10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2014

OR

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to    .

Commission File Number: 001-34818

RealD Inc.

(Exact name of registrant as specified in its charter)

Delaware	77-0620426
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 N. Crescent Drive, Suite 200 Beverly Hills, CA	90210
(Address of principal executive offices)	(Zip Code)

(310) 385-4000

(Registrant’s telephone number, including area code)

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    o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    ý    No    o

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	o	Accelerated filer	ý
Non-accelerated filer	o  (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o        No      ý

On October 27, 2014, the registrant had 50,185,773 shares of common stock, par value $0.0001 per share, outstanding.

RealD Inc.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED

September 30, 2014

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		Page
		Number
ITEM 1.	Financial statements	3
	Condensed consolidated balance sheets as of September 30, 2014 (unaudited) and March 31, 2014	3
	Condensed consolidated statements of operations (unaudited) for the three and six months ended September 30, 2014 and September 30, 2013	4
	Condensed consolidated statements of comprehensive income (loss) (unaudited) for the three and six months ended September 30, 2014 and September 30, 2013	5
	Condensed consolidated statements of cash flows (unaudited) for the six months ended September 30, 2014 and September 30, 2013	6
	Notes to condensed consolidated financial statements (unaudited)	7
ITEM 2.	Management’s discussion and analysis of financial condition and results of operations	17
ITEM 3.	Quantitative and qualitative disclosures about market risk	34
ITEM 4.	Controls and procedures	36
PART II – OTHER INFORMATION
ITEM 1.	Legal proceedings	36
ITEM 1A.	Risk factors	37
ITEM 2.	Unregistered sales of equity securities and use of proceeds	50
ITEM 3.	Defaults upon senior securities	50
ITEM 4.	Mine safety disclosures	50
ITEM 5.	Other information	51
ITEM 6.	Exhibits	52

2

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

RealD Inc.

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

	September 30, 2014			March 31, 2014
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	49,903		$	28,800
Accounts receivable, net	40,600			48,422
Inventories	7,704			9,109
Deferred costs – eyewear	56			149
Prepaid expenses and other current assets	4,975			5,197
Total current assets	103,238			91,677
Property and equipment, net	22,974			22,491
Cinema systems, net	96,106			106,792
Goodwill	10,657			10,657
Other intangibles, net	5,518			6,154
Deferred income taxes	4,571			4,571
Other assets	7,925			4,840
Total assets	$	250,989		$	247,182
Liabilities and equity
Current liabilities:
Accounts payable	$	8,414		$	12,470
Accrued expenses and other liabilities	22,332			21,896
Deferred revenue	6,673			8,143
Income taxes payable	903			1,790
Deferred income taxes	4,292			4,288
Current portion of Credit Agreement	7,460			12,500
Total current liabilities	50,074			61,087
Credit Agreement, net of current portion	26,110			23,750
Deferred revenue, net of current portion	4,937			6,465
Other long-term liabilities	4,297			5,046
Total liabilities	85,418			96,348
Commitments and contingencies
Equity (deficit)
Common stock, $0.0001 par value, 200,000 shares authorized; 50,077 and 49,438 shares issued and outstanding at September 30, 2014 and March 31, 2014, respectively	363,553			352,913
Accumulated deficit	(197,829		)	(201,763		)
Accumulated other comprehensive income	425			262
Total RealD Inc. stockholders’ equity	166,149			151,412
Noncontrolling interest	(578		)	(578		)
Total equity	165,571			150,834
Total liabilities and equity	$	250,989		$	247,182

See accompanying notes to condensed consolidated financial statements

3

RealD Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

	Three months ended						Six months ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Revenue:
License	$	31,834		$	30,976		$	67,807		$	68,282
Product and other	15,578			12,953			34,984			34,866
Total revenue	47,412			43,929			102,791			103,148
Cost of revenue:
License	11,613			11,691			22,510			22,509
Product and other	10,892			12,332			25,391			32,552
Total cost of revenue	22,505			24,023			47,901			55,061
Gross profit	24,907			19,906			54,890			48,087
Operating expenses:
Research and development	6,425			4,685			10,215			10,229
Selling and marketing	5,414			6,115			11,205			13,453
General and administrative	11,168			11,950			23,512			26,372
Total operating expenses	23,007			22,750			44,932			50,054
Operating income (loss)	1,900			(2,844		)	9,958			(1,967		)
Interest expense, net	(455		)	(751		)	(885		)	(1,240		)
Other income (loss)	(1,336		)	483			(1,176		)	274
Income (loss) before income taxes	109			(3,112		)	7,897			(2,933		)
Income tax expense	1,676			1,552			3,963			3,267
Net income (loss)	(1,567		)	(4,664		)	3,934			(6,200		)
Net loss attributable to noncontrolling interest	—			13			—			15
Net income (loss) attributable to RealD Inc. common stockholders	$	(1,567	)	$	(4,651	)	$	3,934		$	(6,185	)
Earnings (loss) per common share:
Basic	$	(0.03	)	$	(0.09	)	$	0.08		$	(0.13	)
Diluted	$	(0.03	)	$	(0.09	)	$	0.08		$	(0.13	)
Shares used in computing earnings (loss) per common share:
Basic	49,783			49,260			49,828			49,479
Diluted	49,783			49,260			51,962			49,479

See accompanying notes to condensed consolidated financial statements

4

RealD Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)

	Three months ended						Six months ended
	September 30, 2014			September 30, 2013			September 30, 2014		September 30, 2013
Net income (loss)	$	(1,567	)	$	(4,664	)	$	3,934	$	(6,200	)
Other comprehensive income, net of tax:
Foreign currency translation gains	164			68			163		205
Other comprehensive income, net of tax	164			68			163		205
Comprehensive income (loss)	$	(1,403	)	$	(4,596	)	$	4,097	$	(5,995	)

See accompanying notes to condensed consolidated financial statements

5

RealD Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Six months ended
	September 30, 2014			September 30, 2013
Cash flows from operating activities
Net income (loss)	$	3,934		$	(6,200	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	20,223			19,764
Deferred income tax	4			(3		)
Non-cash interest expense	126			140
Non-cash stock compensation	8,233			9,118
Gain on sale of digital projectors	—			(18		)
Loss on disposal of property and equipment	(41		)	—
Impairment of long-lived assets and related purchase commitments	1,468			2,783
Changes in operating assets and liabilities:
Accounts receivable	7,822			2,621
Inventories	1,405			(3,626		)
Prepaid expenses and other current assets	237			(1,834		)
Deferred costs - eyewear	93			433
Other assets	(2,316		)	127
Accounts payable	(4,042		)	(11,420		)
Accrued expenses and other liabilities	436			(1,512		)
Other long-term liabilities	(749		)	229
Income taxes receivable/payable	(902		)	464
Deferred revenue	(2,998		)	(3,118		)
Net cash provided by operating activities	32,933			7,948
Cash flows from investing activities
Purchases of property and equipment	(3,448		)	(3,343		)
Purchases of cinema systems and related components	(7,456		)	(13,044		)
Proceeds from sale of property and equipment	79			70
Net cash used in investing activities	(10,825		)	(16,317		)
Cash flows from financing activities
Proceeds from Credit Agreement	37,300			37,500
Repayments on Credit Agreement	(39,980		)	(20,000		)
Payments of debt issuance costs	(895		)	—
Proceeds from exercise of stock options	2,116			1,079
Proceeds from employee stock purchase plan	291			303
Purchases of treasury stock	—			(7,511		)
Net cash provided (used) by financing activities	(1,168		)	11,371
Effect of currency exchange rate changes on cash and cash equivalent	163			205
Net increase in cash and cash equivalents	21,103			3,207
Cash and cash equivalents, beginning of period	28,800			31,020
Cash and cash equivalents, end of period	$	49,903		$	34,227

See accompanying notes to condensed consolidated financial statements

6

RealD Inc.

Notes to condensed consolidated financial statements (unaudited)

1. Business and basis of presentation

RealD Inc. is a leading global licensor of 3D and other visual technologies. Except where specifically noted or the context otherwise requires, the use of terms such as the “Company” or “RealD” in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 refers to RealD Inc. and its subsidiaries.

The accompanying unaudited condensed consolidated financial statements as of September 30, 2014 and for the three months and six months endedSeptember 30, 2014 have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and include all adjustments (consisting of only normal recurring adjustments, unless otherwise indicated), necessary for a fair presentation of the Company’s condensed consolidated financial statements. Accordingly, certain information and footnote disclosure normally included in comprehensive financial statements have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of March 31, 2014 was derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP. Interim results are not necessarily indicative of results for any subsequent quarter, the full fiscal year or any future periods. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2014.

The condensed consolidated financial statements include the accounts of RealD, its wholly owned subsidiaries and its majority owned subsidiaries. RealD does not have any interests in variable interest entities. For consolidated subsidiaries that are not wholly owned but are majority owned, the subsidiaries’ assets, liabilities, and operating results are included in their entirety in the accompanying condensed consolidated financial statements. The noncontrolling interests in those assets, liabilities, and operations are reflected as non-controlling interest in the condensed consolidated balance sheets under equity and condensed consolidated statements of operations.

All significant intercompany balances and transactions have been eliminated in consolidation.

2. Summary of significant accounting policies

Accounting period

The Company’s fiscal year consists of four3-month periods for a total of 12 calendar months and will end on March 31, 2015.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the financial statements relate to the following:

• licensing revenue terms applied to the timing and number of motion picture exhibitor consumer admissions;

• domestic eyewear product revenue terms applied to when the usage occurs and the amount of usage;

• effect of customer contract terms on revenue and balance sheet items;

• impairment testing of goodwill, intangible assets and tangible assets, including determination of relevant reporting units and long-lived asset groups;

• useful lives of intangible assets and tangible assets;

• timing and amount recognized for performance-based compensation, including bonus and certain restricted share units, based on projections of Company performance achievement;

• the impact of potential future tax consequences of events that have been recognized in the Company’s financial statements;

• valuation of accruals and allowances;

• contingency assessments; and

• assumptions used in the determination of the fair value of equity-based awards for stock-based compensation.

7

Earnings (loss) per share of common stock

Basic income per share of common stock is computed by dividing the net income (loss) attributable to the Company’s common stockholders for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income attributable to the Company’s common stockholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan and unvested restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method.

The calculation of the basic and diluted earnings (loss) per share of common stock for the three and six months endedSeptember 30, 2014 and September 30, 2013 was as follows:

	Three months ended						Six months ended
	September 30,			September 30,			September 30,		September 30,
(in thousands, except share and per share data)	2014			2013			2014		2013
Numerator:
Net income (loss)	$	(1,567	)	$	(4,664	)	3,934		(6,200		)
Net loss attributable to noncontrolling interest	—			13			—		15
Net income (loss) attributable to RealD Inc. common stockholders	$	(1,567	)	$	(4,651	)	$	3,934	$	(6,185	)
Denominator:
Weighted-average common shares outstanding (basic)	49,783			49,260			49,828		49,479
Effect of dilutive securities	—			—			2,134		—
Weighted-average common shares outstanding (diluted)	49,783			49,260			51,962		49,479
Earnings (loss) per common share:
Basic	$	(0.03	)	$	(0.09	)	$	0.08	$	(0.13	)
Diluted	$	(0.03	)	$	(0.09	)	$	0.08	$	(0.13	)

The weighted-average number of anti-dilutive shares excluded from the calculation of diluted earnings (loss) per common share for the three and six months endedSeptember 30, 2014 and September 30, 2013 was as follows:

	Three months ended		Six months ended
	September 30,	September 30,	September 30,	September 30,
(in thousands)	2014	2013	2014	2013
Options, employee stock purchase plan, restricted stock units and warrants to purchase common stock	8,697	9,612	9,046	9,741

Due to the loss attributable to the Company’s common stockholders for the three months endedSeptember 30, 2014 and the three and six months ended September 30, 2013, basic loss per share of common stock and diluted loss per share of common stock are the same because the effect of potentially dilutive securities would be antidilutive.

The following table sets forth the number of equity awards that are contingently issuable which were not included in the calculation of diluted shares (for the period where the Company had net income) as the required performance conditions had not been met as of September 30, 2014:

(in thousands)	Six months ended September 30, 2014
Options to purchase shares of common stock and restricted stock awards	1,203

8

Accounts receivable

Accounts receivable consists of trade receivables, value-added tax (“VAT”) receivables and other receivables. The Company provides credit to its customers, who are primarily in the movie production and exhibition businesses. The Company provides for the estimated accounts receivable that will not be collected. These estimates are based on an analysis of historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in the customers’ payment terms and their economic condition. Collection of accounts receivable may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company’s overall credit risk. The allowance for doubtful accounts and customer credits totaled $4.4 million and $3.2 million as of September 30, 2014 and March 31, 2014, respectively.

Inventories and deferred costs-eyewear

Inventories and deferred costs-eyewear represent RealD eyewear and are substantially all finished goods. Inventories and deferred costs-eyewear are valued at the lower of cost (first-in, first-out method) or market value. At each balance sheet date, the Company evaluates ending inventories and deferred costs-eyewear for net realizable value. The Company also evaluates inventories for excess quantities and obsolescence. These evaluations include analyses of expected future average selling prices, projections of future demand and technology changes. In order to state inventories at the lower of cost or market, RealD maintains reserves against such inventories. If the Company’s analyses indicate that market is lower than cost, a write-down of inventories is recorded in cost of revenue in the period the loss is identified. As of September 30, 2014 and March 31, 2014, the inventory reserve as a result of the Company’s net realizable value analyses was $0 and $0.6 million, respectively.

Domestically, the Company provides RealD eyewear free of charge to motion picture exhibitors and then receives a fee from the motion picture studios for the usage of RealD eyewear by the motion picture exhibitors’ consumers. Eyewear shipped from inventory is deferred on the shipment date and then amortized to cost of product revenue according to assumptions related to eyewear usage by consumers.

Impairment of long-lived assets

The Company reviews long-lived assets, such as property and equipment, cinema systems, digital projectors and intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

For the three months endedSeptember 30, 2014 and September 30, 2013, impairment charges for all impaired RealD Cinema Systems charged to cost of revenue totaled $0.5 million and $1.8 million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, impairment charges for all impaired RealD Cinema Systems charged to cost of revenue totaled $1.5 million and $2.8 million, respectively.

Revenue recognition

The Company derives substantially all of its revenue from the license of RealD Cinema Systems and the product sale of RealD eyewear. RealD evaluates revenue recognition for transactions using the criteria set forth by the Financial Accounting Standard Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases, and ASC Topic 605, Revenue Recognition. The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company records revenue net of estimated allowances.

License revenue

License revenue, net of allowances, is accounted for as an operating lease. License revenue is primarily derived under per-admission, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated allowances, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside the Company’s control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and the Company has no more obligations to our customers

9

specific to the contingent payment received. Certain of the Company’s license revenue from leasing RealD Cinema Systems is earned upon admission by the motion picture exhibitor’s consumers. The Company’s licensees, however, do not report and pay for such license revenue until after the admission has occurred, which may be received subsequent to the Company’s fiscal period end. The Company estimates and records licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be made. The Company determines that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee’s admissions report. Revenue is deemed fixed or determinable upon receipt of a licensee’s admissions report or evidence of a RealD box office showing by licensee. The Company determines collectability based on an evaluation of the licensee’s recent payment history and evaluation of the respective customer’s credit-standing.

Product revenue

The Company recognizes product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of the Company’s product revenue from the sale of RealD eyewear is earned upon admission and usage by the motion picture exhibitor’s consumers. The Company’s customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received subsequent to the Company’s fiscal period end. Accordingly, the Company estimates and records such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made.

Comprehensive income (loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). The only component of other comprehensive income or loss is unrealized foreign currency translation gains (losses). There were no reclassifications out of accumulated other comprehensive income (loss) during the three and six months ended September 30, 2014 and September 30, 2013.

Shipping and handling costs

Amounts billed to customers for shipping and handling costs are included in revenue. RealD’s shipping and handling costs consists primarily of packaging and transportation charges and are recorded in cost of revenue. Shipping and handling costs recognized in cost of revenue were $1.3 million and $1.7 million for the three months endedSeptember 30, 2014 and September 30, 2013, respectively. Shipping and handling costs recognized in cost of revenue were $3.1 million and $3.9 million for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

Research and development

Research and development (R&D) costs are expensed as incurred. Major components of R&D expense include salaries and benefits, materials and supplies inclusive of prototypes, non-recurring engineering, payments to third parties for R&D, facilities and equipment that can only be used for a particular project and overhead allocations of various administrative and facilities costs related to R&D.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606), effective for RealD starting April 1, 2017 (the first quarter of fiscal year 2018). Early application is not permitted. The new standard will be implemented retrospectively with the Company choosing to either restate prior periods or recognize the cumulative effect; the Company has not yet selected a transition method.

The new Topic 606 does not apply to lease contracts within the scope of Topic 840 Leases. The primary objective of ASU 2014-09 is to provide guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Revenue recognition is anticipated to entail more judgment and more estimating than under the current guidance. ASU 2014-09 also changes Topic 360 Property, Plant and Equipment, Topic 350 Intangibles-Goodwill and Other and certain other U.S. GAAP. The Company has not yet determined the effects of Topic 606 and other ASU 2014-09 revisions on its consolidated financial statements.

10

3. Cinema Systems and Property & Equipment

Tangible fixed assets consist of the following: 

	September 30,			March 31,
(in thousands)	2014			2014
RealD Cinema Systems	209,319			$	205,632
Leasehold improvements	17,410			16,935
Machinery and equipment	7,283			4,753
Furniture and fixtures	1,269			1,272
Computer equipment and software	10,043			9,197
Construction in process	548			1,554
Total	$	245,872		$	239,343
Less accumulated depreciation	(126,792		)	(110,060		)
Cinema Systems and Property & Equipment, net	$	119,080		$	129,283

Depreciation expense amounted to $10.1 million and $9.9 million for the three months endedSeptember 30, 2014 and September 30, 2013, respectively. Depreciation expense amounted to $19.6 million and $19.1 million for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

During the six months endedSeptember 30, 2014, the Company received $0.1 million in cash from motion picture exhibitor customers for the sale of digital projectors. During the six months endedSeptember 30, 2013, the Company received $0.1 million in cash from motion picture exhibitor customers for the sale of digital projectors.

4. Fair value measurement

The Company’s derivative instruments are recorded at fair value in other current assets and other current liabilities in the condensed consolidated balance sheets. Changes in fair value are reported as a component of other income or loss on the Company’s condensed consolidated statements of operations. For all periods presented, none of the Company’s derivative instruments were designated as hedging instruments. The Company does not use foreign currency option or foreign exchange forward contracts for speculative or trading purposes.

To estimate the fair value of the derivative instruments, the Company uses valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:

• Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;

• Level 2 - Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs;

• Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.

The Company purchases foreign currency forward contracts, generally with maturities of twelve months or less, to reduce the volatility of cash flows primarily related to forcasted payments and expenses denominated in certain foreign currencies. As

11

of September 30, 2014, RealD had outstanding forward contracts based on Great Britain Pound and Euro with notional amounts totaling $8.7 million. The fair value measurement of the derivative instruments was as follows:

(in thousands)
Fair value measurement as of September 30, 2014, using:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Derivatives:
Foreign currency forward contracts	$	—	$	119	$	—	$	119
Total assets	$	—	$	119	$	—	$	119
Liabilities:
Derivatives:
Foreign currency forward contracts	$	—	$	18	$	—	$	18
Total liabilities	$	—	$	18	$	—	$	18

As of March 31, 2014, the carrying amounts of the Company’s foreign currency forward contracts were not significant.

For both the three and six months ended September 30, 2014, the net gain related to the change in fair value of the Company's foreign currency forward contracts was $0.1 million. For both the three and six months ended September 30, 2013, the net gain (loss) related to the change in fair value of the Company’s foreign currency forward contracts was immaterial. Foreign currency master agreements typically allow the netting of receivables and payables. The Company had a net receivable of $0.1 million as of September 30, 2014 and any such amounts were not significant as of March 31, 2014.

The Company monitors its positions with, and the credit quality of, the financial institutions that are counterparties to its financial instruments and does not currently anticipate nonperformance by the counterparties.

5. 2014 Cost Reduction Plan

On November 12, 2013, the Company announced a plan to reduce the overall costs of its global operations (the “2014 Cost Reduction Plan”). The 2014 Cost Reduction Plan was primarily a response to the anticipated impact on the Company’s financial results and operations caused by changes in the 3D box office performance of certain motion pictures due to perceived changes in consumer preference and the fact that the Company’s 3D cinema business is maturing in many markets like the United States in which the Company expected equipment installations to continue to slow. In accordance with the 2014 Cost Reduction Plan, the Company reduced its staff by approximately 20%, rescoped and made other changes to certain research and development projects, reduced certain non-personnel related general and administrative expenses and streamlined certain manufacturing operations. These actions were intended to rationalize the further expansion of the Company’s global cinema platform by focusing on emerging growth markets and higher performing motion picture exhibitors, streamlining the Company’s manufacturing facilities to achieve cost efficiencies while meeting the future commercial demands of the Company’s customers and focusing the Company’s research and development efforts on technologies that would enable the Company to expand its visual technology product offerings.

The Company accounts for the 2014 Cost Reduction Plan in accordance with the Accounting Standards Codification, including ASC 420, Exit or Disposal Cost Obligations, ASC 712, Compensation-Nonretirement Postemployment Benefits, ASC 840, Leases and ASC 360, Property, Plant and Equipment (Impairment or Disposal of Long-Lived Assets). As a result of the 2014 Cost Reduction Plan’s workforce reduction and commencement of the relocation of manufacturing, the Company incurred termination and other charges totaling approximately $4.7 million for the fiscal year ended March 31, 2014. Charges of $0.6 million have been incurred in the six months ended September 30, 2014, including $0.3 million for the accrual of losses on a lease for manufacturing facilities that will no longer be used in the Company’s operations. Therefore, the total charges were $5.3 million through September 30, 2014. The following table summarizes the charges resulting from implementation of the 2014 Cost Reduction Plan during the three and six months endedSeptember 30, 2014:

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	Three months ended						Six months ended
	September 30, 2014						September 30, 2014
(in thousands)	Personnel		Leasehold		Total		Personnel		Leasehold		Total
Cost of revenue	$	24	$	302	$	326	$	24	$	373	$	397
Research and development	—		—		—		—		—		—
Selling and marketing	16		—		16		16		—		16
General and administrative	190		—		190		190		—		190
Total	$	230	$	302	$	532	$	230	$	373	$	603

The following table summarizes the activity resulting from implementation of the 2014 Cost Reduction Plan within accrued expenses and other liabilities: 

	Payments excluding non-cash impairment
(in thousands)	Personnel			Leasehold			Total
Cost reduction plan liabilities as of March 31, 2014	$	1,416		$	—		$	1,416
Charges	230			373			603
(Payments)	(712		)	(108		)	(820		)
Cost reduction plan liabilities as of September 30, 2014	$	934		$	265		$	1,199

Additionally, the Company leases office space for its headquarters that includes approximately $6.0 million in leasehold improvements and other items classified as fixed assets (see Note 3 “Cinema Systems and Property & Equipment”). If the Company relocated the office, these fixed assets could become subject to an impairment assessment and contract termination costs or sublease loss could be incurred.

There is no guarantee that termination and implementation costs will not exceed the estimates, or that any net cost reduction will actually be achieved.

6. Borrowings

2014 Credit Agreement

On June 26, 2014, RealD entered into the Amended and Restated Credit Agreement (the “2014 Credit Agreement”), by and among the Company, as borrower, City National Bank, as administrative agent and letter of credit issuer (“City National”), the other agents from time to time party thereto and the lenders from time to time party thereto (the “Lenders”). The 2014 Credit Agreement amends and restates in its entirety that certain Credit Agreement, dated as of April 19, 2012, by and among the Company, City National and the agents and lenders from time to time party thereto, which had been most recently amended on October 16, 2013 (the "2012 Credit Agreement").

Pursuant to the 2014 Credit Agreement, the Lenders thereunder will make available to RealD:

• a revolving credit facility (including a letter of credit sub-facility) in a maximum amount not to exceed $50 million (the “Revolving Facility”), which matures on June 26, 2017; and

• a delayed draw term loan facility in a maximum amount not to exceed $50 million (the “Term Loan Facility”), which matures on June 26, 2018. During the first quarter of fiscal year 2015, the Company borrowed $37.3 million under the Term Loan Facility, resulting in $12.7 million being available for future draws through June 26, 2016.

Debt issuance costs related to the completion of the 2014 Credit Agreement totaled $0.9 million and were added to the $0.3 million deferred charge remaining on the 2012 Credit Agreement. All these issuance costs are being amortized over the contractual life of the Revolving Facility and recorded as interest expense.

