 and $649
16,682

 
14,260

Deferred tax assets, net

 
48

Other current assets
2,188

 
985

Total Current Assets
39,293

 
43,046

Property and equipment, net of accumulated depreciation of $19,925 and $17,032
14,262

 
10,846

Goodwill
4,998

 
5,101

Other intangible assets, net of accumulated amortization of $2,343 and $1,579
12,396

 
13,165

Other assets
830

 
723

Total Assets
$
71,779

 
$
72,881

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
5,856

 
$
5,291

Accrued liabilities
4,369

 
3,093

Accrued compensation
5,862

 
8,781

Deferred tax liabilities
36

 

Deferred revenue and other credits
2,610

 
2,037

Total Current Liabilities
18,733

 
19,202

Deferred rent, long-term portion
2,238

 
1,819

Taxes payable, long-term
713

 
731

Deferred tax liability, long-term
574

 
79

Note payable and accrued interest
550

 
525

Total Liabilities
22,808

 
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: 11,892 and 11,078
12

 
11

Capital in excess of par value
75,508

 
55,125

Accumulated other comprehensive income
31

 
341

Accumulated deficit
(27,569
)
 
(4,952
)
Stockholders’ Equity attributable to Rentrak Corporation
47,982

 
50,525

Noncontrolling interest
989

 

Total Stockholders’ Equity
48,971

 
50,525

Total Liabilities and Stockholders’ Equity
$
71,779

 
$
72,881

See accompanying Notes to Consolidated Financial Statements.

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Rentrak Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
 
For the Year Ended March 31,
 
2013
 
2012
 
2011
Revenue
$
99,177

 
$
91,071

 
$
97,088

Cost of sales
53,631

 
48,125

 
54,853

Gross margin
45,546

 
42,946

 
42,235

Operating expenses:
 
 
 
 
 
Selling and administrative
67,757

 
48,854

 
44,838

Loss from operations
(22,211
)
 
(5,908
)
 
(2,603
)
Other income:
 
 
 
 
 
Investment income, net
406

 
478

 
470

Other income (expense), net
(29
)
 
(1
)
 
125

Loss before income taxes
(21,834
)
 
(5,431
)
 
(2,008
)
Provision (benefit) for income taxes
844

 
995

 
(1,241
)
Net loss
(22,678
)
 
(6,426
)
 
(767
)
Net loss attributable to noncontrolling interest
(61
)
 

 

Net loss attributable to Rentrak Corporation
$
(22,617
)
 
$
(6,426
)
 
$
(767
)
Net loss per share attributable to Rentrak Corporation common stockholders:
 
 
 
 
 
Basic
$
(1.93
)
 
$
(0.57
)
 
$
(0.07
)
Diluted
$
(1.93
)
 
$
(0.57
)
 
$
(0.07
)
Shares used in per share calculations:
 
 
 
 
 
Basic
11,733

 
11,197

 
10,962

Diluted
11,733

 
11,197

 
10,962

See accompanying Notes to Consolidated Financial Statements.


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

 
 
For the Year Ended March 31,
 
 
2013
 
2012
 
2011
Net loss
 
$
(22,678
)
 
$
(6,426
)
 
$
(767
)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustments
 
(230
)
 
(284
)
 
474

Unrealized holding gains (losses) which arose during the period on available for sale securities (1)
 
34

 
137

 
(26
)
Recognition of previously unrealized gains on available for sale securities included in net loss(2)
 
(114
)
 
(42
)
 
(7
)
Other comprehensive income (loss)
 
(310
)
 
(189
)
 
441

Comprehensive loss
 
(22,988
)
 
(6,615
)
 
(326
)
Comprehensive loss attributable to noncontrolling interest
 
(61
)
 

 

Comprehensive loss attributable to Rentrak Corporation
 
$
(22,927
)
 
$
(6,615
)
 
$
(326
)

(1) For the year ended March 31, 2013, 2012 and 2011, the amounts are net of deferred tax benefits (expenses) of $(30,000), $(101,000) and $19,000, respectively.

(2) For the year ended March 31, 2013, 2012 and 2011, the amounts are net of deferred tax benefits of $83,000, $31,000 and $5,000, respectively.
See accompanying Notes to Consolidated Financial Statements.
















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Rentrak Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For The Years Ended March 31, 2013, 2012 and 2011
(In thousands)
 
Common Stock
 
Capital In Excess of Par Value
 
Cumulative Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Rentrak Stockholders' Equity Total
 
Noncontrolling Interest
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Total Equity
Balance at March 31, 2010
10,595

 
$
11

 
$
48,887

 
$
89

 
$
2,241

 
$
51,228

 
$

 
$
51,228

Net loss

 

 

 

 
(767
)
 
(767
)
 

 
(767
)
Unrealized gain on foreign currency translation

 

 

 
474

 

 
474

 

 
474

Unrealized loss on investments, net of tax

 

 

 
(33
)
 

 
(33
)
 

 
(33
)
Common stock issued pursuant to stock plans
802

 

 
3,009

 

 

 
3,009

 

 
3,009

Common stock used to pay for option exercises
(48
)
 

 
(1,173
)
 

 

 
(1,173
)
 

 
(1,173
)
Common stock used to pay for taxes associated with option exercises
(89
)
 

 
(2,224
)
 

 

 
(2,224
)
 

 
(2,224
)
Common stock issued in exchange for DSUs
67

 

 

 

 

 

 

 

Common stock used to pay for taxes associated with vested RSUs
(84
)
 

 
(2,152
)
 

 

 
(2,152
)
 

 
(2,152
)
Contingent equity consideration

 

 
2,000

 

 

 
2,000

 

 
2,000

DSUs granted to Board of Directors

 

 
1,201

 

 

 
1,201

 

 
1,201

Stock-based compensation expense - options

 

 
1,160

 

 

 
1,160

 

 
1,160

Stock-based compensation expense - RSUs

 

 
2,397

 

 

 
2,397

 

 
2,397

Income tax effect from stock-based compensation

 

 
1,253

 

 

 
1,253

 

 
1,253

Balance at March 31, 2011
11,243

 
$
11

 
$
54,358

 
$
530

 
$
1,474

 
$
56,373

 
$

 
$
56,373

Net loss

 

 

 

 
(6,426
)
 
(6,426
)