Loans outstanding under the 2014 Credit Agreement bear interest at the Company’s option at either the Eurocurrency rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Eurocurrency rate for a one month Interest Period on such day plus 1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on the Company’s leverage

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ratio. Under the 2014 Credit Agreement, the Company is charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility is 0.375% of the unused commitment. Additionally, the Company is charged a letter of credit fee between 2.25% to 2.75%, depending on the Company’s leverage ratio, per year with respect to the amount of each performance letter of credit issued under the 2014 Credit Agreement. The Company also pays customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the 2014 Credit Agreement. There were no letters of credit outstanding at September 30, 2014 and March 31, 2014.

The obligations under the 2014 Credit Agreement are fully and unconditionally guaranteed by the Company’s subsidiaries, ColorLink Inc., a Delaware corporation (“ColorLink”), Stereographics Corporation, a California corporation (“Stereographics”), and RealD DDMG Acquisition, LLC, a Delaware limited liability company (together with the Company, ColorLink and Stereographics, the “Loan Parties”). The obligations under the 2014 Credit Agreement are secured by a first priority security interest in substantially all of the Loan Parties’ tangible and intangible assets.

As of September 30, 2014, $50 million was available under the Revolving Facility and $12.7 million was available under the Term Loan Facility, totaling $62.7 million of availability under the 2014 Credit Agreement.

As of September 30, 2014, there was no balance outstanding under the Revolving Facility. On June 30, 2014, the first quarterly term loan installment of $1.9 million was made on the Term Loan Facility. The term loan outstanding balance of $33.6 million at September 30, 2014 is to be repaid in 14 quarterly installments of $1.9 million through March 31, 2018 and the remaining $7.5 million principal on June 26, 2018.  The current and non-current portions of the Credit Agreement due as of September 30, 2014 and March 31, 2014 were as follows:

	September 30, 2014		March 31, 2014
(in thousands)
Current portion of Credit Agreement	$	7,460	$	12,500
Credit Agreement, net of current portion	26,110		23,750
Total Credit Agreement	$	33,570	$	36,250

At September 30, 2014, the Company’s future minimum 2014 Credit Agreement obligations were as follows:

Fiscal year 2015	$	3,730
Fiscal year 2016	7,460
Fiscal year 2017	7,460
Fiscal year 2018	7,460
Fiscal year 2019	7,460
Total	$	33,570

As of September 30, 2014, borrowings outstanding under the 2014 Credit Agreement bear interest at 2.69%. As of March 31, 2014, there were $36.3 million in borrowings outstanding under the 2012 Credit Agreement which bore interest at 2.88%. Interest expense related to our borrowings was $0.5 million for both the three months endedSeptember 30, 2014 and September 30, 2013. Interest expense related to our borrowings was $0.8 million and $1.1 million for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

Under the 2014 Credit Agreement, RealD’s business is subject to certain limitations, including limitations on the Company’s ability to incur additional debt, make certain investments or acquisitions, enter into certain merger and consolidation transactions, and sell its assets other than in the ordinary course of business. The Company is also required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. As of September 30, 2014, RealD was in compliance with all financial covenants in the 2014 Credit Agreement. If the Company fails to comply with any of the covenants or if any other event of default should occur, the Lenders could elect to prevent the Company from borrowing and declare the indebtedness to be immediately due and payable.

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The 2014 Credit Agreement contains customary events of default applicable to the Company and/or its subsidiaries, including, among other things the occurrence of any change of control. If one or more events of default occurs and continues beyond any applicable cure period, City National may, with the consent of the Lenders holding a majority of the loans and commitments under the facilities, or will, at the request of such Lenders, terminate the commitments of the Lenders to make further loans and declare all of the obligations of the Loan Parties under the 2014 Credit Agreement to be immediately due and payable. 

7. Commitments and contingencies

Indemnities and commitments

During the ordinary course of business, the Company makes certain indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities of certain customers and licensees of our technologies, and indemnities to the Company’s directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. The majority of these indemnities and commitments do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities and commitments in the accompanying condensed consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is reasonably probable and estimable.

The Company has entered into contracts with certain of its vendors. Future obligations under such contracts totaled $6.3 million at September 30, 2014 and include revolving 90-day supply commitments. Many of the contracts contain cancellation penalty provisions requiring payment of up to 20.0% of the unused contract.

Contingencies and assessments

The Company is subject to various loss contingencies and assessments arising in the course of its business, some of which relate to litigation, claims, property taxes and sales and use tax or goods and services tax assessments. The Company considers the likelihood of the loss or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss in determining loss contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to us to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on the Company’s business, consolidated results of operations, financial condition or cash flows.

8. Share-based compensation

The Company accounts for share-based payment awards granted to employees and directors by recording compensation expense based on estimated fair values. The Company estimates the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. The Company determines the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under ASC 718,  Compensation — Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent the Company’s best estimates. The Company’s estimates of the fair values of stock options granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option modifications, estimates of forfeitures, and the related income tax impact.

Share-based compensation expense for all share-based arrangements for the three and six months ended September 30, 2014 and September 30, 2013 was as follows:

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	Three months ended				Six months ended
	September 30,		September 30,		September 30,		September 30,
(in thousands)	2014		2013		2014		2013
Share-based compensation
Cost of revenue	$	424	$	242	$	615	$	541
Research and development	1,050		768		1,676		1,475
Selling and marketing	702		1,259		1,629		2,581
General and administrative	2,086		2,204		4,313		4,521
Total	$	4,262	$	4,473	$	8,233	$	9,118

Stock options granted generally vest over a four-year period, with 25% of the shares vesting after one year and monthly vesting thereafter. The options generally expire ten years from the date of grant. For the six months endedSeptember 30, 2014, the Company granted 0.6 million stock options at a weighted average grant date fair value of $5.88 per share.  For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to stock options and the Company’s employee stock purchase plan was $1.5 million and $3.5 million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to stock options and the Company’s employee stock purchase plan was $4.6 million and $7.1 million, respectively.

Certain of the Company’s management-level employees receive performance stock options, which gives the recipient the right to receive common stock that is contingent upon achievement of specified pre-established performance goals over the performance period, which is generally three years subject to the recipient’s continued service with the Company. The performance goals for the performance stock options are based on the measurement of the Company’s total stockholder return, on a percentile basis, compared to a comparable group of companies. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock options equal to or less than the number of performance stock options granted. In June 2013, the Company’s Chief Executive Officer’s fiscal year 2013 stock option grant was amended to retroactively change the vesting schedule of the stock option so that it now vests based upon the achievement of performance goals rather than based solely upon Mr. Lewis’ continued service with the Company. The performance goal is based on the measurement of the Company’s total stockholder return, on a percentile basis, compared to a comparable group of companies. The performance period for this performance stock option is between three and five years. For both the three and six months ended September 30, 2014, share based compensation expense related to performance stock options were $0.3 million. For the three and six months ended September 30, 2013, share-based compensation expense related to performance stock options were $0.1 million and $0.5 million, respectively.

Certain of the Company’s management-level employees also receive performance stock units, which gives the recipient the right to receive common stock that is contingent upon achievement of specific pre-established performance goals over the performance period, which is generally two years subject to the recipient’s continued service with us. The performance goals are based on achieving certain levels of total licensing revenue over the performance period.  Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock units between 0% and 200% of the number of performance stock units granted. For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to performance stock units was $0.9 million and $(0.1) million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to performance stock units was $1.0 million and $0, respectively.

Certain of the Company’s employees, including certain management level employees, receive time-based restricted stock units. These restricted stock units vest over one to three years based upon a recipient’s continued service with us. For the six months endedSeptember 30, 2014, the Company granted 1.2 million restricted stock units at a weighted average grant date fair value of $11.17 per restricted stock unit. For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to restricted stock units was $1.4 million and $0.9 million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to restricted stock units was $2.6 million and $1.4 million, respectively.

9. Income taxes

The Company’s income tax expense for the three months endedSeptember 30, 2014 and September 30, 2013 was $1.7 million and $1.6 million, respectively. The Company’s income tax expense for the six months endedSeptember 30, 2014 and September 30, 2013 was $4.0 million and $3.3 million, respectively. The increase in income tax expense is due primarily to increased revenues in foreign jurisdictions where the Company is subject to foreign income taxes. The Company has net

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operating losses that may potentially be offset against future domestic earnings. The Company files federal income tax returns and income tax returns in various state and foreign jurisdictions. Due to the net operating loss carryforwards, the Company’s United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.

As of September 30, 2014, the Company has determined based on the weight of the available evidence, both positive and negative, to provide for a valuation allowance against substantially all of the net deferred tax assets. The current deferred tax assets not reserved for by the valuation allowance are those in foreign jurisdictions or amounts that may be carried back in future years. If there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, the Company will adjust all or a portion of the applicable valuation allowance in the period when such change occurs.

10. Equity

A summary of the changes in total equity for the six months endedSeptember 30, 2014 was as follows:

	RealD Inc. stockholders’		Noncontrolling			Total
(in thousands)	equity		interest			equity
Balance, March 31, 2014	$	151,412	$	(578	)	$	150,834
Share-based compensation	8,233		—			8,233
Exercise of stock options	2,116		—			2,116
Purchase and distribution of stock under employee stock purchase plan	291		—			291
Comprehensive income:
Other comprehensive income, net of tax	163		—			163
Net income	3,934		—			3,934
Total comprehensive income	4,097		—			4,097
Balance, September 30, 2014	$	166,149	$	(578	)	$	165,571

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

Cautionary note on forward-looking statements

The following discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “intends,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to: statements regarding the extent and timing of future licensing, products and services revenue levels and mix, expenses, margins, net income (loss) per diluted share, income taxes, tax benefits, acquisition costs and related amortization, and other measures of results of operations; our expectations regarding demand and acceptance for our technologies and our ability to successfully commercialize our technologies within a particular time frame, if at all; 3D motion picture releases and conversions scheduled for fiscal year 2015 ending March 31, 2015 and beyond, their commercial success and consumer preferences that, in recent periods, have trended in favor of 2D over 3D; our ability to increase the number of RealD-enabled screens in domestic and international markets and market share; our ability to supply our products to our customers on a timely basis; our relationships with exhibitor and studio partners and the business model for 3D eyewear in North America; the progress, timing and amount of expenses associated with our research and development activities; market and industry growth opportunities and trends in the markets in which we operate, including in 3D content; our plans, strategies and expected opportunities; the deployment of and demand for our products and products incorporating our technologies; competitive pressures in domestic and international cinema markets impacting licensing and product revenues; and our ability to execute and achieve anticipated savings or other benefits from our cost reduction efforts. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including the risks set forth in the section entitled “Risk factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this filing. Forward-looking statements are based on the beliefs and assumptions of our management based on information currently available to

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management. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results.

Overview

We are a leading global licensor of 3D and other visual technologies. We have an extensive intellectual property portfolio that is and can be used in applications that enable a premium viewing experience in the theater, the home and elsewhere.

Currently, we have one reportable segment for financial reporting purposes. We derive substantially all of our revenue from our core business: the licensing of RealD Cinema Systems and the product sale of RealD eyewear to motion picture exhibitors to enable a premium viewing experience for 3D motion pictures and alternative 3D content in the theater.

Key business metrics

Our management regularly reviews a number of business metrics, including the following key metrics to evaluate our business, monitor the performance of our business model, identify trends affecting our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate forward-looking projections. The measures that we believe are the primary indicators of our quarterly and annual performance are as follows:

• RealD box office.  Estimated domestic box office on RealD-enabled screens represents the estimated 3D box office generated on RealD-enabled domestic screens. Estimated international box office on RealD-enabled screens is the estimated 3D box office generated on RealD-enabled international screens. RealD’s estimates of box office on RealD-enabled screens rely on box office tracking data. International box office reflects RealD’s estimates of international box office generated on RealD-enabled screens in 19 foreign countries where box office tracking is available. RealD estimates these countries represent approximately 85% of RealD’s international license revenues. The 19 foreign countries do not include China.

• Number of 3D motion pictures.  Total 3D motion pictures are the number of 3D motion pictures released domestically in North America during the relevant period.

• Number of screens.  Domestic screens are motion picture theater screens in the United States or Canada enabled with our RealD Cinema Systems. International screens are motion picture theater screens outside the United States and Canada enabled with our RealD Cinema Systems.

• Number of locations.  Domestic locations are motion picture exhibition complexes in the United States or Canada with one or more screens enabled with our RealD Cinema Systems. International locations are motion picture exhibition complexes outside the United States and Canada with one or more screens enabled with our RealD Cinema Systems.

• Adjusted EBITDA.  We use Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income (loss) plus expenses for interest, income taxes, depreciation, amortization, impairment and stock-based compensation plus net foreign exchange loss (gain) plus expenses comprising the non-U.S. GAAP category “restructuring charges, severance costs and reserves” as defined in our 2014 Credit Agreement. We do not consider the preceding adjustments to be indicative of our core operating performance. We consider our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations for that period. However, Adjusted EBITDA is not a recognized measurement under U.S. GAAP and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. For a reconciliation of Adjusted EBITDA to U.S. GAAP net income (loss) and for further discussion regarding Adjusted EBITDA, see “Non-U.S. GAAP discussion”.

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The following table sets forth additional performance highlights of key business metrics for the periods presented (approximate numbers):

	Three months ended				Six months ended
	September 30,		September 30,		September 30,		September 30,
(approximate numbers, in millions)	2014		2013		2014		2013
Estimated box office on RealD screens (generated during the period)
Estimated box office on RealD domestic screens	$	274	$	253	$	662	$	688
Estimated box office on RealD international screens	344		329		741		738
Total estimated box office on RealD screens	$	618	$	582	$	1,403	$	1,426
	Three months ended				Six months ended
	September 30,		September 30,		September 30,		September 30,
(approximate numbers)	2014		2013		2014		2013
Number of 3D motion pictures (released domestically during period)	9		11		19		19
	September 30,		September 30,
	2014		2013
Number of RealD enabled screens (at period end)
Total domestic RealD enabled screens	13,500		13,300
Total international RealD enabled screens	12,500		10,900
Total RealD enabled screens	26,000		24,200
Number of locations with RealD enabled screens (at period end)
Total domestic locations with RealD enabled screens	3,000		3,000
Total international locations with RealD enabled screens	3,060		2,900
Total locations with RealD enabled screens	6,060		5,900

Performance highlights for Adjusted EBITDA are presented below under the caption “Non-U.S. GAAP discussion” below.

Opportunities, trends and factors affecting comparability

Almost all of our revenue is currently dependent upon both the number of 3D motion pictures released and the commercial success of those 3D motion pictures. While in previous periods we have seen a decline in 3D percentages, recently we have seen a stabilization of global 3D percentages. We expect to continue to expand our business in the foreseeable future primarily through our direct sales and marketing efforts in Asia, Russia and Latin America, by building on the sales and operating presence we established in China, Russia and Latin America in 2011, 2012 and 2013, respectively.

Cinema

As of September 30, 2014, there were approximately 26,000 RealD-enabled screens worldwide as compared to approximately 24,200 RealD-enabled screens worldwide as of September 30, 2013, an increase period over period of 1,800 RealD-enabled screens or 7%. The majority of our increase in installed screens occurred in Latin America, China and Europe. Based on the slate announced by motion picture studios, we anticipate that approximately 30 3D motion pictures produced by domestic studios will be released worldwide in our fiscal year 2015, including Guardians of the Galaxy andsequels and spin-offs to successful major motion picture franchises, such as Captain America, Rio, The Amazing Spider-Man, X-Men, How to Train Your Dragon, Transformers, The Hobbit, Divergent and Penguins of Madagascar.

Other technologies and research and development

Historically, we have researched and developed technologies to enable a premium viewing experience in the theater, the home and elsewhere. To date, we have not realized material benefits from some of these efforts. While we continue to support

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our core cinema platform, we are now actively evaluating alternatives for certain research and development efforts. In doing so, we expect to minimize future operating and capital expenditures which may affect future period comparability.

Results of operations

The following table sets forth our condensed consolidated statements of operations and other data for each of the periods indicated:

	Three months ended						Six months ended
	September 30,			September 30,			September 30,			September 30,
(in thousands)	2014			2013			2014			2013
Consolidated statements of operations data:
Revenue	$	47,412		$	43,929		$	102,791		$	103,148
Cost of revenue	22,505			24,023			47,901			55,061
Gross margin	24,907			19,906			54,890			48,087
Operating expenses:
Research and development	6,425			4,685			10,215			10,229
Selling and marketing	5,414			6,115			11,205			13,453
General and administrative	11,168			11,950			23,512			26,372
Total operating expenses	23,007			22,750			44,932			50,054
Operating income (loss)	1,900			(2,844		)	9,958			(1,967		)
Interest expense, net	(455		)	(751		)	(885		)	(1,240		)
Other income (loss)	(1,336		)	483			(1,176		)	274
Income (loss) before income taxes	109			(3,112		)	7,897			(2,933		)
Income tax expense	1,676			1,552			3,963			3,267
Net income (loss)	(1,567		)	(4,664		)	3,934			(6,200		)
Net loss attributable to noncontrolling interest	—			13			—			15
Net income (loss) attributable to RealD Inc. common stockholders	$	(1,567	)	$	(4,651	)	$	3,934		$	(6,185	)
Other data:
Adjusted EBITDA (1)	$	17,556		$	13,671		$	40,485		$	29,698

(1) Adjusted EBITDA is not a recognized measurement under U.S. GAAP.  For a definition of Adjusted EBITDA and reconciliation to net income (loss), the comparable U.S. GAAP item, see “Non-U.S. GAAP discussion”.

2014 Cost Reduction Plan

On November 12, 2013, we announced a plan to reduce the overall costs of its global operations (the “2014 Cost Reduction Plan”). The 2014 Cost Reduction Plan was primarily a response to the anticipated impact on our financial results and operations caused by changes in the 3D box office performance of certain motion pictures due to perceived changes in consumer preference and the fact that our 3D cinema business is maturing in many markets like the United States in which we expected equipment installations to continue to slow. As a result of the 2014 Cost Reduction Plan, we reduced our staff by approximately 20%, rescoped and made other changes to certain research and development projects, reduced certain non-personnel related general and administrative expenses and streamlined certain manufacturing operations. These actions were intended to rationalize the further expansion of our global cinema platform by focusing on emerging growth markets and higher performing motion picture exhibitors, streamlining our manufacturing facilities to achieve cost efficiencies while meeting the future commercial demands of our customers and focusing our research and development efforts on technologies that would enable us to expand its visual technology product offerings.

As a result of the 2014 Cost Reduction Plan’s workforce reduction, we incurred termination and related charges totaling approximately $4.7 million for the year ended March 31, 2014. Charges of $0.6 million have been incurred in the six months ended September 30, 2014, including $0.3 million for the accrual of losses on a lease for manufacturing facilities that will no longer be used in our operations. Therefore, the total charges were $5.3 million through September 30, 2014. The following

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table summarizes the charges resulting from implementation of the 2014 Cost Reduction Plan during the three and six months ended September 30, 2014:

	Three months ended						Six months ended
	September 30, 2014						September 30, 2014
(in thousands)	Personnel		Leasehold		Total		Personnel		Leasehold		Total
Cost of revenue	$	24	$	302	$	326	$	24	$	373	$	397
Research and development	—		—		—		—		—		—
Selling and marketing	16		—		16		16		—		16
General and administrative	190		—		190		190		—		190
Total	$	230	$	302	$	532	$	230	$	373	$	603

The following table summarizes the activity resulting from implementation of the 2014 Cost Reduction Plan within accrued expenses and other liabilities:

	Payments excluding non-cash impairment
(in thousands)	Personnel			Leasehold			Total
Cost reduction plan liabilities as of March 31, 2014	$	1,416		$	—		$	1,416
Charges	230			373			603
(Payments)	(712		)	(108		)	(820		)
Cost reduction plan liabilities as of September 30, 2014	$	934		$	265		$	1,199

Additionally, we lease office space for our headquarters that includes approximately $6.0 million in leasehold improvements and other items classified as fixed assets (see Note 3 “Cinema Systems and Property & Equipment”). If we relocated the office, these fixed assets could become subject to an impairment assessment and contract termination costs or sublease loss could be incurred.

Three months ended September 30, 2014 compared to three months endedSeptember 30, 2013

Revenue

	Three months ended
	September 30,				September 30,
(in thousands)	2014				2013				Amount			Percentage
Revenue:	Amount		% of Total		Amount		% of Total		change			change
License revenue
Domestic	$	10,614	22	%	$	12,024	27	%	$	(1,410	)	(12	)%
International	21,220		45	%	18,952		43	%	2,268			12	%
Total license revenue	$	31,834	67	%	$	30,976	70	%	$	858		3	%
Product and other revenue
Domestic	$	10,372	22	%	$	9,168	21	%	$	1,204		13	%
International	5,206		11	%	3,785		9	%	1,421			38	%
Total product and other revenue	$	15,578	33	%	$	12,953	30	%	$	2,625		20	%
Total revenue	$	47,412	100	%	$	43,929	100	%	$	3,483		8	%

Our total revenue for the three months endedSeptember 30, 2014increased$3.5 million, or 8%, as compared to the three months endedSeptember 30, 2013. The increase was primarily due to an increase in international license revenue and higher eyewear revenue worldwide resulting from an overall increase in our box office performance and our expansion into emerging markets, such as China. This increase in international revenue was partially offset by a decrease in domestic license revenue due to change in mix of types of ticket sales, which resulted in lower percentage of admission. Our international markets comprised approximately 56% of total revenue for the three months endedSeptember 30, 2014 as compared to approximately 52% for the three months endedSeptember 30, 2013.

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For the three months endedSeptember 30, 2014, there were six motion pictures that contributed greater than $1.0 million of admission-based fees to license revenue. License revenue for the three months endedSeptember 30, 2014 includes admission-based fees related to the following motion pictures: Transformers 4: Age of Extinction ($5.5 million), Dawn of The Planet of The Apes ($5.5 million), Guardians of The Galaxy ($4.2 million), Teenage Mutant Ninja Turtles ($2.4 million), How to Train Your Dragon 2 ($2.3 million) and Hercules ($1.4 million).

For the three months endedSeptember 30, 2013, there were nine motion pictures that contributed greater than $1.0 million of admission-based fees to license revenue. License revenue for the three months ended September 30, 2013 includes admission-based fees related to the following motion pictures: Despicable Me 2 ($4.4 million), Monsters University ($3.1 million), The Wolverine ($2.5 million), World War Z ($2.2 million), Pacific Rim ($2.0 million), Smurfs 2 ($1.8 million), Percy Jackson 2: Sea of Monsters ($1.3 million), Man of Steel ($1.3 million) and One Direction 3D Concert Movie ($1.2 million).

License revenues comprised 67% and 70% of total revenues for the three months endedSeptember 30, 2014 and September 30, 2013, respectively. International license revenues comprised of $21.2 million, or 67% of total license revenues and $19.0 million, or 61% of total license revenue for the three months endedSeptember 30, 2014 and September 30, 2013, respectively.

The $2.6 millionincrease in our product and other revenue during the three months endedSeptember 30, 2014 as compared to the three months endedSeptember 30, 2013, was primarily a result of an increase in the volume of RealD eyewear consumed or sold globally and timing of the demand of our products. This increase in RealD eyewear volume both domestically and internationally compared to the prior period resulted from exhibitor buying patterns relative to the film slate and overall increase in our box office performance period over period. International product revenues totaled $5.2 million, or 33%, of total product revenues and $3.8 million, or 29%, of total product revenues for the three months endedSeptember 30, 2014 and September 30, 2013, respectively.

We expect our future revenue, particularly in our license business, will be driven by both the worldwide number of RealD-enabled screens and motion pictures released in 3D, as well as the related worldwide level of 3D admissions, box office performance and mix of ticket types of those films.

Cost of Revenue

	Three months ended
	September 30,				September 30,
(in thousands)	2014				2013				Amount			Percentage
	Amount		% of Revenue		Amount		% of Revenue		change			change
Revenue:
License revenue	$	31,834	67	%	$	30,976	71	%	$	858		3	%
Product and other	15,578		33	%	12,953		29	%	2,625			20	%
Total revenue	$	47,412	100	%	$	43,929	100	%	$	3,483		8	%
Cost of revenue:
License	$	11,613	36	%	$	11,691	38	%	$	(78	)	(1	)%
Product and other	10,892		70	%	12,332		95	%	(1,440		)	(12	)%
Total cost of revenue	$	22,505	47	%	$	24,023	55	%	$	(1,518	)	(6	)%
Gross profit:
License	$	20,221	64	%	$	19,285	62	%	$	936		5	%
Product and other	4,686		30	%	621		5	%	4,065			655	%
Total gross profit	$	24,907	53	%	$	19,906	45	%	$	5,001		25	%

The three months endedSeptember 30, 2014 includes expenses discussed under the caption “2014 Cost Reduction Plan”.

For the three months endedSeptember 30, 2014, our cost of revenue decreased$1.5 million primarily due to lower per pair average cost of RealD eyewear.  This decrease in cost of revenue further impacted cost of revenue as a percentage of revenue, which decreased to 47% for the three months endedSeptember 30, 2014, as compared to 55% for the three months endedSeptember 30, 2013.

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License cost of revenue for the three months endedSeptember 30, 2014 remained relatively consistent as depreciation rates are normalized quarter-over-quarter. Depreciation expense totaling $8.6 million and $8.3 million, or 27% and 27% as a percentage of total license revenue, respectively, was included in license cost of revenue for the three months endedSeptember 30, 2014 and September 30, 2013, respectively.

Product and other gross profit increased$4.1 million during the three months endedSeptember 30, 2014, primarily as a result of optimizing eyewear product mix and decreases in cost of eyewear products. Product and other gross margin increased to 30% for the three months endedSeptember 30, 2014 as compared to 5% for the three months endedSeptember 30, 2013.

Costs associated with our eyewear recycling program have been expensed in the period incurred.  Recycling costs totaled $2.1 million and $1.9 million for the three months endedSeptember 30, 2014 and September 30, 2013, respectively, and included the cost to transport RealD eyewear between theaters and the recycling production facility and costs to process the RealD eyewear for reuse. Due in part to dependence upon voluntary recycling of undamaged eyewear by consumers, the percentage usage of recycled eyewear may decrease in future periods resulting in lower gross profit and gross margin.

Our cost of revenue as a percentage of revenue, as well as our gross profit and gross margin, will be affected in the future by the relative mix of license and product revenue, the mix of domestic and international product revenues, the relative mix of products and any new revenue sources, impairment charges and the cost per unit of eyewear as well as the percentage usage of recycled eyewear. Our impairment charges in future periods may increase as a result of system upgrades and replacements as well as changes in product offerings and new technology.

Operating Expense

	Three months ended
	September 30,		September 30,		Amount			Percentage
(in thousands)	2014		2013		change			change
Research and development	$	6,425	$	4,685	$	1,740		37	%
Selling and marketing	5,414		6,115		(701		)	(11	)%
General and administrative	11,168		11,950		(782		)	(7	)%
Total operating expenses	$	23,007	$	22,750	$	257		1	%

Research and development. Our research and development expenses increased during the three months endedSeptember 30, 2014 as compared to the same period in fiscal year 2014 primarily due to $0.3 million higher stock based compensation, $0.6 million higher incentive compensation resulting from the achievement of certain company performance objectives in current period that were not met in prior period and $0.7 million higher non-recurring engineering expense because of timing of project spending. In addition, as discussed in the Opportunities, trends and factors affecting comparability section, while we continue to support our core cinema platform, we are actively evaluating various alternatives for certain research and development efforts.

Selling and marketing. Our selling and marketing expenses decreased primarily due to $0.2 million lower personnel expenses as a result of the 2014 Cost Reduction Plan, $0.3 million lower online and other marketing expenses and $0.1 million lower travel expenses. We expect to incur less overall selling and marketing expenses despite our continuous global efforts to market future 3D films.

General and administrative. Our general and administrative expenses decreased primarily due to $0.6 million lower bad debt expense, which resulted from successful collection, $0.5 million lower sales and property taxes, $0.5 million lower personnel costs resulting from 2014 Cost Reduction Plan and $0.4 million lower outside service fees, which were offset by $0.9 million higher incentive compensation resulting from the achievement of certain company performance objectives in current period that were not met in prior period, $0.2 million higher depreciation and amortization expenses and $0.2 million higher foreign business tax, which resulted from increased international operations.

Historical operating expenses are not necessarily indicative of future expenses for a changing business.

Other

Interest expense, net.  Net interest expense was $0.5 million and $0.8 million for the three months endedSeptember 30, 2014 and September 30, 2013, respectively. The decrease in net interest expense was primarily due to decreased borrowings.

23

Other income (loss).  Our other loss for the three months endedSeptember 30, 2014 was $1.3 million as compared to other income of $0.5 million for the three months endedSeptember 30, 2013 primarily due to losses on foreign currency exchange transactions that we recorded during the three months endedSeptember 30, 2014 as compared to a gain during the same period of the prior year.

Income tax.  Our income tax expense for the three months endedSeptember 30, 2014 was $1.7 million compared to $1.6 million for the three months endedSeptember 30, 2013, primarily due to increased foreign revenue in countries subject to withholding and income taxes.

We have net operating losses that may potentially offset taxable income in the future. We expect to incur an increasing amount of income tax expenses that relate primarily to federal and state income tax and international operations. We file federal income tax returns and income tax returns in various state and foreign jurisdictions. Due to the net operating loss carryforwards, our United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.

Six months ended September 30, 2014 compared to six months endedSeptember 30, 2013

Revenue

	Six months ended
	September 30,				September 30,
(in thousands)	2014				2013				Amount			Percentage
Revenue:	Amount		% of Total		Amount		% of Total		change			change
License revenue
Domestic	$	23,845	23	%	$	28,630	28	%	$	(4,785	)	(17	)%
International	43,962		43	%	39,652		38	%	4,310			11	%
Total license revenue	$	67,807	66	%	$	68,282	66	%	$	(475	)	(1	)%
Product and other revenue
Domestic	$	23,227	23	%	$	25,193	25	%	$	(1,966	)	(8	)%
International	11,757		11	%	9,673		9	%	2,084			22	%
Total product and other revenue	$	34,984	34	%	$	34,866	34	%	$	118		—	%
Total revenue	$	102,791	100	%	$	103,148	100	%	$	(357	)	—	%

Our total revenue for the six months endedSeptember 30, 2014decreased$0.4 million, or less than 1%, as compared to the six months endedSeptember 30, 2013. The decrease was primarily due to lower domestic license revenue and domestic eyewear revenue resulting from an overall decrease in domestic box office performance during the six months ended September 30, 2014, which primarily occurred during the first fiscal quarter of the year. This decrease in domestic revenue was partially offset by an increase in international license revenue resulting from our expansion into emerging markets, such as China, and higher international eyewear sales during the period. Our international markets comprised approximately 54% of total revenue for the six months endedSeptember 30, 2014 as compared to approximately 47% for the six months endedSeptember 30, 2013.

For the six months endedSeptember 30, 2014, there were 13 motion pictures that contributed greater than $1.0 million of admission-based fees to license revenue. The top ten motion pictures that contributed greater than $1.0 million of admission-based fees to net license revenue for the six months endedSeptember 30, 2014 included the following: Transformers 4: Age of Extinction ($7.2 million), X-Men: Days of Future Past ($5.6 million), Dawn of The Planet of The Apes ($5.5 million), Amazing Spider-Man 2 ($4.9 million), Maleficent ($4.3 million), Captain America 2: The Winter Soldier ($4.2 million), Guardians of The Galaxy ($4.2 million), Godzilla ($3.8 million), How to Train Your Dragon 2 ($3.7 million) and Rio 2 ($3.3 million).

For the six months endedSeptember 30, 2013, there were 15 motion pictures which contributed greater than $1.0 million of admission-based fees to net license revenue. The top ten motion pictures that contributed greater than $1.0 million of admission-based fees to net license revenue for the six months endedSeptember 30, 2013 included the following: Iron Man 3 ($9.0 million), Despicable Me 2 ($4.7 million), Monsters University ($4.6 million), Man of Steel ($4.3 million), World War Z ($3.7 million), Star Trek 2: Into Darkness ($3.4 million), The Croods ($2.8 million), The Wolverine ($2.5 million), The Great Gatsby ($2.2 million) and Epic ($2.2 million).

24

License revenues comprised 66% of total revenues for both the six months endedSeptember 30, 2014 and September 30, 2013. International license revenues comprised of $44.0 million, or 65% of total license revenues and $39.7 million, or 58% of total license revenue for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

The $0.1 millionincrease in our product and other revenue during the six months endedSeptember 30, 2014 as compared to the six months endedSeptember 30, 2013, was primarily a result of an increase in the volume of RealD eyewear consumed or sold to our international markets. This increase in RealD eyewear volume internationally compared to the prior period resulted from exhibitor buying patterns relative to the film slate. This increase was partially impacted by a reduction in average eyewear revenue per unit sold in domestic market as well as a decrease in RealD eyewear volume consumed or sold. International product revenues totaled $11.8 million, or 34%, of total product revenues and $9.7 million, or 28%, of total product revenues for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

We expect our future revenue, particularly in our license business, will be driven by both the worldwide number of RealD-enabled screens and motion pictures released in 3D, as well as the related worldwide level of 3D admissions and box office performance of those films.

Cost of Revenue

	Six months ended
	September 30,				September 30,
(in thousands)	2014				2013				Amount			Percentage
	Amount		% of Revenue		Amount		% of Revenue		change			change
Revenue:
License revenue	$	67,807	66	%	$	68,282	66	%	$	(475	)	(1	)%
Product and other	34,984		34	%	34,866		34	%	118			—	%
Total revenue	$	102,791	100	%	$	103,148	100	%	$	(357	)	—	%
Cost of revenue:
License	$	22,510	33	%	$	22,509	33	%	$	1		—	%
Product and other	25,391		73	%	32,552		93	%	(7,161		)	(22	)%
Total cost of revenue	$	47,901	47	%	$	55,061	53	%	$	(7,160	)	(13	)%
Gross profit:
License	$	45,297	67	%	$	45,773	67	%	$	(476	)	(1	)%
Product and other	9,593		27	%	2,314		7	%	7,279			315	%
Total gross profit	$	54,890	53	%	$	48,087	47	%	$	6,803		14	%

The six months endedSeptember 30, 2014 includes expenses discussed under the caption “2014 Cost Reduction Plan”.

For the six months endedSeptember 30, 2014, our cost of revenue decreased$7.2 million primarily due to the lower averaged per pair cost of RealD eyewear. This decrease in cost of revenue further impacted cost of revenue as a percentage of revenue, which decreased to 47% for the six months endedSeptember 30, 2014, as compared to 53% for the six months endedSeptember 30, 2013.

License cost of revenue for the six months endedSeptember 30, 2014 remained relatively consistent as compared to the same period in prior year. Depreciation expense totaling $16.8 million and $16.1 million, or 25% and 24% as a percentage of total license revenue, respectively, was included in license cost of revenue for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

Product and other gross profit increased$7.3 million during the six months endedSeptember 30, 2014, primarily as a result of optimizing eyewear product mix and decreases in cost of eyewear products. Product and other gross margin increased to 27% for the six months endedSeptember 30, 2014 as compared to 7% for the six months endedSeptember 30, 2013.

Costs associated with our eyewear recycling program have been expensed in the period incurred. Recycling costs totaled $4.2 million for both the six months endedSeptember 30, 2014 and September 30, 2013, and included the cost to transport RealD eyewear between theaters and the recycling production facility and costs to process the RealD eyewear for reuse. Due in

25

part to dependence upon voluntary recycling of undamaged eyewear by consumers, the percentage usage of recycled eyewear may decrease in future periods resulting in lower gross profit and gross margin.

Our cost of revenue as a percentage of revenue, as well as our gross profit and gross margin, will be affected in the future by the relative mix of license and product revenue, the mix of domestic and international product revenues, the relative mix of products and any new revenue sources, impairment charges and the cost per unit of eyewear as well as the percentage usage of recycled eyewear. Our impairment charges in future periods may increase as a result of system upgrades and replacements as well as changes in product offerings and new technology.

Operating Expenses

	Six months ended
	September 30,		September 30,		Amount			Percentage
(in thousands)	2014		2013		change			change
Research and development	10,215		10,229		$	(14	)	—	%
Selling and marketing	11,205		13,453		(2,248		)	(17	)%
General and administrative	23,512		26,372		(2,860		)	(11	)%
Total operating expenses	$	44,932	$	50,054	$	(5,122	)	(10	)%

Research and development. Our research and development expenses remained relatively consistent for the six months endedSeptember 30, 2014 as compared to the same period in fiscal year 2014 primarily due to $0.8 million lower depreciation expense and largely offset by $0.7 million higher non-recurring engineering expense and prototype units due to timing of project spending. In addition, as discussed in Opportunities, trends and factors affecting comparability section, while we continue to support our core cinema platform, we are actively evaluating various alternatives for certain research and development efforts.

Selling and marketing. Our selling and marketing expenses decreased primarily due to $0.8 million lower personnel costs as a result of the 2014 Cost Reduction Plan, $0.8 million lower online and other marketing expenses, $0.3 million lower exhibition marketing expenses and $0.2 million lower traveling expenses. We expect to incur less overall selling and marketing expenses, despite our continuous global marketing efforts to market future 3D films.

General and administrative. Our general and administrative expenses decreased primarily due to $1.3 million lower professional and outside services fees, $0.7 million lower personnel costs as a result of the 2014 Cost Reduction Plan, $0.7 million lower bad debt expenses, $0.7 million lower sales taxes and partially offset by $0.5 million higher depreciation and amortization expense.

Historical operating expenses are not necessarily indicative of future expenses for a changing business.

Other

Interest expense, net.  Net interest expense was $0.9 million and $1.2 million for the six months endedSeptember 30, 2014 and September 30, 2013, respectively. The decrease in net interest expense was primarily due to decreased borrowings under the 2014 Credit Agreement.

Other income (loss).  Our other loss for the six months endedSeptember 30, 2014 was $1.2 million as compared to other income of $0.3 million for the six months endedSeptember 30, 2013 primarily due to losses on foreign currency exchange transactions that we recorded during the six months endedSeptember 30, 2014 as compared to a gain during the same period of the prior year.

Income tax.  Our income tax expense for the six months endedSeptember 30, 2014 was $4.0 million compared to $3.3 million for the six months endedSeptember 30, 2013, primarily due to increased foreign revenue in countries subject to withholding and income taxes.

We have net operating losses that may potentially offset taxable income in the future. We expect to incur an increasing amount of income tax expenses that relate primarily to federal and state income tax and international operations. We file federal income tax returns and income tax returns in various state and foreign jurisdictions. Due to the net operating loss

26

carryforwards, our United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.

Seasonality and quarterly performance

Our operations are generally subject to seasonal trends based on the number of 3D motion pictures released and the box office of those 3D motion pictures. As is the case with other participants in the motion picture exhibition industry, we expect that our fiscal quarters during the summer period generally will tend to show stronger box office performance and higher revenues due to the summer movie-going season, when many of the largest grossing films in any given year are typically released. By comparison the quarter ending in March traditionally does not benefit from the same box office performance due to the number and nature of the motion pictures released in this seasonal period. We expect to experience seasonal fluctuations in results of operations as a result of these trends. Our quarterly financial results have fluctuated in the past and may continue to fluctuate in the future based on a number of other factors in addition to these seasonal trends, many of which are beyond our control. Factors that may cause our operating results to vary or fluctuate include those discussed in Part II, Item 1A below under the caption “Risk factors.”

Liquidity and capital resources

Our cash equivalents primarily consist of money market funds and other marketable securities that mature within three months from the date of purchase. The carrying amount of cash equivalents reasonably approximates fair value due to the short maturities of these instruments. The primary objective of our investment activities is preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. We do not enter into investments for trading or speculative purposes.

We believe that our cash, cash equivalents, potential cash flows from operations, and our availability under the 2014 Credit Agreement will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.

The following table sets forth our major sources and (uses) of cash for each period as set forth below.

	Six months ended
(in thousands)	September 30, 2014			September 30, 2013
Operating activities	$	32,933		$	7,948
Investing activities	$	(10,825	)	$	(16,317	)
Financing activities	$	(1,168	)	$	11,371

Cash flow from operating activities

The six months endedSeptember 30, 2014 includes payments discussed under the caption “2014 Cost Reduction Plan”.

Operating activities provided cash inflow of $32.9 million during the six months endedSeptember 30, 2014. The cash inflow primarily resulted from lower cost of product, reduced operating expenses and higher cash collections and decreased inventories primarily due to better box office performance than expected, partially offset by decreases in accounts payable.

Operating activities provided cash inflow of $7.9 million during the six months endedSeptember 30, 2013. The cash flows primarily resulted from decrease in accounts receivable, partially offset by an increase in inventories and decreases in accounts payable and accrued expenses.  Decrease in accounts receivable was related to the timing of collections.  The increase in inventories is primarily due to lower box office performance than expected. Decreases in accounts payable and accrued expenses were related to the timing of payments.

Cash flow from investing activities

For both the six months endedSeptember 30, 2014 and September 30, 2013, cash outflow for investing activities was primarily related to the purchase of component parts for our RealD Cinema Systems and other property, equipment and leasehold improvements. Capital expenditures were $10.9 million for the six months endedSeptember 30, 2014 and $16.3 million for the six months endedSeptember 30, 2013. We expect to continue to support the growth of our cinema business and existing sales base.

27

Cash flow from financing activities

Net cash outflow from financing activities for six months endedSeptember 30, 2014 resulted from $37.3 million in proceeds from the 2014 Credit Agreement, $2.4 million in proceeds from issuance of stock option exercises and employee stock purchases, which were partially offset by $36.2 million payoff of the 2012 Credit Agreement, the $3.8 million quarterly payment on the 2014 Credit Agreement and the $0.9 million payment of the debt issuance cost related to the completion of the 2014 Credit Agreement.

Net cash inflows from financing activities for the six months endedSeptember 30, 2013 primarily resulted from $37.5 million of proceeds from the 2012 Credit Agreement and $1.4 million proceeds from issuance of stock option exercises and employee stock purchases, which was partially offset by $20 million of repayments to the 2012 Credit Agreement and $7.5 million of stock repurchases

Debt issuance costs related to the completion of the 2014 Credit Agreement totaled $0.9 million and were recorded as a deferred charge.  The issuance costs are being amortized over the contractual life of the Revolving Facility and recorded as interest expense.

As of September 30, 2014, there was $33.6 million in debt outstanding under the 2014 Credit Agreement and $62.7 million available to borrow under the 2014 Credit Agreement. In the future, we may continue to utilize commercial financing, lines of credit and term loans for general corporate purposes and stock repurchases.

For the six months endedSeptember 30, 2014 and September 30, 2013, proceeds from employee stock option exercises and employee stock plan purchases were $2.4 million and $1.4 million, respectively.  From time to time, we expect to receive cash from the exercise of employee stock options and warrants in our common stock. Proceeds from the exercise of employee stock options outstanding will vary from period to period based upon, among other factors, fluctuations in the market value of our common stock relative to the exercise price of such stock options and warrants.

2014 Credit Agreement

On June 26, 2014, we entered into the Amended and Restated Credit Agreement (the “2014 Credit Agreement”), by and among us, as borrower, City National Bank, as administrative agent and letter of credit issuer (“City National”), the other agents from time to time party thereto and the lenders from time to time party thereto (the “Lenders”). The 2014 Credit Agreement amends and restates in its entirety that certain Credit Agreement, dated as of April 19, 2012, by and among us, City National and the agents and lenders from time to time party thereto, which had been most recently amended on October 16, 2013 (the "2012 Credit Agreement").

Pursuant to the 2014 Credit Agreement, the Lenders thereunder will make available to us:

• a revolving credit facility (including a letter of credit sub-facility) in a maximum amount not to exceed $50 million (the “Revolving Facility”), which matures on June 26, 2017. In addition, we may request up to an additional $25 million of commitments under the Revolving Facility (such that the maximum amount of all commitments under the Revolving Facility may not exceed $75 million), subject to the satisfaction of certain financial and other conditions and subject to obtaining such commitments; and

• a delayed draw term loan facility in a maximum amount not to exceed $50 million (the “Term Loan Facility”), which matures on June 26, 2018. During the first quarter of fiscal year 2015, we borrowed $37.3 million under the Term Loan Facility, resulting in $12.7 million being available for future draws through June 26, 2016.

Debt issuance costs related to the completion of the 2014 Credit Agreement totaled $0.9 million and were added to the $0.3 million deferred charge remaining on the 2012 Credit Agreement. All these issuance costs are being amortized over the contractual life of the agreement and recorded as interest expense.

Loans outstanding under the 2014 Credit Agreement bear interest at our option at either the Euro currency rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Euro currency rate for a one month Interest Period on such day plus 1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on our leverage ratio. Under the 2014 Credit Agreement, we are charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility is 0.375% of the unused commitment. Additionally, we

28

are charged a letter of credit fee equal of between 2.25% to 2.75%, depending on our leverage ratio, per year with respect to the amount of each performance letter of credit issued under the 2014 Credit Agreement. We also pay customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the 2014 Credit Agreement. There were no letters of credit outstanding at September 30, 2014 and March 31, 2014.

The obligations under the 2014 Credit Agreement are fully and unconditionally guaranteed by our subsidiaries, ColorLink Inc., a Delaware corporation (“ColorLink”), Stereographics Corporation, a California corporation (“Stereographics”), and RealD DDMG Acquisition, LLC, a Delaware limited liability company (together with RealD, ColorLink and Stereographics, the “Loan Parties”). The obligations under the 2014 Credit Agreement are secured by a first priority security interest in substantially all of the Loan Parties’ tangible and intangible assets.

As of September 30, 2014, $50 million was available under the Revolving Facility and $12.7 million was available under the Term Loan Facility, totaling $62.7 million of availability under the 2014 Credit Agreement.

As of September 30, 2014, there was no balance outstanding under the Revolving Facility. On June 30, 2014, the first quarterly term loan installment of $1.9 million was made on the Term Loan Facility. The outstanding balance of $33.6 million on the Term Loan Facility at September 30, 2014 is to be repaid in 14 quarterly installments of $1.9 million through March 31, 2018 and the remaining $7.5 million principal on June 26, 2018. As of September 30, 2014, our primary sources of liquidity were our cash and cash equivalents of $49.9 million and the $62.7 million in funds available under the 2014 Credit Agreement.

Stock repurchase activity

On April 20, 2012, we announced that our board of directors had approved an authorization to repurchase up to $50 million of RealD common stock. On December 14, 2012, our board of directors approved a $25 million increase in our stock repurchase plan, increasing the $50 million repurchase plan announced on April 20, 2012 to $75 million. The number of shares to be repurchased and the timing of any potential repurchases will depend on factors such as our stock price, economic and market conditions, uses of capital, and corporate and regulatory requirements. Repurchases of common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when we might otherwise be precluded from doing so under insider trading laws, and a variety of other methods, including open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The repurchase program may be suspended or discontinued at any time.

Pursuant to the stock repurchase plan authorized by our board of directors, we have repurchased a total of 6,599,726 shares of common stock at an average price per share, including sales commissions, of $10.30 for an aggregate cost of $68.0 million inception to date. For the six months endedSeptember 30, 2014, there were no stock repurchases.

Off-balance sheet arrangements

We had no off-balance sheet arrangements as of September 30, 2014. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries.

Non-U.S. GAAP discussion

In addition to our U.S. GAAP results, we present Adjusted EBITDA as a supplemental measure of our performance. However, Adjusted EBITDA is not a recognized measurement under U.S. GAAP. We define Adjusted EBITDA as net income (loss) plus expenses for interest, income taxes, depreciation, amortization, impairment and stock-based compensation plus net foreign exchange loss (gain) plus expenses comprising the non-U.S. GAAP category “restructuring charges, severance costs and reserves” as defined in our 2014 Credit Agreement. We do not consider the preceding adjustments to be indicative of our core operating performance. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations that period. Non-U.S. GAAP adjustments to our results prepared in accordance with U.S. GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual, infrequent or non-recurring items.

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Set forth below is a reconciliation of Adjusted EBITDA to net income for the three and six months endedSeptember 30, 2014 and September 30, 2013:

	Three months ended						Six months ended
	September 30,			September 30,			September 30,		September 30,
(in thousands)	2014			2013			2014		2013
Net income (loss)	$	(1,567	)	$	(4,664	)	$	3,934	$	(6,200	)
Add (deduct):
Interest expense, net	455			751			885		1,240
Income tax expense	1,676			1,552			3,963		3,267
Depreciation and amortization	10,410			10,210			20,223		19,764
Other (income) loss (1)	1,336			(483		)	1,176		(274		)
Share-based compensation expense (2)	4,262			4,473			8,233		9,118
Impairment of assets and intangibles (3)	452			1,832			1,468		2,783
Cost reduction plan (4)	532			—			603		—
Adjusted EBITDA (5)	$	17,556		$	13,671		$	40,485	$	29,698

(1) Includes gains and losses from foreign currency exchange and foreign currency forward contracts.

(2) Represents share-based compensation expense of nonstatutory and incentive stock options and restricted stock units and employee stock purchase plan to employees, non-employees, officers and directors.

(3) Represents impairment of long-lived assets, such as fixed assets, theatrical equipment and related purchase commitments and identifiable intangibles.

(4) Expenses comprising the non-U.S. GAAP category “restructuring charges, severance costs and reserves” as defined in our 2014 Credit Agreement (also see the “2014 Cost Reduction Plan” caption above).

(5) Adjusted EBITDA is not a recognized measurement under U.S. GAAP. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the comparable U.S. GAAP item, see the entirety of this “Non-U.S. GAAP discussion”.

We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA in developing our internal budgets, forecasts and strategic plans, in analyzing the effectiveness of our business strategies, in evaluating potential acquisitions, in making compensation decisions and in communications with our board of directors concerning our financial performance. Adjusted EBITDA also aligns with the similarly titled definition in the 2014 Credit Agreement and is used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments. Adjusted EBITDA has limitations as an analytical tool which includes, among others, the following:

• Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

• Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

• non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;

• Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

• other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplement. Our consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with U.S. GAAP.

Critical accounting policies and estimates

This discussion is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, estimates and judgments are evaluated, including those related to revenue recognition, revenue deductions, product returns, fair value of our common stock, share-based compensation, inventories, definite lived asset impairments, goodwill impairment and income taxes. These estimates and judgments are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the financial statements relate to the following:

• licensing revenue terms applied to the timing and number of motion picture exhibitor consumer admissions;

• domestic eyewear product revenue terms applied to when the usage occurs and the amount of usage;

• effect of customer contract terms on revenue and balance sheet items;

• impairment testing of goodwill, intangible assets and tangible assets, including determination of relevant reporting units and long-lived asset groups;

• useful lives of intangible assets and tangible assets;

• timing and amount recognized for performance-based compensation, including bonus and certain restricted share units, based on projections of our performance achievement;

• the impact of potential future tax consequences of events that have been recognized in our financial statements;

• valuation of accruals and allowances;

• contingency assessments; and

• assumptions used in the determination of the fair value of equity-based awards for stock-based compensation.

Revenue recognition

We derive substantially all of our revenue from the license of our RealD Cinema Systems and the product sale of our RealD eyewear. We evaluate revenue recognition for transactions using the criteria set forth by the SEC in Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104) and Accounting Standards Codification Topic 605, Revenue Recognition (ASC 605). The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured.

License revenue.  License revenue, net of allowances, is accounted for as an operating lease. License revenue is primarily derived under a per-admission, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated allowances, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside our control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and we have no more obligations to our customers specific to the contingent payment received. Certain of our license revenue from leasing our RealD Cinema Systems is earned upon admission by the motion picture exhibitor’s consumers. We estimate and record licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be

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made. We determine that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee’s admissions report. Revenue is deemed fixed or determinable upon receipt of a licensee’s admissions report or evidence of a RealD box office showing by licensee. We determine collectability based on an evaluation of the licensee’s recent payment history.

Product revenue.  We recognize product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of our product revenue from the sale of our RealD eyewear is earned upon admission and usage by the motion picture exhibitor’s consumers. Our customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received subsequent to our fiscal period end. We estimate and record such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made.

Share-based compensation

We account for share-based awards granted to employees and directors by recording compensation expense based on estimated fair values. We estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. We determine the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under ASC 718, Compensation—Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. Our estimates of the fair values of share-based awards granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, modifications, estimates of forfeitures, and the related income tax impact.

Share-based compensation expense for all share-based arrangements for the three and six months ended September 30, 2014 and September 30, 2013 was as follows:

	Three months ended				Six months ended
	September 30,		September 30,		September 30,		September 30,
(in thousands)	2014		2013		2014		2013
Share-based compensation
Cost of revenue	$	424	$	242	$	615	$	541
Research and development	1,050		768		1,676		1,475
Selling and marketing	702		1,259		1,629		2,581
General and administrative	2,086		2,204		4,313		4,521
Total	$	4,262	$	4,473	$	8,233	$	9,118

Stock options granted generally vest over a four-year period, with 25% of the shares vesting after one year and monthly vesting thereafter. The options generally expire ten years from the date of grant. For the six months endedSeptember 30, 2014, we granted 0.6 million stock options at a weighted average grant date fair value of $5.88 per share.  For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to stock options and our employee stock purchase plan was $1.5 million and $3.5 million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to stock options and our employee stock purchase plan was $4.6 million and $7.1 million, respectively.

Certain of our management-level employees receive performance stock options, which gives the recipient the right to receive common stock that is contingent upon achievement of specified pre-established performance goals over the performance period, which is generally three years subject to the recipient’s continued service with us. The performance goals for the performance stock options are based on the measurement of our total stockholder return, on a percentile basis, compared to a comparable group of companies. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock options equal to or less than the number of performance stock options granted. In June 2013, our Chief Executive Officer’s fiscal year 2013 stock option grant was amended to retroactively change the vesting schedule of the stock option so that it now vests based upon the achievement of performance goals rather than based solely upon Mr. Lewis’ continued service with us. The performance goal is based on the measurement of our total stockholder return, on a percentile basis, compared to a comparable group of companies. The performance period for this performance stock option is between three and five years. For both the three and six months ended September 30, 2014, share based compensation expense related to

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performance stock options were $0.3 million. For the three and six ended September 30, 2013, share-based compensation expense related to performance stock options were $0.1 million and $0.5 million, respectively.

Certain of our management-level employees also receive performance stock units, which gives the recipient the right to receive common stock that is contingent upon achievement of specific pre-established performance goals over the performance period, which is generally two years subject to the recipient’s continued service with us. The performance goals are based on achieving certain levels of total licensing revenue over the performance period.  Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock units between 0% and 200% of the number of performance stock units granted. For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to performance stock units was $0.9 million and $(0.1) million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to performance stock units was $1.0 million and $0, respectively.

Certain of our employees, including certain management level employees, receive time-based restricted stock units. These restricted stock units vest over one to three years based upon a recipient’s continued service with us. For the six months endedSeptember 30, 2014, the Company granted 1.2 million restricted stock units at a weighted average grant date fair value of $11.17 per restricted stock unit. For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to restricted stock units was $1.4 million and $0.9 million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to restricted stock units was $2.6 million and $1.4 million, respectively.

Inventories and deferred costs-eyewear

Inventories and deferred costs-eyewear represent RealD eyewear and are substantially all finished goods. Inventories and deferred costs-eyewear are valued at the lower of cost (first-in, first-out method) or market value. At each balance sheet date, we evaluate ending inventories and deferred costs-eyewear for net realizable value. We also evaluate inventories for excess quantities and obsolescence. These evaluations include analysis of expected future average selling prices, projections of future demand and technology changes. In order to state inventories at the lower of cost or market, we maintain reserves against such inventories. If our analysis indicates that market is lower than cost, a write-down of inventories is recorded in cost of revenue in the period the loss is identified. As of September 30, 2014 and March 31, 2014, the inventory reserve as a result of our net realizable value analyses was $0 and $0.6 million, respectively.

Domestically, we provide RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of RealD eyewear by the motion picture exhibitors’ consumers. Eyewear shipped from inventory is deferred on the shipment date and then amortized to cost of product revenue according to assumptions related to eyewear usage by consumers.

Impairment of long-lived assets

We review long-lived assets, such as property and equipment, cinema systems, digital projectors and intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

For the three months endedSeptember 30, 2014 and September 30, 2013, impairment charges for all impaired RealD Cinema Systems charged to cost of revenue totaled $0.5 million and $1.8 million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, impairment charges for all impaired RealD Cinema Systems charged to cost of revenue totaled $1.5 million and $2.8 million, respectively.

Deferred tax asset valuation and tax exposures

As of September 30, 2014, we have determined based on the weight of the available evidence, both positive and negative, to provide for a valuation allowance against substantially all of the net deferred tax assets. The current deferred tax assets not reserved for by the valuation allowance are those in foreign jurisdictions or amounts that may be carried back in future years. If there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, we will adjust all or a portion of the applicable valuation allowance in the period when such change occurs.

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We are subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, we adjust tax expense to reflect our ongoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results.

Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, the valuation allowance against our deferred tax assets and uncertainty in income tax positions. Our financial position and results of operations may be materially impacted if actual results significantly differ from these estimates or the estimates are adjusted in future periods.

Contingencies and assessments

We are subject to various loss contingencies and assessments arising in the course of our business, some of which relate to litigation, claims, property taxes and sales and use or goods and services tax assessments. We consider the likelihood of the loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss, contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on our business, consolidated results of operations, financial condition or cash flows.

Research and development

Research and development (R&D) costs are expensed as incurred. Major components of R&D expense include salaries and benefits, materials and supplies inclusive of prototypes, non-recurring engineering, payments to third parties for R&D, facilities and equipment that can only be used for a particular project and overhead allocations of various administrative and facilities costs related to R&D.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606), effective for RealD starting April 1, 2017 (the first quarter of fiscal year 2018). Early application is not permitted. The new standard will be implemented retrospectively with the Company choosing to either restate prior periods or recognize the cumulative effect; the Company has not yet selected a transition method.

The new Topic 606 does not apply to lease contracts within the scope of Topic 840 Leases. The primary objective of ASU 2014-09 is to provide guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Revenue recognition is anticipated to entail more judgment and more estimating than under the current guidance. ASU 2014-09 also changes Topic 360 Property, Plant and Equipment, ASC 350 Intangibles-Goodwill and Other and certain other U.S. GAAP. The Company has not yet determined the effects of Topic 606 and other ASU 2014-09 revisions on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have operations both within the United States and internationally and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks as well as changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by collecting in advance and setting credit limits, as we deem appropriate. In addition, our investment strategy currently has been to invest in financial instruments that are highly liquid, readily convertible into cash and which mature within three months from the date of purchase. We also enter into foreign exchange derivative hedging transactions as part of our risk management program. For accounting purposes, we do not designate any of our derivative instruments as hedges and we do not use derivatives for speculating trading purposes and are not a party to leveraged derivatives.

Interest rate risk

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We are exposed to market risk related to changes in interest rates.

Our investments are considered cash equivalents and primarily consist of money market funds. At September 30, 2014, we had cash and cash equivalents of $49.9 million. The carrying amount of cash equivalents reasonably approximates fair value due to the short maturities of these instruments. The primary objective of our investment activities is preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, however, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and therefore, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe our cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits.

Loans outstanding under the 2014 Credit Agreement bear interest at our option at either the Euro currency rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Euro currency rate for a one month Interest Period on such day plus (1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on the Company’s leverage ratio. Changes in interest rates do not affect operating results or cash flows on our fixed rate borrowings but would impact our variable rate borrowings. As of September 30, 2014, we had $33.6 million in borrowings outstanding under the 2014 Credit Agreement which bear interest at approximately 2.69%.

Foreign currency risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. Our historical revenue has generally been denominated in U.S. dollars, and a significant portion of our current revenue continues to be denominated in U.S. dollars; however, we expect an increasing portion of our future revenue and operating expenses to be denominated in currencies other than the U.S. dollar, primarily the Euro, British pound sterling, Canadian dollar, Latin American currencies, Russian Ruble, Japanese Yen, Chinese Yuan and Hong Kong Dollar. Our operating expenses are generally denominated in the currencies of the countries in which our operations are located, primarily the United States and United Kingdom. Increases and decreases in our international revenue from movements in foreign exchange rates are partially offset by the corresponding increases or decreases in our international operating expenses. To further reduce our net exposure to foreign exchange rate fluctuations on our results of operations, we have entered into foreign currency forward contracts.

As of September 30, 2014, we had outstanding forward contracts based on Great Britain Pound and Euro with notional amounts totaling $8.7 million. We do not designate any of our forward contracts as hedges for accounting purposes. For both the three and six months ended September 30, 2014, the net gain related to the change in fair value of our foreign currency forward contracts was $0.1 million. For both the three and six months ended September 30, 2013, the net gain (loss) related to the change in fair value of our foreign currency forward contracts was immaterial. Foreign currency master agreements typically allow the netting of receivables and payables. We had a net receivable of $0.1 million as of September 30, 2014 and any such amounts were not significant as of March 31, 2014.

As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. As our international operations grow, we expect to conduct more of our business in currencies other than the U.S. dollar, thereby increasing risks associated with fluctuation in currency rates. Currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. As our exposure to currency risks grows, we will continue to reassess our risk management.

Inflation risk

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We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Counterparty risk

Our financial statements, including derivatives, are subject to counterparty credit risk, which we consider as part of the overall fair value measurement. We attempt to mitigate this risk through credit monitoring procedures.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Subject to the limitations noted above, our management, with the participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that, as of such date, our disclosure controls and procedures were effective to meet the objective for which they were designed and operate at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights, commercial, employment and other matters. Our management believes that losses in excess of the amounts accrued arising from such lawsuits are remote, but that litigation is necessarily uncertain and there is the potential for a material adverse effect on our financial statements if one or more matters are resolved in a particular period in an amount in excess of that anticipated by management.

In March 2014, we filed separate patent lawsuits in the United States District Court for the Central District of California against MasterImage 3D, Inc., et al. ("MasterImage"), for its MI-Horizon 3D products, and against Volfoni Inc., et al. ("Volfoni"), for its SmartCrystal Diamond product. These lawsuits contend that MasterImage and Volfoni are infringing on RealD XL Cinema System intellectual property rights with their respective products. In June 2014, we dismissed the lawsuit against Volfoni without prejudice after Volfoni made specific representations and warranties that it had not sold or distributed and is not selling or distributing its SmartCrystal product in the United States. In October 2014, MasterImage filed Inter Partes Review petitions with the US Patent and Trademark Office requesting post-grant reviews of certain patent claims asserted by us

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in the litigations. We have until January 2015 to respond to the Inter Partes Reviews. The patent infringement action against MasterImage in the United States District Court for the Central District of California is ongoing.

ITEM 1A. RISK FACTORS

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business, results of operations, financial condition and/or liquidity. If any of these events or the following risks actually occur, our business, operating results and financial condition could be materially adversely affected, and you could lose all or part of your investment.

Risks relating to our business and our industry

If motion pictures that can be viewed with RealD Cinema Systems are not made or are not commercially successful, our revenue will decline.

Almost all of our revenue is currently dependent upon both the number of 3D motion pictures released and the commercial success of those 3D motion pictures. Although we have produced alternative content in 3D, such as the production of Carmen in 3D with London’s Royal Opera House, we are not actively developing 3D motion pictures or our own 3D content, and therefore, we rely on motion picture studios to produce and release 3D motion pictures compatible with our RealD Cinema Systems. There is no guarantee that the number of 3D motion pictures being released will remain at current levels or increase or that motion picture studios will continue to produce 3D motion pictures at all. Motion picture studios may refrain from producing and releasing 3D motion pictures for any number of reasons, including their lack of commercial success, changes in consumer preferences, the lower-cost to produce 2D motion pictures or the availability of other entertainment options.  The commercial success of a 3D motion picture depends on a number of factors that are outside of our control, including whether it achieves critical acclaim, timing of the release, cost, marketing efforts and promotional support for the release. In the past, consumer interest in 3D motion pictures was episodic and motion picture studios tended to use 3D motion pictures as a gimmick rather than as an artistic tool to enhance the viewing experience. Consumer preferences have recently trended toward viewing motion pictures in 2D rather than 3D resulting in weaker box office performance. Weaker box office performance of 3D motion pictures may result in motion picture studios producing fewer 3D motion pictures or motion picture exhibitors may reduce the frequency in which they show motion pictures in 3D or may decide not to show 3D motion pictures at peak movie-going hours. Poor box office performance of 3D motion pictures, disruption or reduction in 3D motion picture production or conversion of 2D motion pictures into 3D motion pictures, changes in release schedules, the inability to see 3D motion pictures at peak hours, cancellations of motion picture releases in 3D versions, a reduction in marketing efforts for 3D motion pictures by motion picture studios or a lack of consumer demand for 3D motion pictures could result in lower 3D motion picture attendance, which would substantially reduce our revenue, which declined in fiscal year 2014 compared to fiscal year 2013. Moreover, films can be subject to delays in production or changes in release schedule, and the slippage of a film’s release date from one accounting period to another could adversely affect our financial condition, results of operations and business.

If motion picture exhibitors do not continue to use our RealD Cinema Systems or experience financial difficulties, our growth and results of operations could be adversely affected.

Our primary licensees in the motion picture industry are motion picture exhibitors. Our license agreements with motion picture exhibitors do not obligate these licensees to deploy a specific number of our RealD Cinema Systems. We cannot predict whether any of our existing motion picture exhibitor licensees will continue to perform under their license agreements with us, whether we or any of our existing motion picture exhibitor licensees may now or in the future be in breach of those agreements or whether our existing motion picture exhibitor licensees will renew their license agreements with us at the end of their term. If our existing motion picture exhibitor licensees do not renew their license agreements with us, or they negotiate renewals of their license agreements for substantially lesser license fees, our revenue would decline, which would adversely affect our business and results of operations. In addition, if motion picture exhibitors reduce or eliminate the number of 3D motion pictures that are exhibited in theaters, then our revenue could be materially and adversely affected, and motion picture studios may not produce and release 3D motion pictures, which could also adversely affect our financial condition, results of operations and business.

In addition, license revenue from Wanda (including AMC), Cinemark and Regal collectively comprised approximately 33% of our gross license revenue in the year ended March 31, 2014, 22% in the year ended March 31, 2013 and 24% in the year ended March 23, 2012. If any of these motion picture exhibitors were to experience financial difficulties, they may be unable to pay us amounts due in a timely fashion or at all, which could substantially reduce our cash flow and materially

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and adversely impact our financial condition and results of operations. For example, in order to attract more movie-goers, these motion picture exhibitors recently renovated certain of their theaters and installed larger chairs, which not only led to reduced seating capacity, but also resulted in higher ticket prices. If the motion picture exhibitors are unable to attract more movie-goers who are willing to pay higher ticket prices, they could experience financial difficulties, which in turn could adversely affect our financial condition, results of operations and business.

A deterioration in our relationships with the major motion picture studios could adversely affect our business and results of operations.

The six major motion picture studios accounted for approximately 78% of domestic box office revenue and eight of the top 10 grossing 3D motion pictures in calendar year 2013. Such 3D motion pictures are also released internationally. In addition, for our domestic operations, these major motion picture studios pay us a per use fee for our RealD eyewear. To the extent that our relationship with any of these major motion picture studios deteriorates or any of these studios stop making motion pictures that can be viewed at RealD-enabled theater screens, refuse to co-brand with us, stop using or paying for the use of or reduce the amounts paid for our RealD eyewear in domestic and certain international markets, our costs could increase and our revenue could decline, which would adversely affect our business and results of operations. Additionally, if consumers’ demand for 3D motion pictures declines, then motion picture studios may reduce marketing the 3D aspect of 3D motion pictures which could reduce box office performance of 3D motion pictures and our revenue could be adversely affected.

If the deployment of our RealD Cinema Systems is delayed or not realized, our future prospects could be limited and our business could be adversely affected.

We have license agreements with motion picture exhibitors that give us the right, subject to certain exceptions, to deploy our RealD Cinema Systems if a location under contract is already equipped with our systems.  Under the terms of these agreements, the motion picture exhibitor licensees may choose to install additional 3D digital projector systems. However, our license agreements do not obligate our licensees to deploy a specific number of our RealD Cinema Systems. Numerous factors beyond our control could influence when and whether our RealD Cinema Systems will be deployed, including motion picture exhibitors’ ability to fund capital expenditures, or their decision to delay or abandon the conversion of their theaters to digital projection or reduce the number of 3D motion pictures exhibited in their theaters, and our ability to secure adequate supplies of components comprising our RealD Cinema System in any given period. If motion picture exhibitors delay, postpone or decide not to deploy RealD Cinema Systems at the number of screens they have announced, or we are unable to deploy our RealD Cinema Systems in a timely manner, our future prospects could be limited and our business could be adversely affected.

We have a history of net losses and may suffer losses in the future.

While we were profitable in the fiscal year ended March 23, 2012, we incurred net losses in our fiscal years ended 2014, 2013, 2011 and 2010.  Our revenues declined in our fiscal year 2014 as compared to the prior year.  If we cannot return to sustainable revenue growth and profitability, our financial condition will deteriorate, and we may be unable to achieve our business objectives.

Any inability to protect our intellectual property rights could reduce the value of our 3D and other visual technologies and our brands, which could adversely affect our financial condition, results of operations and business.

Our business is dependent upon our patents, trademarks, trade secrets, copyrights and other intellectual property rights. Effective intellectual property rights protection, however, may not be available under the laws of every country in which we and our licensees operate, such as China. For example, we believe competitors may be introducing cinema systems similar to our RealD Cinema Systems that potentially infringe on our intellectual property rights in China, Russia and other territories to unfairly compete against us.  While we are actively engaged in the enforcement and protection of our intellectual property rights, the efforts we have taken may not be sufficient or we may not prevail. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, protecting our intellectual property rights is costly and time consuming. It may not be practicable or cost effective for us to fully protect our intellectual property rights in some countries or jurisdictions. If we are unable to successfully identify and stop unauthorized use of our intellectual property, we could lose potential revenue and experience increased operational and enforcement costs, which could adversely affect our financial condition, results of operations and business.

It is possible that some of our 3D and other visual technologies may not be protectable by patents. In addition, given the costs of obtaining patent protection, we may choose not to protect particular innovations that later turn out to be important.

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Even where we do have patent protection, the scope of such protection may be insufficient to prevent third parties from designing around our particular patent claims or otherwise avoiding infringement. Furthermore, there is always the possibility that an issued patent may later be found to be invalid or unenforceable, or a competitor may attempt to engineer around our issued patent. Additionally, patents only offer a limited term of protection. Moreover, the intellectual property we maintain as trade secrets could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from those trade secrets.

Any failure to maintain the security of information relating to our customers, employees, licensees and suppliers, whether as a result of cybersecurity attacks or otherwise, could expose us to litigation, government enforcement actions and costly response measures, and could disrupt our operations and harm our reputation.

In connection with the sales and marketing of our products and our entering into licensing arrangements with motion picture exhibitors, we may from time to time transmit confidential information. We also have access to, collect or maintain private or confidential information regarding our customers, employees, licensees and suppliers, as well as our business. We have procedures in place to safeguard such data and information and as a result of those procedures, to our knowledge, computer hackers have been unable to gain access to the information stored in our information systems. However, cyber-attacks are rapidly evolving and becoming increasingly sophisticated. It is possible that computer hackers and others might compromise our security measures or those that we do business with in the future and obtain the personal information of our customers, employees, licensees and suppliers or our business information. A security breach of any kind could expose us to risks of data loss, litigation, government enforcement actions and costly response measures, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation which could cause us to lose market share and have an adverse effect on our results of operations.

We may in the future be subject to intellectual property rights disputes that are costly to defend, could require us to pay damages and could limit our ability to use particular 3D and other visual technologies in the future.

We may be exposed to, or threatened with, future litigation or any other disputes by other parties alleging that our 3D and other visual technologies infringe their intellectual property rights. Any intellectual property disputes, regardless of their merit, could be time consuming, expensive to litigate or settle and could divert management resources and attention. An adverse determination in any intellectual property dispute could require us to pay damages and/or stop using our 3D and other visual technologies, trademarks, copyrighted works and other material found to be in violation of another party’s rights and could prevent us from licensing our 3D and other visual technologies to others. In order to avoid these restrictions and resolve the dispute, we may have to pay for a license. This license may not be available on reasonable terms, could require us to pay significant license fees and may significantly increase our operating expenses. A license also may not be available to us at all. As a result, we may be required to use and/or develop non-infringing alternatives, which could require significant effort and expense, or which may not be possible. If we cannot obtain a license or develop alternatives for any infringing aspects of our business, we may be forced to limit our 3D and other visual technologies and may be unable to compete effectively. In certain instances, we have contractually agreed to provide indemnification to licensees relating to our intellectual property. This may require us to defend or hold harmless motion picture exhibitors, manufacturers or other licensees. We have from time to time corresponded with one or more third parties regarding patent enforcement issues and in-bound and out-bound patent licensing opportunities. In addition, from time to time we may be engaged in disputes regarding the licensing of our intellectual property rights, including matters related to our license fee rates and other terms of our licensing arrangements. These types of disputes can be asserted by our licensees or prospective licensees or by other third parties as part of negotiations with us or in private actions seeking monetary damages or injunctive relief or in regulatory actions. Requests for monetary and injunctive remedies asserted in claims like these could be material and could have a significant impact on our business. Any disputes with our licensees, potential licensees or other third parties could materially and adversely affect our business, results of operations and prospects.

Our reliance on certain significant suppliers for the raw materials used in our RealD Cinema Systems subjects us to risks which could adversely affect our business.

We rely on certain significant suppliers for the raw materials used in our RealD Cinema Systems, which are critical to our operations. Our business could be negatively impacted by any quality or reliability issues with our suppliers’ products, including any undetected, latent defects. In addition, our dependence on these suppliers subjects us to the possible risks of shortages, interruptions and price fluctuations. If any of our suppliers are unable to fulfill their obligations to us, or if we are unable to find replacement suppliers in the event of a supply shortage or disruption, we could incur higher costs to secure adequate supplies and risk using lesser quality products, either of which could materially harm our business.  Possible shortages or interruptions in the supply of raw materials caused by the inability of our suppliers to obtain credit in a tightened credit market or other conditions beyond our control could adversely affect the availability, quality and cost of the supply used in our RealD

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Cinema Systems. Any inability on our part to effectively manage supply chain risk could increase our costs and limit the availability of raw materials that are critical to our operations.

Our RealD Cinema Systems and other visual technologies are generally designed for use with third-party technologies and hardware, and if we are unable to maintain the ability of our RealD Cinema Systems and other visual technologies to work with these third-party technologies and hardware, our business and operating results could be adversely affected.

Our RealD Cinema Systems and other visual technologies are generally designed for use with third-party technologies and hardware, such as Christie and Barco projectors, Doremi servers, Harkness Hall screens and Sony Electronics 4K SXRD® digital cinema projectors. Third-party technologies and hardware may be modified, re-engineered or removed altogether from the marketplace. In addition, third-party technologies used to interact with our 3D and other visual technologies can change without prior notice to us, which could result in increased costs or our inability to provide our 3D and other visual technologies to our licensees. If we are unable to maintain the ability of our 3D and other visual technologies to work with these third-party technologies and hardware, our business and operating results could be adversely affected.

If we are unable to maintain our brand and reputation for providing high quality 3D and other visual technologies, our business, results of operations and prospects could be materially harmed.

Our business, results of operations and prospects depend, in part, on maintaining and strengthening our brand and reputation for providing high quality 3D and other visual technologies. If problems with our 3D and other visual technologies cause motion picture exhibitors or other licensees to experience operational disruption or failure or delays in the delivery of their products and services to their customers, our brand and reputation could be diminished. Maintaining and strengthening our brand and reputation may be particularly challenging if we enter business segments in which we have limited experience. If we fail to promote and maintain our brand and reputation successfully, our business, results of operations and prospects could be materially harmed.

Competition from other providers of 3D technologies to the motion picture industry could adversely affect our business.

The motion picture industry is highly competitive, particularly among providers of 3D technologies. Our primary competitors include Dolby, Sony, IMAX, MasterImage and Xpand, with IMAX increasing market share in recent periods. In addition, other companies, including motion picture exhibitors and studios and smaller competitors in international markets, may develop their own 3D technologies in the future. Consumers may also perceive the quality of 3D technologies delivered by some of our competitors to be equivalent or superior to our 3D technologies. In addition, some of our current or future competitors may enjoy competitive advantages, such as greater financial, technical, marketing and other resources, greater market share and name recognition, ability to develop and be the first to introduce new 3D technologies successfully to the market or more experience or advantages in the business segments in which we compete that will allow them to offer lower prices or higher quality technologies, products or services. If we do not successfully compete with these providers of 3D technologies, we could lose market share and our business could be adversely affected. In addition, competition could force us to decrease prices and cause our margins to decline, which could adversely affect our business. Pricing pressures in both domestic and international motion picture exhibitor markets continue, and no assurance can be given that our margins in future periods will increase.

The introduction of new 3D and other visual technologies and changes in the way that our competitors operate could harm our business. If we fail to keep up with rapidly changing 3D and other visual technologies or the growth of new and existing opportunities, our 3D and other visual technologies could become less competitive or obsolete.

Due to technological advances and changing consumer tastes, numerous companies have developed, and are expected to continue to develop, new 3D and other visual technologies that may compete directly with or render our 3D and other visual technologies less competitive or obsolete. We believe that original equipment manufacturers may be working to develop laser-based projection technologies, which may compete with, be incompatible with or render our RealD Cinema Systems obsolete. Competitors may develop alternative 3D and other visual technologies that are more attractive to consumers, content producers and distributors, motion picture exhibitors and others, or more cost effective than our technologies, and compete with or render our 3D and other visual technologies less competitive or obsolete. As a result of this competition, we could lose market share, which could harm our business and operating results. If we are unable to develop and effectively market new 3D and other visual technologies that adequately or competitively address the needs of these changing industries, our business, results of operations and prospects could be materially and adversely affected.

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In addition, we face competition from companies that enjoy competitive advantages in the industries in which we operate for our research and development projects. Our competitors have greater financial resources than we do and deeper relationships with manufacturers, more developed distribution channels and technologies that may be better suited to bring these products to market. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, products, technologies or standards in 3D and other visual technologies and may offer consumers superior technology or lower prices which may reduce the demand for visual display devices using our 3D and other visual technologies. As a result, we may not be able to compete successfully in the industries in which we operate for our research and development projects.

If our 3D and other visual technologies fail to be widely adopted by or are not compatible with the needs of our licensees, our business prospects could be limited and our operating results could be adversely affected.

Our licensees depend upon our 3D and other visual technologies being compatible with a wide variety of motion picture and other systems, products and infrastructure. We make significant efforts to design our 3D and other visual technologies to address capability, quality and cost considerations so that they either meet or, where possible, exceed the needs of our licensees. To have our 3D and other visual technologies widely adopted, we must convince a broad spectrum of professional organizations worldwide, as well as motion picture studios and exhibitors and other industry participants, to adopt them, and to ensure that our 3D and other visual technologies are compatible with their systems, products and infrastructure.

If our 3D and other visual technologies are not widely adopted or retained or if we fail to conform our 3D and other visual technologies to the expectations of, or standards set by, industry participants, they may not be compatible with other products and our business, operating results and prospects could be adversely affected. We expect that meeting and maintaining the needs of our licensees for compatibility with them will be significant to our business in the future. In addition, the market for broadcast technologies has traditionally been heavily regulated by governments or other regulatory bodies, and we expect this to continue to be the case in the future. If our 3D and other visual technologies are not compatible with the broadcasting infrastructure or governmental or regulatory requirements in particular geographic areas, our ability to compete in these markets could be adversely affected.

Other forms of entertainment may be more attractive to consumers than those using our 3D and other visual technologies, which could harm our growth and operating results.

We face competition for consumer attention from other forms of entertainment that may drive down motion picture box office and license revenue from motion picture exhibitors. We compete with a number of alternative motion picture distribution channels, such as cable, satellite, broadcast, packaged media and the Internet and business models in these areas continue to evolve rapidly. There are also other forms of entertainment competing for consumers’ leisure time and disposable income such as concerts, amusement parks, sporting events and, from time to time, other major events like the Olympic Games or the World Cup. A significant increase in the popularity of these motion picture channels and competing forms of entertainment could reduce the demand for theatrical exhibition of 3D motion pictures, including those viewed with our RealD Cinema Systems, or the use of 3D-enabled consumer electronics devices, any of which would have an adverse effect on our business and operating results.

We have a limited operating history in several of the industries in which we operate for our research and development projects, which makes it difficult to predict our future prospects and financial performance.

We have a limited operating history in several of the industries in which we operate for our research and development projects. As such, the potential for future success for our research and development projects will depend on the challenges, uncertainties, expenses and difficulties encountered by us and we cannot predict whether and when any of such projects will be commercially available in the near future or at all. In addition, our research and development projects must be considered in light of our strategic plan to focus on our core business: the innovation and licensing of 3D and other visual technologies for the theater. In connection with this strategic plan, we are actively evaluating alternatives for refocusing and restructuring our research and development efforts through partnering or other means by which we can commercialize these technologies while keeping low or further reducing our cost structure. However, we cannot assure you that any strategic alternative, if identified, evaluated and consummated, will be beneficial to our business or provide greater value to our stockholders.

Our level of indebtedness reduces our financial flexibility and could impede our ability to operate.

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We are highly leveraged. As of March 31, 2014, our total indebtedness was approximately $36.3 million. Our high degree of leverage could have important consequences, including the following: (i) we may not generate sufficient cash flow from operations to service and repay our debt and related obligations and have sufficient funds left over to achieve or sustain profitability in our operations; (ii) we may be unable to meet our working capital and capital expenditure needs or compete successfully in our industry, particularly if we increase our debt obligations under our secured credit facility; (iii) our ability to obtain additional financing in the future, including obtaining additional commitments from our Revolving Facility, may be limited; (iv) we are at a competitive disadvantage to lesser leveraged competitors; (v) our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and (vi) we may be vulnerable to general adverse economic and industry conditions, including changes in interest rates.

We may borrow additional amounts under our credit facilities to fund various growth initiatives, including accelerated research and product development, acquisitions, capital expenditures and stock repurchases. We may maintain a certain amount of indebtedness on an ongoing basis. Our revolving credit facility matures on June 26, 2017, and our term loan facility matures on June 26, 2018.

Our credit facilities require us to pay a variable rate of interest, which will increase or decrease based on variations in certain financial indexes, and fluctuations in interest rates can significantly decrease our profits. We do not have any hedge or similar contracts in place that would protect us against changes in interest rates. There is no assurance that we will be able to refinance our outstanding indebtedness, or if refinancing is available, that it can be obtained on terms we can afford. For more information regarding our credit facilities, see “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources.”

Our credit facilities impose, and the terms of any future indebtedness may impose, significant operating, financial and other restrictions on us and our subsidiaries.

Restrictions imposed by our credit facilities will limit or prohibit, among other things, our ability to:

• incur additional debt;

• make certain investments or acquisitions;

• enter into certain merger and consolidation transactions; and

• sell our assets other than in the ordinary course of business.

We are also required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. If we fail to comply with any of the covenants or if any other event of default, as defined in our credit facilities, should occur, the lenders could elect to prevent us from borrowing and declare the indebtedness to be immediately due and payable.

These restrictions could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities. A breach of any of these restrictions, including breach of financial covenants, could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and fees, to be immediately due and payable and proceed against any collateral securing that indebtedness, which will constitute substantially all of our assets.

Our operating results may fluctuate from quarter to quarter, which may be different from analysts’ expectations and adversely affect our stock price.

Our operating results may fluctuate from quarter to quarter. Factors that have affected our operating results in the past, and are likely to affect our operating results in the future, include, among other things:

• the timing of when a 3D motion picture is released which tends to be based on specific consumer entertainment dynamics, which results in seasonal patterns, with the largest number of motion pictures being released in summer and early winter;

• the attendance at 3D versions of motion picture releases;

• the rate of installations of new RealD Cinema Systems, which we expect to decrease with the passage of time;

• the timing of capital expenditures and expenses, including depreciation expense of our RealD Cinema Systems deployed at a motion picture exhibitor’s premises (we expect capital expenditures to decrease, and depreciation expense to increase, as our RealD Cinema Systems business matures), digital projector depreciation expenses, RealD eyewear costs (including shipping, handling and recycling costs), field service and support costs, and

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occupancy costs, which may increase significantly, even in quarters when we do not experience a similar growth in revenue;

• the timing and accuracy of license fee reports which often include positive or negative corrective or retroactive license fees that cover extended periods of time; and

• competitive and pricing pressures that vary from market-to-market and place-to-place.

In addition, variances in our operating results from analysts’ expectations could adversely affect our stock price. See also “Management’s discussion and analysis of financial condition and results of operations—Seasonality and quarterly performance.”

We face a number of challenges with respect to the maturity of the domestic digital cinema market, and if motion picture exhibitors do not continue converting analog theaters to digital outside of the United States or the pace of conversion slows, our future prospects could be limited and our business could be adversely affected.

Our RealD Cinema Systems only work in theaters equipped with digital cinema projection systems, which enable 3D motion pictures to be delivered, stored and projected electronically, and our systems are not compatible with analog motion picture projectors. Motion picture exhibitors have been converting projectors from analog to digital cinema over the last several years, giving us the opportunity to deploy our RealD Cinema Systems. After motion picture exhibitors convert their projectors to digital cinema, they must install a polarization preserving screen and our RealD Cinema System to display motion pictures in RealD 3D. The conversion by motion picture exhibitors of their projectors and screens from analog to digital cinema requires significant expense. As of December 31, 2013, approximately 93% of domestic theater screens had converted to digital and approximately 78% of the international theater screens had been converted. We face a number of challenges with respect to the maturity of the domestic digital cinema market, including that the demand for new digital cinema screens has decreased significantly. Future growth in the domestic digital cinema market will depend on a number of factors, including the construction of new theaters, exhibitors choosing to deploy our RealD Cinema Systems versus competing or alternative technologies and our ability to maintain competitive pricing. In addition, if the market for digital cinema overseas develops more slowly than expected, or if the motion picture exhibitors we have agreements with delay or abandon the conversion of their theaters from analog theaters to digital, our ability to grow our revenue and our business could be adversely affected. While DCIP and Cinedigm financing provided funding for the digital conversion of domestic theater screens operated by many of our licensees, there has not yet been a similar effort to organize digital conversion in certain geographies outside North America. If the pace of digital conversion outside of the United States does not follow that which occurred inside the United States, our revenue may not grow or may decline, and our business could be adversely affected.

We have incurred and may in the future incur asset impairment charges.

An asset impairment charge may result from the occurrence of unexpected adverse events or management decisions that impact our estimates of expected cash flows generated from our long-lived assets. We review our long-lived assets for impairment, when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We may be required to recognize asset impairment charges in the future as a result of reductions in demand for specific technologies, a weak economic environment, challenging market conditions, events related to particular customers or asset type, or as a result of asset or portfolio sale decisions by management.

We face risks from doing business internationally that could harm our business, financial condition and results of operations.

We are dependent on international business for a significant portion of our total revenue. International gross revenue accounted for approximately 52% in fiscal 2014, 50% in fiscal 2013 and 49% in fiscal 2012. We expect that our international business will continue to represent a significant portion of our total revenue for the foreseeable future. This future revenue will depend to a large extent on the continued use and expansion of our 3D and other visual technologies in the motion picture industry worldwide. As a result, our business is subject to certain risks inherent in international business operations, many of which are beyond our control. These risks include:

• competitive and pricing pressures that vary from market-to-market and place-to-place;

• fluctuating foreign exchange rates and systems;

• laws and policies affecting trade, investment and taxes, including laws and policies relating to customs, duties, the repatriation of funds and withholding taxes and changes in these laws and our compliance with the foregoing;

• changes in local regulatory requirements, including restrictions on content;

• differing cultural tastes and attitudes;

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• differing degrees of protection for intellectual property;

• the need to adapt our business model to local requirements;

• difficulties in staffing and managing foreign and geographically dispersed operations;

• imposition of differing labor laws and standards;

• the instability of foreign economies and governments; and

• political instability, natural disaster, war or acts of terrorism.

Events or developments related to these and other risks associated with our international business operations could adversely affect our revenue from such operations, which could have a material and adverse effect on our business, financial condition and results of operations.

Our RealD eyewear may, in the future, be regulated by the Food and Drug Administration, or FDA, or by other state or foreign governmental or regulatory agencies, which could increase our costs and materially and adversely impact our profitability.

Currently, polarized 3D eyewear, including our RealD eyewear, is not regulated by the FDA, or by state or foreign governmental and regulatory agencies. However, certain eyewear, such as non-prescription reading glasses and sunglasses, are considered to be medical devices by the FDA and are subject to regulations imposed by the FDA and various state and foreign governmental and regulatory agencies. With the rising popularity of polarized 3D eyewear, there has been an increasing level of public scrutiny examining its potential health risks. Polarized 3D eyewear, including our RealD eyewear, may at some point be subject to federal, state or foreign regulations that could potentially restrict how our RealD eyewear is produced, used or marketed, and the cost of complying with those regulations may adversely affect our profitability.

If 3D viewing with active or passive eyewear is found to cause health risks or consumers believe that it does, demand for the 3D viewing experience may decrease or we may become subject to liability, any of which could adversely affect our results of operations, financial condition, business and prospects.

Research conducted by institutions unrelated to us has suggested that 3D viewing with active or passive eyewear may cause vision fatigue, eye strain, discomfort, headaches, motion sickness, dizziness, nausea, epileptic seizures, strokes, disorientation, perceptual after-effects, decreased postural stability or other health risks in some consumers. If these potential health risks are substantiated or consumers believe in their validity, demand for the 3D viewing experience in the theater, the home and elsewhere may decline. As a result, major motion picture studios and other content producers and distributors may refrain from developing 3D content, motion picture exhibitors may reduce the number of 3D-enabled screens (including RealD-enabled screens) they currently deploy or plan to deploy, or they may reduce the number of 3D motion pictures exhibited in their theaters, which would adversely affect our results of operations, financial condition and prospects. A decline in consumer demand may also lead to the reduction or abandonment of 3D products, which could adversely affect our prospects and financial condition.

In addition, if health risks associated with our RealD eyewear materialize, we may become subject to governmental regulation or product liability claims, including claims for personal injury. Successful assertion against us of one or a series of large claims could materially harm our business. Also, if our RealD eyewear is found to be defective, we may be required to recall it, which may result in substantial expense and adverse publicity that could adversely impact our sales, operating results and reputation. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded under the terms of the policy, which could adversely affect our financial condition. In addition, we may also be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage in the future, which could materially and adversely affect our results of operations, financial condition and business. Even meritless product liability claims could be expensive to resolve and may divert our management’s attention.

Our agreements with motion picture studios domestically and motion picture exhibitors internationally require us to manage the supply chain of our RealD eyewear, and any interruption to the supply chain for our RealD eyewear components could adversely affect our results of operations, financial condition, business and prospects.

Our RealD eyewear is an integral part of our RealD Cinema Systems. We have entered into non-exclusive agreements with several manufacturers to produce RealD eyewear. We manage manufacturing, distribution and recycling of RealD eyewear for motion picture studios and exhibitors worldwide. Domestically, we generally provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors’ customers. Most international motion picture exhibitors and some domestic motion picture exhibitors purchase RealD eyewear directly from us and sell them to consumers as part of their admission or as a concession item. Any interruption in the supply of RealD eyewear from manufacturers, increase in shipping costs,

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logistics or recycling interruption, other disruption to our global supply chain or competitive pricing pressures could adversely affect our results of operations, financial condition, business and prospects. For example, in connection with major 3D motion picture releases and increased consumer demand, we have in the past exhausted our inventory of RealD eyewear and incurred increased shipping costs to accelerate delivery of new inventory.

Our RealD 3D eyewear business model in North America and a limited number of countries internationally relies on financial support from motion picture studios for the RealD eyewear that are provided to theater customers, and the uncertainty and any potential dispute between motion picture studios and exhibitors could adversely affect our results of operations, financial condition, business and prospects.

Our RealD eyewear is an integral part of our RealD Cinema Systems. In North America, we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors’ customers.  In certain territories, motion picture studios provide financial support directly to theater operators for the RealD eyewear that are used by their customers.  Elsewhere, motion picture exhibitors purchase RealD eyewear directly from us and sell them to customers as part of their admission or as a concession. While we support multiple business models for our RealD eyewear around the world, the uncertainty and any potential dispute between motion picture studios and exhibitors over the eyewear business model, whether domestically or internationally, could adversely affect our results of operations, financial condition, business and prospects. In addition, we expect that profitability in our RealD eyewear business may not be sustainable, as motion picture studios with whom we do business seek to recover our cost savings and efficiencies in the form of reduced prices for eyewear.

Economic conditions beyond our control could reduce consumer demand for motion pictures and consumer electronics using our 3D and other visual technologies and, as a result, could materially and adversely affect our business, revenue and growth prospects.

Difficult economic conditions and recessionary periods may lead to a decrease indiscretionary consumer spending or consumer preference for lower-cost 2D motion pictures, resulting in lower motion picture box office revenue. In the event of declining box office revenue, motion picture studios may be less willing to release 3D motion pictures and motion picture exhibitors may be less willing to license our RealD Cinema Systems or exhibit 3D motion pictures. Further, a decrease in discretionary consumer spending may adversely affect future demand for consumer electronics products that may use our 3D and other visual technologies and consumer electronics manufacturers may decide to limit, delay or cease their use of our 3D and other visual technologies, any of which could cause our business, revenue and growth prospects to suffer.

The loss of members of our management could substantially disrupt our business operations.

Our success depends to a significant degree upon the continued contribution by members of our management . A limited number of individuals have primary responsibility for managing our business, including our relationships with motion picture studios and exhibitors. The loss of members of our management, including Michael V. Lewis, our Chairman and Chief Executive Officer, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could impair our ability to sustain and grow our business and could substantially disrupt our business operations. In addition, because we operate in a highly competitive industry, our hiring of qualified executives, scientists, engineers or other personnel may cause us or those persons to be subject to lawsuits alleging misappropriation of trade secrets, improper solicitation of employees, breach of contract or other claims.

Our ability to use our net operating loss carryforwards to offset future taxable income could be subject to certain limitations if our ownership has changed or will change by more than 50%, which could potentially result in increased future tax liability.

While currently subject to a full valuation allowance for purposes of preparing our consolidated financial statements (see the discussion under the heading “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates—Deferred tax asset valuation and tax exposures”), we intend to use our U.S. net operating loss carryforwards to reduce any future U.S. corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. In that event, our ability to use our net operating loss carryforwards could be adversely affected. To the extent our use of net operating loss carryforwards is significantly limited under the rules of Section 382 (as a result of our IPO or otherwise), our income could be subject to U.S. corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

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Furthermore, we operate both in the United States and in certain jurisdictions outside the United States. Our non-U.S. operations may in the future generate taxable income that is subject to income or other taxes in the jurisdictions in which those operations are conducted. As of September 30, 2014, we had foreign tax credit carryforwards of approximately $16.4 million for federal income tax purposes that begin to expire in the year 2019. Each jurisdiction in which we operate may have its own limitations on our ability to utilize such foreign tax credit carryforwards generated in that jurisdiction. Also, we generally cannot utilize net operating loss carryforwards or tax credits generated in one jurisdiction to reduce our liability for taxes in any other jurisdiction. Accordingly, we may be subject to tax liabilities in certain jurisdictions in which we operate notwithstanding the existence of net operating loss carryforwards or tax credits in other jurisdictions.

We may not achieve anticipated cost savings from the implementation of our cost reduction planand may experience difficulties, delays and unexpected costs in continuing our cost reduction efforts.

We implemented our 2014 Cost Reduction Plan during fiscal year 2014 to reduce the overall costs of our global operations, and we are seeking further efficiencies in our cost structure, including actively evaluating alternatives for certain of our research and development efforts. We may encounter difficulties, delays and unexpected costs in connection with such efforts. Our ability to achieve anticipated savings is dependent upon various future developments, some of which are beyond our control. If we are unable to achievethe anticipated savings or benefits to our business in the expected time frame or other unforeseen events occur, our business and results of operations may be adversely affected.

In addition, part of our cost reduction efforts may involve an involuntary reduction in force. For our cost reduction efforts to be successful while at the same time building a framework for future growth, we must continue to execute and deliver on our core business initiatives around the world with fewer human resources and losses of intellectual capital. We will need to manage complexities associated with a geographically diverse organization. We must also attract, retain and motivate key employees, including highly qualified management, scientific, manufacturing and sales and marketing personnel who are critical to our business. We may not be able to attract, retain or motivate qualified employees in the future and our inability to do so may adversely affect our business.

There may also be other risks associated with our cost reduction efforts and we cannot guarantee that we will be able to successfully manage these or other risks. If we fail to execute on our initiatives in these ways or others, such failure could result in a material adverse effect on our business and results of operations.

Changes in accounting may affect our reported earnings and operating income.

U.S. GAAP and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of the Company’s business, such as revenue recognition, film accounting, accounting for pensions and other postretirement benefits, accounting for income taxes, and treatment of goodwill or long lived assets, are highly complex and involve many subjective judgments. Changes in these rules, their interpretation, management’s estimates, or changes in the Company’s products or business could significantly change its reported future earnings and operating income and could add significant volatility to those measures, without a comparable underlying change in cash flow from operations.

Beginning in the first quarter of fiscal year 2014, we modified our definition of Adjusted EBITDA to align with the Adjusted EBITDA definition under our expanded credit facility. As a result, we no longer add back sales and use tax and property tax to calculate Adjusted EBITDA for financial reporting purposes.  For a definition of Adjusted EBITDA and reconciliation to net income (loss), the most comparable U.S. GAAP item, see “Non-U.S. GAAP discussion” under Item 7 in Part II.

We face risks in conducting business in China, Russia and other emerging economies.

We believe that various trends will increase our exposure to the risks of conducting business in emerging economies. For example, China and Russia are among our largest and fastest growing market opportunities. As of March 31, 2014, our RealD Cinema Systems were deployed and operated in approximately 1,500 cinema screens in China and approximately 250 cinema screens in Russia, with an additional approximately 950 screens under contract within these markets. We believe that our sales of products and services in China, Russia and other emerging economies will expand in the future to the extent that the use of technologies increases in these countries, including in movies and theaters, and as consumers there become more affluent. We face many risks associated with operating in these emerging economies, in large part due to limited recognition and enforcement of contractual and intellectual property rights. As a result, we may experience difficulties in enforcing our intellectual property rights in these emerging economies, where intellectual property rights are more difficult to enforce as compared to the United States, Hong Kong, Japan and Europe. We believe that it is critical that we strengthen existing relationships and develop new relationships with entertainment industry participants worldwide to

46

increase our ability to enforce our intellectual property and contractual rights without relying solely on the legal systems in the countries in which we operate. If we are unable to develop, maintain, and strengthen these relationships, our revenue from these countries could be adversely affected.

We may not realize the benefits of any strategic initiatives with respect to our research and development projects.

Our business strategy with respect to our research and development projects may include strategic initiatives, such as joint ventures, that allow us to profitably expand our business and leverage our technologies. Any future strategic initiatives involving our research and development projects could divert management’s time and focus from operating our business, potentially have adverse effects on our existing business relationships and our key employees and involve risks and uncertainties associated with entering markets in which we have no or limited prior experience. We also may not accurately assess the value or prospects of engaging in a strategic initiative with respect to certain of our research and development projects, and the anticipated benefits from any such initiative may not materialize. In addition, any future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, the incurrence of additional debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could materially harm our business and financial condition.

We have incurred, and may continue to incur, increased costs and demands on our management as a result of complying with the laws and regulations affecting public companies.

We have incurred, and may continue to incur, increased costs and demands on our management as a result of complying with the laws and regulations affecting public companies. Upon becoming a public company in July 2010, we began incurring additional general and administrative expenses to comply with the SEC reporting requirements, the listing standards of the New York Stock Exchange, or NYSE, the provisions of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The increased costs associated with operating a public company may negatively affect our operating results and divert our management’s attention from other business concerns.

We face risks associated with international trade and currency exchange.

We maintain sales, marketing and business operations in foreign countries. Consequently, we are exposed to fluctuations in exchange rates associated with the local currencies, including the Chinese Yuan, Russian Ruble and Brazilian Real, of our foreign business operations. Revenue from our foreign business operations in transactions denominated in local currencies are significant. While we may also derive revenue from our foreign business operations in transactions denominated in U.S. dollars, a substantial portion of our costs from our foreign operations are denominated in the currency of that foreign location. Consequently, exchange rate fluctuations between the U.S. dollar and other currencies could have a material impact on our profitability. In addition, foreign governments may restrict transfers of cash out of the country and control exchange rates. There can be no assurance that we will be able to repatriate our earnings, and at exchange rates that are beneficial to us, which could have a material adverse effect on our business and results of operations.

Risks related to owning our common stock

The price of our common stock may fluctuate significantly and you could lose all or part of your investment as a result.

Shares of our common stock were sold in our IPO in July 2010 at a price of $16.00 per share, and, as of September 30, 2014, our common stock has subsequently traded as high as $35.60 and as low as $6.41. An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares or at all. The market price of our common stock could fluctuate significantly for various reasons, including those factors listed in “—Risks related to our business and our industry” and the following:

• our quarterly or annual earnings or those of our competitors;

• the public’s reaction to press releases or other public announcements by us or third parties, including our filings with the SEC;

• changes in earnings estimates or recommendations by research analysts who track our common stock or the stock of our competitors;

• investor perceptions or the investment opportunity associated with our common stock relative to other investment ;

• new laws or regulations or new interpretations of laws or regulations applicable to our business;

• changes in accounting standards, policies, guidance, interpretations or principles;

47

• changes in general conditions in the domestic and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

• litigation involving our Company or investigations or audits by regulators into the operations of our Company or our competitors;

• strategic action by our competitors; and

• sales of common stock by our directors, executive officers and significant stockholders.

In addition, the stock market in general, and the market for technology and media companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources even if such litigation is without merit and regardless of the outcome of such litigation.

Sales of outstanding shares of our common stock (or shares of our common stock issued upon exercise of stock options) into the market in the future could cause the market price of our stock to drop significantly, even if our business is doing well.

As of September 30, 2014, we had 50,077,041 shares of common stock outstanding which are freely tradable, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume, manner of sale, notice and availability of public information provisions of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. Our co-founders and certain other pre-IPO stockholders also have registration rights which enable them to cause us to register for sale shares held by them in the public markets. If our existing security holders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline.

In addition, as of September 30, 2014, there were 14,075,596 shares underlying options and restricted stock that were issued and outstanding and we have an aggregate of 5,188,684 shares of common stock reserved for future issuance under our equity incentive plan and employee stock purchase plan. These shares will become eligible for sale in the public market to the extent permitted by the provisions of various option and warrant agreements, maintenance of applicable registration statements and Rules 144 and 701 under the Securities Act. If additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our stock could decline and it might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

Our business could be negatively affected by the actions of activist stockholders, and activist activities could impact the market price of our stock.

Certain activist stockholders have expressed opposition to the Company’s strategic plan and their intent to take actions designed to prevent full implementation of our strategic plan. Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could also interfere with our ability to execute our strategic plan. The perceived uncertainties as to our future direction and financial performance may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners.

Certain activist stockholders have made strategic proposals, suggestions or requested changes concerning the Company's strategy and operations. We cannot predict, and no assurances can be given, as to the outcome or timing of these matters. Our business could be negatively affected because of the actions of activist stockholders and our stock price may experience periods of increased volatility as a result.

Our co-founders, directors, executive officers and principal stockholders have substantial control over us and could delay or prevent a change in corporate control.

48

As of March 31, 2014, our directors and executive officers, together with their affiliates, beneficially owned approximately 20% of our outstanding common stock, including approximately 13% beneficially owned by Michael V. Lewis, our Chairman and Chief Executive Officer.

These stockholders, acting together, have the ability to control, or have significant influence over, the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have the ability to control, or have significant influence over, the management and affairs of our Company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

• delaying, deferring or preventing a change in corporate control;

• impeding a merger, consolidation, takeover or other business combination involving us; or

• discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

As a public company, we are required to assess our internal control over financial reporting on an annual basis, and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

As a public company, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we need to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on and our independent registered public accounting firm to attest to the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 requires that we expend significant management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we may be unable to conclude that our internal control over financial reporting is effective. Any failure to develop or maintain effective controls or any difficulties encountered in our implementation of our internal control over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially cause the market price of our common stock to decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be issued to satisfy our obligations under our equity incentive plans, shares that may be issued in connection with our acquisition of other companies, assets or technology, or shares of our authorized but unissued preferred stock. Issuances of common stock or preferred voting stock could reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, likely could result in your interest in us being subject to the prior rights of holders of that preferred stock. In addition, any future issuance of capital stock by us will dilute your economic interest in us.

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We do not expect to pay dividends on shares of our common stock in the foreseeable future, and we intend to use cash generated from operations to continue to grow our business. Consequently, your only opportunity to achieve a positive return on your investment in us will be if the market price of our common stock appreciates.

If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our business or if they downgrade our stock, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. We do not control these analysts. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

49

Provisions in our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a change of control of our Company or changes in our management and, therefore, may depress the trading price of our stock.

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our stock by acting to discourage, delay or prevent a change of control of our Company or changes in our management that some of the stockholders of our Company may deem advantageous. Some of these provisions:

• authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

• provide for a classified board of directors (three classes) where only one-third of our board of directors is up for re-election at the annual stockholders meeting each year;

• provide that stockholders may only remove directors for cause;

• provide that stockholders may only remove directors prior to the expiration of their term upon a supermajority vote of at least 80% of our outstanding common stock;

• provide that any vacancy on our board of directors, including a vacancy resulting from an increase in the size of the board, may only be filled by the affirmative vote of a majority of our directors then in office, even if less than a quorum;

• provide that a special meeting of stockholders may only be called by our board of directors or by our chief executive officer;

• provide that action by written consent of the stockholders may be taken only if the board of directors first approves such action; provided that, notwithstanding the foregoing, we will hold an annual meeting of stockholders in accordance with NYSE rules, for so long as our shares are listed on NYSE, and as otherwise required by the bylaws;

• provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and

• establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

We may also adopt a “poison pill” stockholder rights plan at any time in response to a potentially hostile bid or for any or no reason due to our available “blank check” preferred stock. Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.

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

Issuer Purchases of Equity Securities

On April 20, 2012, we announced that our board of directors had approved an authorization to repurchase up to $50.0 million of RealD common stock. On December 17, 2012, our board approved a $25 million increase in our stock repurchase plan, increasing the $50 million repurchase plan announced on April 20, 2012 to $75 million. The number of shares to be repurchased and the timing of any potential repurchases will depend on factors such as the Company’s stock price, economic and market conditions, alternative uses of capital, and corporate and regulatory requirements. Repurchases of common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when RealD might otherwise be precluded from doing so under insider trading laws, and a variety of other methods, including open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The repurchase program may be suspended or discontinued at any time.

Pursuant to our stock repurchase plan authorized by our board of directors, we have repurchased a total of 6,599,726 shares of common stock at an average price per share of $10.30, including sales commissions, for an aggregate cost of $68 million inception to date. For the three and six months ended September 30, 2014, there were no stock repurchases.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURE

None.

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ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The following exhibits are attached hereto and filed herewith:

EXHIBIT INDEX

		Incorporated by Reference
Exhibit  Number	Exhibit Description	Form	SEC File No.	Exhibit	Filing Date	Filed Herewith
3.1	Amended and Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on July 15, 2010.	10-Q	001-34818	3.1	July 29, 2011
3.2	Amended and Restated Bylaws as became effective on July 15, 2010.	10-Q	001-34818	3.2	July 29, 2011
3.3	Amended and Restated Bylaws as amended and restated June 5, 2013.	10-K	001-34818	3.3	June 6, 2013
4.1	Specimen of common stock certificate.	S-1/A	333-165988	4.1	May 26, 2010
4.2	Amended and Restated Investors’ Rights Agreement, dated December 24, 2007, by and among the registrant, the founders and the investors named therein.	S-1/A	333-165988	4.2	May 26, 2010
4.3	Amendment and Agreement to Amended and Restated Investors’ Rights Agreement, dated June 11, 2010, by and among the registrant and the other signatories thereto.	S-1/A	333-165988	4.6	June 29, 2010
4.4	Side letter, dated June 25, 2010, to Amended and Restated Investors’ Rights Agreement, as amended.	S-1/A	333-165988	4.8	June 29, 2010
10.1†	Separation Agreement and General Release with Minard Hamilton dated November 11, 2013.	10-Q	001-34818	10.1	February 5, 2014
10.2†	Separation Agreement and General Release with Joseph Peixoto dated October 21, 2013.	10-Q	001-34818	10.2	February 5, 2014
10.3	Amended and Restated Credit Agreement, dated June 26, 2014.	8-K	001-34818	10.1	July 3, 2014
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.3	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X

52

32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
32.3	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
101.INS*	XBRL Instance Document.	X
101.SCH*	XBRL Taxonomy Extension Schema Document.	X
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.	X
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.	X
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.	X
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.	X

†

Indicates a management contract or compensatory plan or arrangement.

*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURE

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

RealD Inc.
By:	/s/ Andrew A. Skarupa
	Andrew A. Skarupa
	Chief Financial Officer and Chief Business Development Officer, Cinema
	(Principal Financial Officer)
By:	/s/ Heather O’Connor
	Heather O’Connor
	Senior Vice President, Finance
	and Chief Accounting Officer
	(Principal Financial Officer)

Date: November 3, 2014

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EX-31.1

EXHIBIT 31. 1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael V. Lewis, certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of RealD Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 3, 2014

/s/ Michael V. Lewis
	Michael V. Lewis
	Chief Executive Officer and
	Chairman of the Board of Directors (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Andrew A. Skarupa, certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of RealD Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 3, 2014

/s/ Andrew A. Skarupa
	Andrew A. Skarupa
	Chief Financial Officer and Chief Business Development Officer, Cinema
	(Principal Financial Officer)

EX-31.3

EXHIBIT 31.3

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Heather O’Connor, certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of RealD Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 3, 2014

/s/ Heather O’Connor
	Heather O’Connor
	Senior Vice President, Finance and Chief Accounting Officer
	(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RealD Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael V. Lewis, Chief Executive Officer of the Company and Chairman of the Board of Directors, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael V. Lewis

Michael V. Lewis

Chief Executive Officer and

Chairman of the Board of Directors

(Principal Executive Officer)

November 3, 2014

This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RealD Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew A. Skarupa, Chief Financial Officer and Chief Business Development Officer, Cinema, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Andrew A. Skarupa

Andrew A. Skarupa

Chief Financial Officer and Chief Business Development Officer, Cinema

(Principal Financial Officer)

November 3, 2014

This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.3

EXHIBIT 32.3

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RealD Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Heather O’Connor, Senior Vice President, Finance and Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Heather O’Connor

Heather O’Connor

Senior Vice President, Finance

and Chief Accounting Officer

(Principal Financial Officer)

November 3, 2014

This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

XML

Commitments and contingencies (Details) (Purchase Commitment, USD $) In Millions, unless otherwise specified	6 Months Ended
	Sep. 30, 2014
Indemnities and commitments
Future obligations	$ 6.3
Revolving supply commitments (in days)	90 days
Maximum
Indemnities and commitments
Payment required under the cancellation penalty provisions as a percentage of the unused contract	20.00%

XML

Summary of significant accounting policies (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2014 quarter	Sep. 30, 2013	Sep. 30, 2014 quarter	Sep. 30, 2013
Accounting period
Number of periods in an accounting period	4		4
Length of quarter (in months)			3 months
Length of fiscal year (in months)			12 months
Numerator:
Net income (loss)	$ (1,567)	$ (4,664)	$ 3,934	$ (6,200)
Net loss attributable to noncontrolling interest	0	13	0	15
Net income (loss) attributable to RealD Inc. common stockholders	$ (1,567)	$ (4,651)	$ 3,934	$ (6,185)
Denominator: (in shares)
Weighted-average common shares outstanding (basic)	49,783	49,260	49,828	49,479
Effect of dilutive securities	0	0	2,134	0
Weighted-average common shares outstanding (diluted)		49,260	51,962	49,479
Earnings (loss) per common share:
Basic (in dollars per share)	$ (0.03)	$ (0.09)	$ 0.08	$ (0.13)
Diluted (in dollars per share)	$ (0.03)	$ (0.09)	$ 0.08	$ (0.13)
Loss per share of common stock
Options to purchase shares of common stock and restricted stock awards			1,203
Options, employee stock purchase plan, restricted stock units and warrants to purchase common stock
Loss per share of common stock
Weighted-average number of anti-dilutive shares excluded from the calculation of diluted loss per common share	8,697	9,612	9,046	9,741

XML

Equity (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance			$ 150,834
Share-based compensation			8,233
Exercise of stock options			2,116
Purchase and distribution of stock under employee stock purchase plan			291	303
Other comprehensive loss, net of tax	164	68	163	205
Effect of currency exchange rate changes on cash and cash equivalent			163	205
Net income (loss)	(1,567)	(4,664)	3,934	(6,200)
Total comprehensive income			4,097
Balance	165,571		165,571
Parent [Member]
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance			151,412
Share-based compensation			8,233
Exercise of stock options			2,116
Purchase and distribution of stock under employee stock purchase plan			291
Other comprehensive loss, net of tax			163
Net income (loss)			3,934
Total comprehensive income			4,097
Balance	166,149		166,149
Noncontrolling Interest [Member]
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance			(578)
Share-based compensation			0
Exercise of stock options			0
Purchase and distribution of stock under employee stock purchase plan			0
Other comprehensive loss, net of tax			0
Net income (loss)			0
Total comprehensive income			0
Balance	$ (578)		$ (578)

XML

Property and equipment, RealD Cinema Systems and digital projectors

6 Months Ended

Sep. 30, 2014

Property and equipment, RealD Cinema Systems and digital projectors

Property and equipment, RealD Cinema Systems and digital projectors

Tangible fixed assets consist of the following: 

	September 30,			March 31,
(in thousands)	2014			2014
RealD Cinema Systems	209,319			$	205,632
Leasehold improvements	17,410			16,935
Machinery and equipment	7,283			4,753
Furniture and fixtures	1,269			1,272
Computer equipment and software	10,043			9,197
Construction in process	548			1,554
Total	$	245,872		$	239,343
Less accumulated depreciation	(126,792		)	(110,060		)
Cinema Systems and Property & Equipment, net	$	119,080		$	129,283

Depreciation expense amounted to $10.1 million and $9.9 million for the three months endedSeptember 30, 2014 and September 30, 2013, respectively. Depreciation expense amounted to $19.6 million and $19.1 million for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

During the six months endedSeptember 30, 2014, the Company received $0.1 million in cash from motion picture exhibitor customers for the sale of digital projectors. During the six months endedSeptember 30, 2013, the Company received $0.1 million in cash from motion picture exhibitor customers for the sale of digital projectors.

XML

Cost Reduction Plan (Details) (USD $)	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	12 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended
	Sep. 30, 2014	Sep. 30, 2014	Sep. 30, 2014 Cost of revenue	Sep. 30, 2014 Cost of revenue	Sep. 30, 2014 Research and development	Sep. 30, 2014 Research and development	Sep. 30, 2014 Selling and marketing	Sep. 30, 2014 Selling and marketing	Sep. 30, 2014 General and administrative	Sep. 30, 2014 General and administrative	Sep. 30, 2014 Personnel	Sep. 30, 2014 Personnel	Mar. 31, 2014 Personnel	Sep. 30, 2014 Personnel Cost of revenue	Sep. 30, 2014 Personnel Cost of revenue	Sep. 30, 2014 Personnel Research and development	Sep. 30, 2014 Personnel Research and development	Sep. 30, 2014 Personnel Selling and marketing	Sep. 30, 2014 Personnel Selling and marketing	Sep. 30, 2014 Personnel General and administrative	Sep. 30, 2014 Personnel General and administrative	Sep. 30, 2014 Leasehold	Sep. 30, 2014 Leasehold	Sep. 30, 2014 Leasehold Cost of revenue	Sep. 30, 2014 Leasehold Cost of revenue	Sep. 30, 2014 Leasehold Research and development	Sep. 30, 2014 Leasehold Research and development	Sep. 30, 2014 Leasehold Selling and marketing	Sep. 30, 2014 Leasehold Selling and marketing	Sep. 30, 2014 Leasehold General and administrative	Sep. 30, 2014 Leasehold General and administrative	Mar. 31, 2015 Scenario, Forecast Leasehold
Cost reduction plan
Percentage of staff reduced under the cost reduction plan		20.00%
Charges related to staff reduced													$ 4,700,000
Expected cost to be incurred related to exiting a lease																																600,000
Cost reduction plan total charges incurred to date	5,300,000	5,300,000
Total charges associated with the cost reduction plan	532,000	603,000	326,000	397,000	0	0	16,000	16,000	190,000	190,000	230,000	230,000		24,000	24,000	0	0	16,000	16,000	190,000	190,000	302,000	373,000	302,000	373,000	0	0	0	0	0	0
Restructuring and Related Costs, Accrual of Losses for Lease Manufacturing Facilities	$ 0	$ 0

XML

Property and equipment, RealD Cinema Systems and digital projectors (Details) (USD $)	3 Months Ended		6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Mar. 31, 2014
Property and equipment, RealD Cinema Systems and digital projectors
Total	$ 245,872,000		$ 245,872,000		$ 239,343,000
Less accumulated depreciation	(126,792,000)		(126,792,000)		(110,060,000)
Cinema Systems and Property & Equipment, net	119,080,000		119,080,000		129,283,000
Depreciation expense	10,100,000	9,900,000	19,600,000	19,100,000
Proceeds from sale of property, plant, and equipment			79,000	70,000
RealD Cinema Systems
Property and equipment, RealD Cinema Systems and digital projectors
Total	209,319,000		209,319,000		205,632,000
Leasehold improvements
Property and equipment, RealD Cinema Systems and digital projectors
Total	17,410,000		17,410,000		16,935,000
Machinery and equipment
Property and equipment, RealD Cinema Systems and digital projectors
Total	7,283,000		7,283,000		4,753,000
Furniture and fixtures
Property and equipment, RealD Cinema Systems and digital projectors
Total	1,269,000		1,269,000		1,272,000
Computer equipment and software
Property and equipment, RealD Cinema Systems and digital projectors
Total	10,043,000		10,043,000		9,197,000
Construction in process
Property and equipment, RealD Cinema Systems and digital projectors
Total	$ 548,000		$ 548,000		$ 1,554,000

XML

Fair value measurement (Details) (USD $)	3 Months Ended	6 Months Ended
	Sep. 30, 2014	Sep. 30, 2014
Derivative instruments
Gain (loss) on foreign currency derivative instruments not designated as hedging instruments	$ 100,000	$ 100,000
Not designated as hedging instrument
Derivative instruments
Derivative asset, fair value, gross asset	119,000	119,000
Derivative liability, fair value, gross liability	18,000	18,000
Not designated as hedging instrument | Fair value, inputs, level 1
Derivative instruments
Derivative asset, fair value, gross asset	0	0
Derivative liability, fair value, gross liability	0	0
Not designated as hedging instrument | Fair value, inputs, level 2
Derivative instruments
Derivative asset, fair value, gross asset	119,000	119,000
Derivative liability, fair value, gross liability	18,000	18,000
Not designated as hedging instrument | Fair value, inputs, level 3
Derivative instruments
Derivative asset, fair value, gross asset	0	0
Derivative liability, fair value, gross liability	0	0
Not designated as hedging instrument | Foreign exchange forward
Derivative instruments
Derivative asset, fair value, gross asset	119,000	119,000
Derivative liability, fair value, gross liability	18,000	18,000
Not designated as hedging instrument | Foreign exchange forward | Fair value, inputs, level 1
Derivative instruments
Derivative asset, fair value, gross asset	0	0
Derivative liability, fair value, gross liability	0	0
Not designated as hedging instrument | Foreign exchange forward | Fair value, inputs, level 2
Derivative instruments
Derivative, notional amount	8,667,000	8,667,000
Derivative asset, fair value, gross asset	119,000	119,000
Derivative liability, fair value, gross liability	18,000	18,000
Foreign currency forward contracts, maturity period (in months)		12 months
Derivative Asset	100,000	100,000
Not designated as hedging instrument | Foreign exchange forward | Fair value, inputs, level 3
Derivative instruments
Derivative asset, fair value, gross asset	0	0
Derivative liability, fair value, gross liability	$ 0	$ 0

XML

Cost Reduction Plan (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended		3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	12 Months Ended
	Sep. 30, 2014	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014 Personnel	Sep. 30, 2014 Personnel	Sep. 30, 2014 Leasehold	Sep. 30, 2014 Leasehold	Mar. 31, 2015 Scenario, Forecast Leaseholds and Leasehold Improvements
Summary of currently incurred charges resulting from implementation of the cost reduction plan within accrued expenses and other liabilities
Cost reduction plan liabilities, period start		$ 1,416			$ 1,416		$ 0
Charges	532	603		230	230	302	373
(Payments)		(820)			(712)		(108)
Cost reduction plan liabilities, period end	1,199	1,199		934	934	265	265
Impairment		$ 1,468	$ 2,783					$ 6,000

XML

Summary of significant accounting policies

6 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Summary of significant accounting policies

Summary of significant accounting policies

Accounting period

The Company’s fiscal year consists of four3-month periods for a total of 12 calendar months and will end on March 31, 2015.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the financial statements relate to the following:

• licensing revenue terms applied to the timing and number of motion picture exhibitor consumer admissions;

• domestic eyewear product revenue terms applied to when the usage occurs and the amount of usage;

• effect of customer contract terms on revenue and balance sheet items;

• impairment testing of goodwill, intangible assets and tangible assets, including determination of relevant reporting units and long-lived asset groups;

• useful lives of intangible assets and tangible assets;

• timing and amount recognized for performance-based compensation, including bonus and certain restricted share units, based on projections of Company performance achievement;

• the impact of potential future tax consequences of events that have been recognized in the Company’s financial statements;

• valuation of accruals and allowances;

• contingency assessments; and

• assumptions used in the determination of the fair value of equity-based awards for stock-based compensation.

Earnings (loss) per share of common stock

Basic income per share of common stock is computed by dividing the net income (loss) attributable to the Company’s common stockholders for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income attributable to the Company’s common stockholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan and unvested restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method.

The calculation of the basic and diluted earnings (loss) per share of common stock for the three and six months endedSeptember 30, 2014 and September 30, 2013 was as follows:

	Three months ended						Six months ended
	September 30,			September 30,			September 30,		September 30,
(in thousands, except share and per share data)	2014			2013			2014		2013
Numerator:
Net income (loss)	$	(1,567	)	$	(4,664	)	3,934		(6,200		)
Net loss attributable to noncontrolling interest	—			13			—		15
Net income (loss) attributable to RealD Inc. common stockholders	$	(1,567	)	$	(4,651	)	$	3,934	$	(6,185	)
Denominator:
Weighted-average common shares outstanding (basic)	49,783			49,260			49,828		49,479
Effect of dilutive securities	—			—			2,134		—
Weighted-average common shares outstanding (diluted)	49,783			49,260			51,962		49,479
Earnings (loss) per common share:
Basic	$	(0.03	)	$	(0.09	)	$	0.08	$	(0.13	)
Diluted	$	(0.03	)	$	(0.09	)	$	0.08	$	(0.13	)

The weighted-average number of anti-dilutive shares excluded from the calculation of diluted earnings (loss) per common share for the three and six months endedSeptember 30, 2014 and September 30, 2013 was as follows:

	Three months ended		Six months ended
	September 30,	September 30,	September 30,	September 30,
(in thousands)	2014	2013	2014	2013
Options, employee stock purchase plan, restricted stock units and warrants to purchase common stock	8,697	9,612	9,046	9,741

Due to the loss attributable to the Company’s common stockholders for the three months endedSeptember 30, 2014 and the three and six months ended September 30, 2013, basic loss per share of common stock and diluted loss per share of common stock are the same because the effect of potentially dilutive securities would be antidilutive.

The following table sets forth the number of equity awards that are contingently issuable which were not included in the calculation of diluted shares (for the period where the Company had net income) as the required performance conditions had not been met as of September 30, 2014:

(in thousands)	Six months ended September 30, 2014
Options to purchase shares of common stock and restricted stock awards	1,203

Accounts receivable

Accounts receivable consists of trade receivables, value-added tax (“VAT”) receivables and other receivables. The Company provides credit to its customers, who are primarily in the movie production and exhibition businesses. The Company provides for the estimated accounts receivable that will not be collected. These estimates are based on an analysis of historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in the customers’ payment terms and their economic condition. Collection of accounts receivable may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company’s overall credit risk. The allowance for doubtful accounts and customer credits totaled $4.4 million and $3.2 million as of September 30, 2014 and March 31, 2014, respectively.

Inventories and deferred costs-eyewear

Inventories and deferred costs-eyewear represent RealD eyewear and are substantially all finished goods. Inventories and deferred costs-eyewear are valued at the lower of cost (first-in, first-out method) or market value. At each balance sheet date, the Company evaluates ending inventories and deferred costs-eyewear for net realizable value. The Company also evaluates inventories for excess quantities and obsolescence. These evaluations include analyses of expected future average selling prices, projections of future demand and technology changes. In order to state inventories at the lower of cost or market, RealD maintains reserves against such inventories. If the Company’s analyses indicate that market is lower than cost, a write-down of inventories is recorded in cost of revenue in the period the loss is identified. As of September 30, 2014 and March 31, 2014, the inventory reserve as a result of the Company’s net realizable value analyses was $0 and $0.6 million, respectively.

Domestically, the Company provides RealD eyewear free of charge to motion picture exhibitors and then receives a fee from the motion picture studios for the usage of RealD eyewear by the motion picture exhibitors’ consumers. Eyewear shipped from inventory is deferred on the shipment date and then amortized to cost of product revenue according to assumptions related to eyewear usage by consumers.

Impairment of long-lived assets

The Company reviews long-lived assets, such as property and equipment, cinema systems, digital projectors and intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

For the three months endedSeptember 30, 2014 and September 30, 2013, impairment charges for all impaired RealD Cinema Systems charged to cost of revenue totaled $0.5 million and $1.8 million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, impairment charges for all impaired RealD Cinema Systems charged to cost of revenue totaled $1.5 million and $2.8 million, respectively.

Revenue recognition

The Company derives substantially all of its revenue from the license of RealD Cinema Systems and the product sale of RealD eyewear. RealD evaluates revenue recognition for transactions using the criteria set forth by the Financial Accounting Standard Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases, and ASC Topic 605, Revenue Recognition. The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company records revenue net of estimated allowances.

License revenue

License revenue, net of allowances, is accounted for as an operating lease. License revenue is primarily derived under per-admission, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated allowances, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside the Company’s control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and the Company has no more obligations to our customers specific to the contingent payment received. Certain of the Company’s license revenue from leasing RealD Cinema Systems is earned upon admission by the motion picture exhibitor’s consumers. The Company’s licensees, however, do not report and pay for such license revenue until after the admission has occurred, which may be received subsequent to the Company’s fiscal period end. The Company estimates and records licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be made. The Company determines that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee’s admissions report. Revenue is deemed fixed or determinable upon receipt of a licensee’s admissions report or evidence of a RealD box office showing by licensee. The Company determines collectability based on an evaluation of the licensee’s recent payment history and evaluation of the respective customer’s credit-standing.

Product revenue

The Company recognizes product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of the Company’s product revenue from the sale of RealD eyewear is earned upon admission and usage by the motion picture exhibitor’s consumers. The Company’s customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received subsequent to the Company’s fiscal period end. Accordingly, the Company estimates and records such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made.

Comprehensive income (loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). The only component of other comprehensive income or loss is unrealized foreign currency translation gains (losses). There were no reclassifications out of accumulated other comprehensive income (loss) during the three and six months ended September 30, 2014 and September 30, 2013.

Shipping and handling costs

Amounts billed to customers for shipping and handling costs are included in revenue. RealD’s shipping and handling costs consists primarily of packaging and transportation charges and are recorded in cost of revenue. Shipping and handling costs recognized in cost of revenue were $1.3 million and $1.7 million for the three months endedSeptember 30, 2014 and September 30, 2013, respectively. Shipping and handling costs recognized in cost of revenue were $3.1 million and $3.9 million for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

Research and development

Research and development (R&D) costs are expensed as incurred. Major components of R&D expense include salaries and benefits, materials and supplies inclusive of prototypes, non-recurring engineering, payments to third parties for R&D, facilities and equipment that can only be used for a particular project and overhead allocations of various administrative and facilities costs related to R&D.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606), effective for RealD starting April 1, 2017 (the first quarter of fiscal year 2018). Early application is not permitted. The new standard will be implemented retrospectively with the Company choosing to either restate prior periods or recognize the cumulative effect; the Company has not yet selected a transition method.

The new Topic 606 does not apply to lease contracts within the scope of Topic 840 Leases. The primary objective of ASU 2014-09 is to provide guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Revenue recognition is anticipated to entail more judgment and more estimating than under the current guidance. ASU 2014-09 also changes Topic 360 Property, Plant and Equipment, Topic 350 Intangibles-Goodwill and Other and certain other U.S. GAAP. The Company has not yet determined the effects of Topic 606 and other ASU 2014-09 revisions on its consolidated financial statements.

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Borrowings (Details) (USD $)	6 Months Ended			0 Months Ended	3 Months Ended		6 Months Ended					6 Months Ended		0 Months Ended	6 Months Ended	0 Months Ended	6 Months Ended		0 Months Ended								0 Months Ended			0 Months Ended	3 Months Ended	6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Mar. 31, 2014	Jun. 26, 2014 2014 Credit Agreement [Member]	Sep. 30, 2014 2014 Credit Agreement [Member]	Sep. 30, 2013 2014 Credit Agreement [Member]	Sep. 30, 2014 2014 Credit Agreement [Member]	Sep. 30, 2013 2014 Credit Agreement [Member]	Jun. 30, 2014 2014 Credit Agreement [Member]	Jun. 26, 2014 2014 Credit Agreement [Member]	Mar. 31, 2014 2014 Credit Agreement [Member]	Sep. 30, 2014 2014 Credit Agreement [Member] Debt Instrument Variable Base Rate	Sep. 30, 2014 2014 Credit Agreement [Member] Eurocurrency Rate	Jun. 26, 2014 2014 Credit Agreement [Member] Eurocurrency Rate For A One Month Interest Period	Sep. 30, 2014 2014 Credit Agreement [Member] Eurocurrency Rate For A One Month Interest Period	Jun. 26, 2014 2014 Credit Agreement [Member] FederalFundsRate	Sep. 30, 2014 2014 Credit Agreement [Member] FederalFundsRate	Sep. 30, 2014 2014 Credit Agreement [Member] City National Bank Prime Rate	Jun. 26, 2014 2014 Credit Agreement [Member] Minimum	Jun. 26, 2014 2014 Credit Agreement [Member] Minimum Eurocurrency Rate	Jun. 26, 2014 2014 Credit Agreement [Member] Minimum Eurocurrency Rate For A One Month Interest Period	Jun. 26, 2014 2014 Credit Agreement [Member] Maximum	Jun. 26, 2014 2014 Credit Agreement [Member] Maximum Eurocurrency Rate	Jun. 26, 2014 2014 Credit Agreement [Member] Maximum Eurocurrency Rate For A One Month Interest Period	Sep. 30, 2014 Revolving Credit Facility	Jun. 30, 2014 Revolving Credit Facility	Jun. 26, 2014 Revolving Credit Facility Minimum	Jun. 26, 2014 Revolving Credit Facility Maximum	Jun. 26, 2014 Revolving Credit Facility Maximum	Jun. 26, 2014 Notes Payable to Banks	Jun. 30, 2014 Notes Payable to Banks	Sep. 30, 2014 Notes Payable to Banks installment	Jun. 26, 2014 Notes Payable to Banks Maximum
Borrowings and Credit Agreement
Borrowing capacity																													$ 50,000,000				$ 50,000,000
Interest rate added to base rate (as a percent)														1.00%		0.50%				2.25%			2.75%
Interest rate added to variable rate (as a percent)																					1.25%			1.75%
Commitment fee of unused balance (as a percent)																											0.25%	0.375%		0.375%
Letter of credit fee (as a percent)																			2.25%			2.75%
Variable rate basis												base rate	Eurocurrency rate		Eurocurrency rate		Federal Funds	City National's prime rate
Borrowings drawn	37,300,000	37,500,000																													37,300,000
Available borrowing capacity									62,700,000																50,000,000						12,700,000	12,700,000
Amount outstanding	0		0								36,300,000															0						33,600,000
Number of installments for debt instrument periodic payment																																14
Amount of periodic payment of debt																																1,900,000
Debt issuance costs				900,000
Deferred charge remaining										300,000
Calculation of the current and non-current portion of the Credit Agreement
Current portion of Credit Agreement	7,460,000		12,500,000
Credit Agreement, net of current portion	26,110,000		23,750,000
Total Credit Agreement	33,570,000		36,250,000
Future minimum Credit Agreement obligations
Fiscal year 2015	3,730,000
Fiscal year 2016	7,460,000
Fiscal year 2017	7,460,000
Fiscal year 2018	7,460,000
Fiscal year 2019	7,460,000
Interest rate (as a percent)					2.69%		2.69%				2.88%
Interest expense					$ 500,000	$ 500,000	$ 800,000	$ 1,100,000

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Condensed consolidated balance sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Mar. 31, 2014
Current assets:
Cash and cash equivalents	$ 49,903	$ 28,800
Accounts receivable, net	40,600	48,422
Inventories	7,704	9,109
Deferred costs – eyewear	56	149
Prepaid expenses and other current assets	4,975	5,197
Total current assets	103,238	91,677
Property and equipment, net	22,974	22,491
Cinema systems, net	96,106	106,792
Goodwill	10,657	10,657
Other intangibles, net	5,518	6,154
Deferred income taxes	4,571	4,571
Other assets	7,925	4,840
Total assets	250,989	247,182
Current liabilities:
Accounts payable	8,414	12,470
Accrued expenses and other liabilities	22,332	21,896
Deferred revenue	6,673	8,143
Income taxes payable	903	1,790
Deferred income taxes	4,292	4,288
Current portion of Credit Agreement	7,460	12,500
Total current liabilities	50,074	61,087
Credit Agreement, net of current portion	26,110	23,750
Deferred revenue, net of current portion	4,937	6,465
Other long-term liabilities	4,297	5,046
Total liabilities	85,418	96,348
Commitments and contingencies
Equity (deficit)
Common stock, $0.0001 par value, 200,000 shares authorized; 50,077 and 49,438 shares issued and outstanding at September 30, 2014 and March 31, 2014, respectively	363,553	352,913
Accumulated deficit	(197,829)	(201,763)
Accumulated other comprehensive income	425	262
Total RealD Inc. stockholders’ equity	166,149	151,412
Noncontrolling interest	(578)	(578)
Total equity	165,571	150,834
Total liabilities and equity	$ 250,989	$ 247,182

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Condensed consolidated statements of cash flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash flows from operating activities
Net income (loss)	$ 3,934	$ (6,200)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization	20,223	19,764
Deferred income tax	4	(3)
Non-cash interest expense	126	140
Non-cash stock compensation	8,233	9,118
Gain on sale of digital projectors	0	(18)
Loss on disposal of property and equipment	(41)	0
Impairment of long-lived assets and related purchase commitments	1,468	2,783
Changes in operating assets and liabilities:
Accounts receivable	7,822	2,621
Inventories	1,405	(3,626)
Prepaid expenses and other current assets	237	(1,834)
Deferred costs - eyewear	93	433
Other assets	(2,316)	127
Accounts payable	(4,042)	(11,420)
Accrued expenses and other liabilities	436	(1,512)
Other long-term liabilities	(749)	229
Income taxes receivable/payable	(902)	464
Deferred revenue	(2,998)	(3,118)
Net cash provided by operating activities	32,933	7,948
Cash flows from investing activities
Purchases of property and equipment	(3,448)	(3,343)
Purchases of cinema systems and related components	(7,456)	(13,044)
Proceeds from sale of property and equipment	79	70
Net cash used in investing activities	(10,825)	(16,317)
Cash flows from financing activities
Proceeds from Credit Agreement	37,300	37,500
Repayments on Credit Agreement	(39,980)	(20,000)
Payments of debt issuance costs	(895)	0
Proceeds from exercise of stock options	2,116	1,079
Proceeds from employee stock purchase plan	291	303
Purchases of treasury stock	0	(7,511)
Net cash provided (used) by financing activities	(1,168)	11,371
Effect of currency exchange rate changes on cash and cash equivalent	163	205
Net increase in cash and cash equivalents	21,103	3,207
Cash and cash equivalents, beginning of period	28,800	31,020
Cash and cash equivalents, end of period	$ 49,903	$ 34,227

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Share-based compensation (Details 2) (USD $) Share data in Millions, except Per Share data, unless otherwise specified	6 Months Ended	3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended				3 Months Ended		6 Months Ended				3 Months Ended		6 Months Ended
	Sep. 30, 2014 Employee Stock Option	Sep. 30, 2014 Stock Options and Employee Stock	Jun. 30, 2013 Stock Options and Employee Stock	Sep. 30, 2014 Stock Options and Employee Stock	Sep. 30, 2013 Stock Options and Employee Stock	Sep. 30, 2014 Performance Stock Options	Sep. 30, 2013 Performance Stock Options	Sep. 30, 2014 Performance Stock Options	Sep. 30, 2013 Performance Stock Options	Sep. 30, 2014 Performance Stock Options Minimum Chief Executive Officer	Sep. 30, 2014 Performance Stock Options Maximum Chief Executive Officer	Sep. 30, 2014 Performance Stock Units PSUs	Sep. 30, 2013 Performance Stock Units PSUs	Sep. 30, 2014 Performance Stock Units PSUs	Sep. 30, 2013 Performance Stock Units PSUs	Sep. 30, 2014 Performance Stock Units PSUs Minimum	Sep. 30, 2014 Performance Stock Units PSUs Maximum	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member] Minimum	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member] Maximum
Share-based compensation
Vesting period (in years)	4 years																					1 year	3 years
Percentage of shares that vest after one year from the date of grant	25.00%
Period from grant date after which awards begin to vest (in years)	1 year
Term of options (in years)	10 years
Granted (in shares)	0.6																			1.2
Weighted average grant date fair value (in dollars per share)	$ 5.88																			$ 11.17
Share-based compensation expense (in dollars)		$ 1,500,000	$ 3,500,000	$ 4,600,000	$ 7,100,000	$ 300,000	$ 100,000	$ 300,000	$ 500,000			$ 900,000	$ (100,000)	$ 1,000,000	$ 0			$ 1,400,000	$ 900,000	$ 2,600,000	$ 1,400,000
Performance period (in years)								3 years		3 years	5 years			2 years
Percentage of options earned depending on outcome of performance goals																0.00%	200.00%

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Borrowings (Tables)

6 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

Schedule of the current and non-current portions of the Credit Agreement

The current and non-current portions of the Credit Agreement due as of September 30, 2014 and March 31, 2014 were as follows:

	September 30, 2014		March 31, 2014
(in thousands)
Current portion of Credit Agreement	$	7,460	$	12,500
Credit Agreement, net of current portion	26,110		23,750
Total Credit Agreement	$	33,570	$	36,250

Schedule of future minimum Credit Agreement obligations

At September 30, 2014, the Company’s future minimum 2014 Credit Agreement obligations were as follows:

Fiscal year 2015	$	3,730
Fiscal year 2016	7,460
Fiscal year 2017	7,460
Fiscal year 2018	7,460
Fiscal year 2019	7,460
Total	$	33,570

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Income taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Income Tax Disclosure [Abstract]
Income tax expense	$ 1,676	$ 1,552	$ 3,963	$ 3,267

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Equity (Tables)

6 Months Ended

Sep. 30, 2014

Equity [Abstract]

Summary of the changes in total equity

A summary of the changes in total equity for the six months endedSeptember 30, 2014 was as follows:

	RealD Inc. stockholders’		Noncontrolling			Total
(in thousands)	equity		interest			equity
Balance, March 31, 2014	$	151,412	$	(578	)	$	150,834
Share-based compensation	8,233		—			8,233
Exercise of stock options	2,116		—			2,116
Purchase and distribution of stock under employee stock purchase plan	291		—			291
Comprehensive income:
Other comprehensive income, net of tax	163		—			163
Net income	3,934		—			3,934
Total comprehensive income	4,097		—			4,097
Balance, September 30, 2014	$	166,149	$	(578	)	$	165,571

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Business and basis of presentation

6 Months Ended

Sep. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Business and basis of presentation

Business and basis of presentation

RealD Inc. is a leading global licensor of 3D and other visual technologies. Except where specifically noted or the context otherwise requires, the use of terms such as the “Company” or “RealD” in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 refers to RealD Inc. and its subsidiaries.

The accompanying unaudited condensed consolidated financial statements as of September 30, 2014 and for the three months and six months endedSeptember 30, 2014 have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and include all adjustments (consisting of only normal recurring adjustments, unless otherwise indicated), necessary for a fair presentation of the Company’s condensed consolidated financial statements. Accordingly, certain information and footnote disclosure normally included in comprehensive financial statements have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of March 31, 2014 was derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP. Interim results are not necessarily indicative of results for any subsequent quarter, the full fiscal year or any future periods. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2014.

The condensed consolidated financial statements include the accounts of RealD, its wholly owned subsidiaries and its majority owned subsidiaries. RealD does not have any interests in variable interest entities. For consolidated subsidiaries that are not wholly owned but are majority owned, the subsidiaries’ assets, liabilities, and operating results are included in their entirety in the accompanying condensed consolidated financial statements. The noncontrolling interests in those assets, liabilities, and operations are reflected as non-controlling interest in the condensed consolidated balance sheets under equity and condensed consolidated statements of operations.

All significant intercompany balances and transactions have been eliminated in consolidation.

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Condensed consolidated balance sheets (Parenthetical) (USD $)	Sep. 30, 2014	Mar. 31, 2014
Statement of Financial Position [Abstract]
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, share issued	50,077,000	49,438,000
Common stock, shares outstanding	50,077,000	49,438,000

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Summary of significant accounting policies (Policies)

6 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Accounting period

Accounting period

The Company’s fiscal year consists of four3-month periods for a total of 12 calendar months and will end on March 31, 2015.

Use of estimates

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the financial statements relate to the following:

• licensing revenue terms applied to the timing and number of motion picture exhibitor consumer admissions;

• domestic eyewear product revenue terms applied to when the usage occurs and the amount of usage;

• effect of customer contract terms on revenue and balance sheet items;

• impairment testing of goodwill, intangible assets and tangible assets, including determination of relevant reporting units and long-lived asset groups;

• useful lives of intangible assets and tangible assets;

• timing and amount recognized for performance-based compensation, including bonus and certain restricted share units, based on projections of Company performance achievement;

• the impact of potential future tax consequences of events that have been recognized in the Company’s financial statements;

• valuation of accruals and allowances;

• contingency assessments; and

• assumptions used in the determination of the fair value of equity-based awards for stock-based compensation.

Earnings (loss) per share of common stock

Earnings (loss) per share of common stock

Basic income per share of common stock is computed by dividing the net income (loss) attributable to the Company’s common stockholders for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income attributable to the Company’s common stockholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan and unvested restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method.

Derivative instruments

The Company’s derivative instruments are recorded at fair value in other current assets and other current liabilities in the condensed consolidated balance sheets. Changes in fair value are reported as a component of other income or loss on the Company’s condensed consolidated statements of operations. For all periods presented, none of the Company’s derivative instruments were designated as hedging instruments. The Company does not use foreign currency option or foreign exchange forward contracts for speculative or trading purposes.

Accounts receivable

Accounts receivable

Accounts receivable consists of trade receivables, value-added tax (“VAT”) receivables and other receivables. The Company provides credit to its customers, who are primarily in the movie production and exhibition businesses. The Company provides for the estimated accounts receivable that will not be collected. These estimates are based on an analysis of historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in the customers’ payment terms and their economic condition. Collection of accounts receivable may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company’s overall credit risk.

Inventories and deferred costs-eyewear

Inventories and deferred costs-eyewear

Inventories and deferred costs-eyewear represent RealD eyewear and are substantially all finished goods. Inventories and deferred costs-eyewear are valued at the lower of cost (first-in, first-out method) or market value. At each balance sheet date, the Company evaluates ending inventories and deferred costs-eyewear for net realizable value. The Company also evaluates inventories for excess quantities and obsolescence. These evaluations include analyses of expected future average selling prices, projections of future demand and technology changes. In order to state inventories at the lower of cost or market, RealD maintains reserves against such inventories. If the Company’s analyses indicate that market is lower than cost, a write-down of inventories is recorded in cost of revenue in the period the loss is identified. As of September 30, 2014 and March 31, 2014, the inventory reserve as a result of the Company’s net realizable value analyses was $0 and $0.6 million, respectively.

Domestically, the Company provides RealD eyewear free of charge to motion picture exhibitors and then receives a fee from the motion picture studios for the usage of RealD eyewear by the motion picture exhibitors’ consumers. Eyewear shipped from inventory is deferred on the shipment date and then amortized to cost of product revenue according to assumptions related to eyewear usage by consumers.

Impairment of long-lived assets

Impairment of long-lived assets

The Company reviews long-lived assets, such as property and equipment, cinema systems, digital projectors and intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

Revenue recognition

Revenue recognition

The Company derives substantially all of its revenue from the license of RealD Cinema Systems and the product sale of RealD eyewear. RealD evaluates revenue recognition for transactions using the criteria set forth by the Financial Accounting Standard Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases, and ASC Topic 605, Revenue Recognition. The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company records revenue net of estimated allowances.

License revenue

License revenue, net of allowances, is accounted for as an operating lease. License revenue is primarily derived under per-admission, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated allowances, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside the Company’s control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and the Company has no more obligations to our customers specific to the contingent payment received. Certain of the Company’s license revenue from leasing RealD Cinema Systems is earned upon admission by the motion picture exhibitor’s consumers. The Company’s licensees, however, do not report and pay for such license revenue until after the admission has occurred, which may be received subsequent to the Company’s fiscal period end. The Company estimates and records licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be made. The Company determines that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee’s admissions report. Revenue is deemed fixed or determinable upon receipt of a licensee’s admissions report or evidence of a RealD box office showing by licensee. The Company determines collectability based on an evaluation of the licensee’s recent payment history and evaluation of the respective customer’s credit-standing.

Product revenue

The Company recognizes product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of the Company’s product revenue from the sale of RealD eyewear is earned upon admission and usage by the motion picture exhibitor’s consumers. The Company’s customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received subsequent to the Company’s fiscal period end. Accordingly, the Company estimates and records such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made.

Comprehensive income (loss)

Comprehensive income (loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). The only component of other comprehensive income or loss is unrealized foreign currency translation gains (losses). There were no reclassifications out of accumulated other comprehensive income (loss) during the three and six months ended September 30, 2014 and September 30, 2013.

Shipping and handling costs

Shipping and handling costs

Amounts billed to customers for shipping and handling costs are included in revenue. RealD’s shipping and handling costs consists primarily of packaging and transportation charges and are recorded in cost of revenue.

Recent accounting pronouncements

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606), effective for RealD starting April 1, 2017 (the first quarter of fiscal year 2018). Early application is not permitted. The new standard will be implemented retrospectively with the Company choosing to either restate prior periods or recognize the cumulative effect; the Company has not yet selected a transition method.

The new Topic 606 does not apply to lease contracts within the scope of Topic 840 Leases. The primary objective of ASU 2014-09 is to provide guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Revenue recognition is anticipated to entail more judgment and more estimating than under the current guidance. ASU 2014-09 also changes Topic 360 Property, Plant and Equipment, Topic 350 Intangibles-Goodwill and Other and certain other U.S. GAAP. The Company has not yet determined the effects of Topic 606 and other ASU 2014-09 revisions on its consolidated financial statements.

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Document and Entity Information	6 Months Ended
	Sep. 30, 2014	Oct. 27, 2014
Document and Entity Information
Entity Registrant Name	RealD Inc.
Entity Central Index Key	0001327471
Current Fiscal Year End Date	--03-31
Entity Filer Category	Accelerated Filer
Document Type	10-Q
Document Period End Date	Sep. 30, 2014
Document Fiscal Year Focus	2015
Document Fiscal Period Focus (Q1,Q2,Q3,FY)	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding		50,185,773

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Summary of significant accounting policies (Tables)

6 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Schedule of calculation of the basic and diluted loss per share of common stock

The calculation of the basic and diluted earnings (loss) per share of common stock for the three and six months endedSeptember 30, 2014 and September 30, 2013 was as follows:

	Three months ended						Six months ended
	September 30,			September 30,			September 30,		September 30,
(in thousands, except share and per share data)	2014			2013			2014		2013
Numerator:
Net income (loss)	$	(1,567	)	$	(4,664	)	3,934		(6,200		)
Net loss attributable to noncontrolling interest	—			13			—		15
Net income (loss) attributable to RealD Inc. common stockholders	$	(1,567	)	$	(4,651	)	$	3,934	$	(6,185	)
Denominator:
Weighted-average common shares outstanding (basic)	49,783			49,260			49,828		49,479
Effect of dilutive securities	—			—			2,134		—
Weighted-average common shares outstanding (diluted)	49,783			49,260			51,962		49,479
Earnings (loss) per common share:
Basic	$	(0.03	)	$	(0.09	)	$	0.08	$	(0.13	)
Diluted	$	(0.03	)	$	(0.09	)	$	0.08	$	(0.13	)

Schedule of weighted-average number of anti-dilutive shares excluded from the calculation of diluted loss per common share

The weighted-average number of anti-dilutive shares excluded from the calculation of diluted earnings (loss) per common share for the three and six months endedSeptember 30, 2014 and September 30, 2013 was as follows:

	Three months ended		Six months ended
	September 30,	September 30,	September 30,	September 30,
(in thousands)	2014	2013	2014	2013
Options, employee stock purchase plan, restricted stock units and warrants to purchase common stock	8,697	9,612	9,046	9,741

Schedule of contingently issuable securities excluded from computation of earnings per share

The following table sets forth the number of equity awards that are contingently issuable which were not included in the calculation of diluted shares (for the period where the Company had net income) as the required performance conditions had not been met as of September 30, 2014:

(in thousands)	Six months ended September 30, 2014
Options to purchase shares of common stock and restricted stock awards	1,203

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Condensed consolidated statements of operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenue:
License	$ 31,834	$ 30,976	$ 67,807	$ 68,282
Product and other	15,578	12,953	34,984	34,866
Total revenue	47,412	43,929	102,791	103,148
Cost of revenue:
License	11,613	11,691	22,510	22,509
Product and other	10,892	12,332	25,391	32,552
Total cost of revenue	22,505	24,023	47,901	55,061
Gross profit	24,907	19,906	54,890	48,087
Operating expenses:
Research and development	6,425	4,685	10,215	10,229
Selling and marketing	5,414	6,115	11,205	13,453
General and administrative	11,168	11,950	23,512	26,372
Total operating expenses	23,007	22,750	44,932	50,054
Operating income (loss)	1,900	(2,844)	9,958	(1,967)
Interest expense, net	(455)	(751)	(885)	(1,240)
Other income (loss)	(1,336)	483	(1,176)	274
Income (loss) before income taxes	109	(3,112)	7,897	(2,933)
Income tax expense	1,676	1,552	3,963	3,267
Net income (loss)	(1,567)	(4,664)	3,934	(6,200)
Net loss attributable to noncontrolling interest	0	13	0	15
Net income (loss) attributable to RealD Inc. common stockholders	$ (1,567)	$ (4,651)	$ 3,934	$ (6,185)
Earnings (loss) per common share:
Basic (in dollars per share)	$ (0.03)	$ (0.09)	$ 0.08	$ (0.13)
Diluted (in dollars per share)	$ (0.03)	$ (0.09)	$ 0.08	$ (0.13)
Shares used in computing earnings (loss) per common share:
Weighted-average common shares outstanding (basic)	49,783	49,260	49,828	49,479
Diluted (in dollars per share)		49,260	51,962	49,479

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Borrowings

6 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

Borrowings

Borrowings

2014 Credit Agreement

On June 26, 2014, RealD entered into the Amended and Restated Credit Agreement (the “2014 Credit Agreement”), by and among the Company, as borrower, City National Bank, as administrative agent and letter of credit issuer (“City National”), the other agents from time to time party thereto and the lenders from time to time party thereto (the “Lenders”). The 2014 Credit Agreement amends and restates in its entirety that certain Credit Agreement, dated as of April 19, 2012, by and among the Company, City National and the agents and lenders from time to time party thereto, which had been most recently amended on October 16, 2013 (the "2012 Credit Agreement").

Pursuant to the 2014 Credit Agreement, the Lenders thereunder will make available to RealD:

• a revolving credit facility (including a letter of credit sub-facility) in a maximum amount not to exceed $50 million (the “Revolving Facility”), which matures on June 26, 2017; and

• a delayed draw term loan facility in a maximum amount not to exceed $50 million (the “Term Loan Facility”), which matures on June 26, 2018. During the first quarter of fiscal year 2015, the Company borrowed $37.3 million under the Term Loan Facility, resulting in $12.7 million being available for future draws through June 26, 2016.

Debt issuance costs related to the completion of the 2014 Credit Agreement totaled $0.9 million and were added to the $0.3 million deferred charge remaining on the 2012 Credit Agreement. All these issuance costs are being amortized over the contractual life of the Revolving Facility and recorded as interest expense.

Loans outstanding under the 2014 Credit Agreement bear interest at the Company’s option at either the Eurocurrency rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Eurocurrency rate for a one month Interest Period on such day plus 1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on the Company’s leverage ratio. Under the 2014 Credit Agreement, the Company is charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility is 0.375% of the unused commitment. Additionally, the Company is charged a letter of credit fee between 2.25% to 2.75%, depending on the Company’s leverage ratio, per year with respect to the amount of each performance letter of credit issued under the 2014 Credit Agreement. The Company also pays customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the 2014 Credit Agreement. There were no letters of credit outstanding at September 30, 2014 and March 31, 2014.

The obligations under the 2014 Credit Agreement are fully and unconditionally guaranteed by the Company’s subsidiaries, ColorLink Inc., a Delaware corporation (“ColorLink”), Stereographics Corporation, a California corporation (“Stereographics”), and RealD DDMG Acquisition, LLC, a Delaware limited liability company (together with the Company, ColorLink and Stereographics, the “Loan Parties”). The obligations under the 2014 Credit Agreement are secured by a first priority security interest in substantially all of the Loan Parties’ tangible and intangible assets.

As of September 30, 2014, $50 million was available under the Revolving Facility and $12.7 million was available under the Term Loan Facility, totaling $62.7 million of availability under the 2014 Credit Agreement.

As of September 30, 2014, there was no balance outstanding under the Revolving Facility. On June 30, 2014, the first quarterly term loan installment of $1.9 million was made on the Term Loan Facility. The term loan outstanding balance of $33.6 million at September 30, 2014 is to be repaid in 14 quarterly installments of $1.9 million through March 31, 2018 and the remaining $7.5 million principal on June 26, 2018.  The current and non-current portions of the Credit Agreement due as of September 30, 2014 and March 31, 2014 were as follows:

	September 30, 2014		March 31, 2014
(in thousands)
Current portion of Credit Agreement	$	7,460	$	12,500
Credit Agreement, net of current portion	26,110		23,750
Total Credit Agreement	$	33,570	$	36,250

At September 30, 2014, the Company’s future minimum 2014 Credit Agreement obligations were as follows:

Fiscal year 2015	$	3,730
Fiscal year 2016	7,460
Fiscal year 2017	7,460
Fiscal year 2018	7,460
Fiscal year 2019	7,460
Total	$	33,570

As of September 30, 2014, borrowings outstanding under the 2014 Credit Agreement bear interest at 2.69%. As of March 31, 2014, there were $36.3 million in borrowings outstanding under the 2012 Credit Agreement which bore interest at 2.88%. Interest expense related to our borrowings was $0.5 million for both the three months endedSeptember 30, 2014 and September 30, 2013. Interest expense related to our borrowings was $0.8 million and $1.1 million for the six months endedSeptember 30, 2014 and September 30, 2013, respectively.

Under the 2014 Credit Agreement, RealD’s business is subject to certain limitations, including limitations on the Company’s ability to incur additional debt, make certain investments or acquisitions, enter into certain merger and consolidation transactions, and sell its assets other than in the ordinary course of business. The Company is also required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. As of September 30, 2014, RealD was in compliance with all financial covenants in the 2014 Credit Agreement. If the Company fails to comply with any of the covenants or if any other event of default should occur, the Lenders could elect to prevent the Company from borrowing and declare the indebtedness to be immediately due and payable.

The 2014 Credit Agreement contains customary events of default applicable to the Company and/or its subsidiaries, including, among other things the occurrence of any change of control. If one or more events of default occurs and continues beyond any applicable cure period, City National may, with the consent of the Lenders holding a majority of the loans and commitments under the facilities, or will, at the request of such Lenders, terminate the commitments of the Lenders to make further loans and declare all of the obligations of the Loan Parties under the 2014 Credit Agreement to be immediately due and payable.

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Fair value measurement

6 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair value measurement

Fair value measurement

The Company’s derivative instruments are recorded at fair value in other current assets and other current liabilities in the condensed consolidated balance sheets. Changes in fair value are reported as a component of other income or loss on the Company’s condensed consolidated statements of operations. For all periods presented, none of the Company’s derivative instruments were designated as hedging instruments. The Company does not use foreign currency option or foreign exchange forward contracts for speculative or trading purposes.

To estimate the fair value of the derivative instruments, the Company uses valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:

• Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;

• Level 2 - Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs;

• Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.

The Company purchases foreign currency forward contracts, generally with maturities of twelve months or less, to reduce the volatility of cash flows primarily related to forcasted payments and expenses denominated in certain foreign currencies. As of September 30, 2014, RealD had outstanding forward contracts based on Great Britain Pound and Euro with notional amounts totaling $8.7 million. The fair value measurement of the derivative instruments was as follows:

(in thousands)
Fair value measurement as of September 30, 2014, using:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Derivatives:
Foreign currency forward contracts	$	—	$	119	$	—	$	119
Total assets	$	—	$	119	$	—	$	119
Liabilities:
Derivatives:
Foreign currency forward contracts	$	—	$	18	$	—	$	18
Total liabilities	$	—	$	18	$	—	$	18

As of March 31, 2014, the carrying amounts of the Company’s foreign currency forward contracts were not significant.

For both the three and six months ended September 30, 2014, the net gain related to the change in fair value of the Company's foreign currency forward contracts was $0.1 million. For both the three and six months ended September 30, 2013, the net gain (loss) related to the change in fair value of the Company’s foreign currency forward contracts was immaterial. Foreign currency master agreements typically allow the netting of receivables and payables. The Company had a net receivable of $0.1 million as of September 30, 2014 and any such amounts were not significant as of March 31, 2014.

The Company monitors its positions with, and the credit quality of, the financial institutions that are counterparties to its financial instruments and does not currently anticipate nonperformance by the counterparties.

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Share-based compensation (Tables)

6 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of share-based compensation expense for all share-based arrangements

Share-based compensation expense for all share-based arrangements for the three and six months ended September 30, 2014 and September 30, 2013 was as follows:

	Three months ended				Six months ended
	September 30,		September 30,		September 30,		September 30,
(in thousands)	2014		2013		2014		2013
Share-based compensation
Cost of revenue	$	424	$	242	$	615	$	541
Research and development	1,050		768		1,676		1,475
Selling and marketing	702		1,259		1,629		2,581
General and administrative	2,086		2,204		4,313		4,521
Total	$	4,262	$	4,473	$	8,233	$	9,118

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Property and equipment, RealD Cinema Systems and digital projectors (Tables)

6 Months Ended

Sep. 30, 2014

Property and equipment, RealD Cinema Systems and digital projectors

Schedule of property and equipment of RealD Cinema Systems and digital projectors

consist of the following: 

	September 30,			March 31,
(in thousands)	2014			2014
RealD Cinema Systems	209,319			$	205,632
Leasehold improvements	17,410			16,935
Machinery and equipment	7,283			4,753
Furniture and fixtures	1,269			1,272
Computer equipment and software	10,043			9,197
Construction in process	548			1,554
Total	$	245,872		$	239,343
Less accumulated depreciation	(126,792		)	(110,060		)
Cinema Systems and Property & Equipment, net	$	119,080		$	129,283

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Income taxes

6 Months Ended

Sep. 30, 2014

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

The Company’s income tax expense for the three months endedSeptember 30, 2014 and September 30, 2013 was $1.7 million and $1.6 million, respectively. The Company’s income tax expense for the six months endedSeptember 30, 2014 and September 30, 2013 was $4.0 million and $3.3 million, respectively. The increase in income tax expense is due primarily to increased revenues in foreign jurisdictions where the Company is subject to foreign income taxes. The Company has net operating losses that may potentially be offset against future domestic earnings. The Company files federal income tax returns and income tax returns in various state and foreign jurisdictions. Due to the net operating loss carryforwards, the Company’s United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.

As of September 30, 2014, the Company has determined based on the weight of the available evidence, both positive and negative, to provide for a valuation allowance against substantially all of the net deferred tax assets. The current deferred tax assets not reserved for by the valuation allowance are those in foreign jurisdictions or amounts that may be carried back in future years. If there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, the Company will adjust all or a portion of the applicable valuation allowance in the period when such change occurs.

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Commitments and contingencies

6 Months Ended

Sep. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments and contingencies

. Commitments and contingencies

Indemnities and commitments

During the ordinary course of business, the Company makes certain indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities of certain customers and licensees of our technologies, and indemnities to the Company’s directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. The majority of these indemnities and commitments do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities and commitments in the accompanying condensed consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is reasonably probable and estimable.

The Company has entered into contracts with certain of its vendors. Future obligations under such contracts totaled $6.3 million at September 30, 2014 and include revolving 90-day supply commitments. Many of the contracts contain cancellation penalty provisions requiring payment of up to 20.0% of the unused contract.

Contingencies and assessments

The Company is subject to various loss contingencies and assessments arising in the course of its business, some of which relate to litigation, claims, property taxes and sales and use tax or goods and services tax assessments. The Company considers the likelihood of the loss or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss in determining loss contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to us to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on the Company’s business, consolidated results of operations, financial condition or cash flows.

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Share-based compensation

6 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-based compensation

8. Share-based compensation

The Company accounts for share-based payment awards granted to employees and directors by recording compensation expense based on estimated fair values. The Company estimates the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. The Company determines the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under ASC 718,  Compensation — Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent the Company’s best estimates. The Company’s estimates of the fair values of stock options granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option modifications, estimates of forfeitures, and the related income tax impact.

Share-based compensation expense for all share-based arrangements for the three and six months ended September 30, 2014 and September 30, 2013 was as follows:

	Three months ended				Six months ended
	September 30,		September 30,		September 30,		September 30,
(in thousands)	2014		2013		2014		2013
Share-based compensation
Cost of revenue	$	424	$	242	$	615	$	541
Research and development	1,050		768		1,676		1,475
Selling and marketing	702		1,259		1,629		2,581
General and administrative	2,086		2,204		4,313		4,521
Total	$	4,262	$	4,473	$	8,233	$	9,118

Stock options granted generally vest over a four-year period, with 25% of the shares vesting after one year and monthly vesting thereafter. The options generally expire ten years from the date of grant. For the six months endedSeptember 30, 2014, the Company granted 0.6 million stock options at a weighted average grant date fair value of $5.88 per share.  For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to stock options and the Company’s employee stock purchase plan was $1.5 million and $3.5 million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to stock options and the Company’s employee stock purchase plan was $4.6 million and $7.1 million, respectively.

Certain of the Company’s management-level employees receive performance stock options, which gives the recipient the right to receive common stock that is contingent upon achievement of specified pre-established performance goals over the performance period, which is generally three years subject to the recipient’s continued service with the Company. The performance goals for the performance stock options are based on the measurement of the Company’s total stockholder return, on a percentile basis, compared to a comparable group of companies. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock options equal to or less than the number of performance stock options granted. In June 2013, the Company’s Chief Executive Officer’s fiscal year 2013 stock option grant was amended to retroactively change the vesting schedule of the stock option so that it now vests based upon the achievement of performance goals rather than based solely upon Mr. Lewis’ continued service with the Company. The performance goal is based on the measurement of the Company’s total stockholder return, on a percentile basis, compared to a comparable group of companies. The performance period for this performance stock option is between three and five years. For both the three and six months ended September 30, 2014, share based compensation expense related to performance stock options were $0.3 million. For the three and six months ended September 30, 2013, share-based compensation expense related to performance stock options were $0.1 million and $0.5 million, respectively.

Certain of the Company’s management-level employees also receive performance stock units, which gives the recipient the right to receive common stock that is contingent upon achievement of specific pre-established performance goals over the performance period, which is generally two years subject to the recipient’s continued service with us. The performance goals are based on achieving certain levels of total licensing revenue over the performance period.  Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock units between 0% and 200% of the number of performance stock units granted. For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to performance stock units was $0.9 million and $(0.1) million, respectively. For the six months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to performance stock units was $1.0 million and $0, respectively.

Certain of the Company’s employees, including certain management level employees, receive time-based restricted stock units. These restricted stock units vest over one to three years based upon a recipient’s continued service with us. For the six months endedSeptember 30, 2014, the Company granted 1.2 million restricted stock units at a weighted average grant date fair value of $11.17 per restricted stock unit. For the three months endedSeptember 30, 2014 and September 30, 2013, share-based compensation expense related to restricted stock units was $1.4 million and $0.9 million, respectively.

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Equity

6 Months Ended

Sep. 30, 2014

Equity [Abstract]

Equity

Equity

A summary of the changes in total equity for the six months endedSeptember 30, 2014 was as follows:

	RealD Inc. stockholders’		Noncontrolling			Total
(in thousands)	equity		interest			equity
Balance, March 31, 2014	$	151,412	$	(578	)	$	150,834
Share-based compensation	8,233		—			8,233
Exercise of stock options	2,116		—			2,116
Purchase and distribution of stock under employee stock purchase plan	291		—			291
Comprehensive income:
Other comprehensive income, net of tax	163		—			163
Net income	3,934		—			3,934
Total comprehensive income	4,097		—			4,097
Balance, September 30, 2014	$	166,149	$	(578	)	$	165,571

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Share-based compensation (Details) (Employee Stock, USD $)	3 Months Ended		6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Share-based compensation
Share-based compensation expense	$ 4,262,000	$ 4,473,000	$ 8,233,000	$ 9,118,000
Cost of revenue
Share-based compensation
Share-based compensation expense	424,000	242,000	615,000	541,000
Research and development
Share-based compensation
Share-based compensation expense	1,050,000	768,000	1,676,000	1,475,000
Selling and marketing
Share-based compensation
Share-based compensation expense	702,000	1,259,000	1,629,000	2,581,000
General and administrative
Share-based compensation
Share-based compensation expense	$ 2,086,000	$ 2,204,000	$ 4,313,000	$ 4,521,000

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Fair value measurement (Tables)

6 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Schedule of fair value of the derivative instruments

The fair value measurement of the derivative instruments was as follows:

(in thousands)
Fair value measurement as of September 30, 2014, using:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Derivatives:
Foreign currency forward contracts	$	—	$	119	$	—	$	119
Total assets	$	—	$	119	$	—	$	119
Liabilities:
Derivatives:
Foreign currency forward contracts	$	—	$	18	$	—	$	18
Total liabilities	$	—	$	18	$	—	$	18

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Summary of significant accounting policies (Details 2) (USD $)	3 Months Ended	6 Months Ended
	Sep. 30, 2014	Sep. 30, 2014	Mar. 31, 2014
Accounting Policies [Abstract]
Gain (loss) on foreign currency derivative instruments not designated as hedging instruments	$ 100,000	$ 100,000
Accounts receivable: value added tax (VAT) receivables
Allowance for doubtful accounts and customer credits	4,400,000	4,400,000	3,200,000
Inventories and deferred costs-eyewear
Inventory reserve	$ 0	$ 0	$ 600,000

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Condensed consolidated statements of comprehensive income (loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Statement of Comprehensive Income [Abstract]
Net income (loss)	$ (1,567)	$ (4,664)	$ 3,934	$ (6,200)
Other comprehensive income, net of tax:
Foreign currency translation gains	164	68	163	205
Other comprehensive income, net of tax	164	68	163	205
Comprehensive income (loss)	$ (1,403)	$ (4,596)	$ 4,097	$ (5,995)

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Cost Reduction Plan

6 Months Ended

Sep. 30, 2014

Restructuring and Related Activities [Abstract]

Cost Reduction Plan

2014 Cost Reduction Plan

On November 12, 2013, the Company announced a plan to reduce the overall costs of its global operations (the “2014 Cost Reduction Plan”). The 2014 Cost Reduction Plan was primarily a response to the anticipated impact on the Company’s financial results and operations caused by changes in the 3D box office performance of certain motion pictures due to perceived changes in consumer preference and the fact that the Company’s 3D cinema business is maturing in many markets like the United States in which the Company expected equipment installations to continue to slow. In accordance with the 2014 Cost Reduction Plan, the Company reduced its staff by approximately 20%, rescoped and made other changes to certain research and development projects, reduced certain non-personnel related general and administrative expenses and streamlined certain manufacturing operations. These actions were intended to rationalize the further expansion of the Company’s global cinema platform by focusing on emerging growth markets and higher performing motion picture exhibitors, streamlining the Company’s manufacturing facilities to achieve cost efficiencies while meeting the future commercial demands of the Company’s customers and focusing the Company’s research and development efforts on technologies that would enable the Company to expand its visual technology product offerings.

The Company accounts for the 2014 Cost Reduction Plan in accordance with the Accounting Standards Codification, including ASC 420, Exit or Disposal Cost Obligations, ASC 712, Compensation-Nonretirement Postemployment Benefits, ASC 840, Leases and ASC 360, Property, Plant and Equipment (Impairment or Disposal of Long-Lived Assets). As a result of the 2014 Cost Reduction Plan’s workforce reduction and commencement of the relocation of manufacturing, the Company incurred termination and other charges totaling approximately $4.7 million for the fiscal year ended March 31, 2014. Charges of $0.6 million have been incurred in the six months ended September 30, 2014, including $0.3 million for the accrual of losses on a lease for manufacturing facilities that will no longer be used in the Company’s operations. Therefore, the total charges were $5.3 million through September 30, 2014. The following table summarizes the charges resulting from implementation of the 2014 Cost Reduction Plan during the three and six months endedSeptember 30, 2014:

	Three months ended						Six months ended
	September 30, 2014						September 30, 2014
(in thousands)	Personnel		Leasehold		Total		Personnel		Leasehold		Total
Cost of revenue	$	24	$	302	$	326	$	24	$	373	$	397
Research and development	—		—		—		—		—		—
Selling and marketing	16		—		16		16		—		16
General and administrative	190		—		190		190		—		190
Total	$	230	$	302	$	532	$	230	$	373	$	603

The following table summarizes the activity resulting from implementation of the 2014 Cost Reduction Plan within accrued expenses and other liabilities: 

	Payments excluding non-cash impairment
(in thousands)	Personnel			Leasehold			Total
Cost reduction plan liabilities as of March 31, 2014	$	1,416		$	—		$	1,416
Charges	230			373			603
(Payments)	(712		)	(108		)	(820		)
Cost reduction plan liabilities as of September 30, 2014	$	934		$	265		$	1,199

Additionally, the Company leases office space for its headquarters that includes approximately $6.0 million in leasehold improvements and other items classified as fixed assets (see Note 3 “Cinema Systems and Property & Equipment”). If the Company relocated the office, these fixed assets could become subject to an impairment assessment and contract termination costs or sublease loss could be incurred.

There is no guarantee that termination and implementation costs will not exceed the estimates, or that any net cost reduction will actually be achieved.

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Summary of significant accounting policies (Details 3) (USD $)	3 Months Ended		6 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Comprehensive income (loss)
Reclassifications out of accumulated other comprehensive income (loss)	$ 0	$ 0	$ 0	$ 0
Shipping and handling costs
Shipping and handling costs	1,300,000	1,700,000	3,100,000	3,900,000
Cinema systems
Impairment of long-lived assets
Impairment charges	$ 500,000	$ 1,800,000	$ 1,500,000	$ 2,800,000

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Cost Reduction Plan (Tables)

6 Months Ended

Sep. 30, 2014

Restructuring and Related Activities [Abstract]

Summary of charges resulting from implementation of the cost reduction plan

The following table summarizes the charges resulting from implementation of the 2014 Cost Reduction Plan during the three and six months endedSeptember 30, 2014:

	Three months ended						Six months ended
	September 30, 2014						September 30, 2014
(in thousands)	Personnel		Leasehold		Total		Personnel		Leasehold		Total
Cost of revenue	$	24	$	302	$	326	$	24	$	373	$	397
Research and development	—		—		—		—		—		—
Selling and marketing	16		—		16		16		—		16
General and administrative	190		—		190		190		—		190
Total	$	230	$	302	$	532	$	230	$	373	$	603

Summary of currently estimated charges resulting from the cost reduction plan implementation

The following table summarizes the activity resulting from implementation of the 2014 Cost Reduction Plan within accrued expenses and other liabilities: 

	Payments excluding non-cash impairment
(in thousands)	Personnel			Leasehold			Total
Cost reduction plan liabilities as of March 31, 2014	$	1,416		$	—		$	1,416
Charges	230			373			603
(Payments)	(712		)	(108		)	(820		)
Cost reduction plan liabilities as of September 30, 2014	$	934		$	265		$	1,199