Table of Contents

 
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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM10-Q**

 

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** **
| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------|

**For theQuarterly Period Ended June 25, 2010**

******OR**

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

**For thetransition period from ______ to ______.**

** **

**CommissionFile Number: 001-34818**

** **

** **

**RealD Inc.**

**(Exact name of registrant asspecified in its charter)**

** **

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|                                                                        |                                       |
|-----------------------------------------------------------------------------|--------------------------------------------|
| **Delaware**                                                                | **77-0620426**                             |
| **(State  or other jurisdiction of  incorporation or organization)**        | **(I.R.S.  Employer  Identification No.)** |
|                                                                        |                                       |
| **100  N. Crescent Drive, Suite 120  Beverly Hills, CA**                    | **90210**                                  |
| **(Address  of principal executive offices)**                               | **(Zip  Code)**                            |
| **(310)  385-4000****(Registrant's telephone number, including area code)** |
| ** **                                                                  |

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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 (orfor 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  o    No x

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (Section 232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).Yes  o    No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See  thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller  reporting company” in Rule 12b-2 of theExchange Act.

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

 

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

 

On July 29, 2010, the registrant had 48,109,320 shares of common stock,par value $0.0001 per share, outstanding. 
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Table ofContents

 

**RealDInc.**

**QUARTERLYREPORT ON FORM 10-QFOR THE QUARTER ENDEDJUNE 25, 2010**

 

 

**TABLEOF CONTENTS**

 

**PART I– FINANCIAL INFORMATION**

 

 

 
|                                      |                                                                                                                               | **Page  Number** |
|-------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|------------------|
| Part I.  Financial Information       |
|                                      |                                                                                                                               |             |
| ITEM 1.                              | Financial statements                                                                                                               | 3                |
|                                      |                                                                                                                               |             |
|                                      | Condensed consolidated balance sheets as of  June 25, 2010 (unaudited) and March 26, 2010                                | 3                |
|                                      |                                                                                                                               |             |
|                                      | Condensed consolidated statements of operations  (unaudited) for the three months ended June 25, 2010 and June 26,  2009 | 4                |
|                                      |                                                                                                                               |             |
|                                      | Condensed consolidated statements of cash flows  (unaudited) for the three months ended June 25, 2010 and June 26, 2009  | 5                |
|                                      |                                                                                                                               |             |
|                                      | Notes to condensed consolidated financial statements  (unaudited)                                                                  | 6                |
|                                      |                                                                                                                               |             |
| ITEM 2.                                   | Management’s discussion  and analysis of financial condition and results of operations                                        | 14               |
|                                      |                                                                                                                               |             |
| ITEM 3.                                   | Quantitative and qualitative  disclosures about market risk                                                                        | 28               |
|                                      |                                                                                                                               |             |
| ITEM 4.                                   | Controls and  procedures                                                                                                           | 29               |
|                                      |                                                                                                                               |             |
|                                      |                                                                                                                               |             |
| **PART II – OTHER INFORMATION** |
|                                      |                                                                                                                               |             |
|                                      |                                                                                                                               |             |
| ITEM 1.                                   | Legal proceedings                                                                                                                  | 30               |
|                                      |                                                                                                                               |             |
| ITEM 1A.                                  | Risk factors                                                                                                                       | 30               |
|                                      |                                                                                                                               |             |
| ITEM 2.                                   | Unregistered  sales of equity securities and use of proceeds                                                                       | 40               |
|                                      |                                                                                                                               |             |
| ITEM 5.                                   | Other information                                                                                                                  | 40               |
|                                      |                                                                                                                               |             |
| ITEM 6.                                   | Exhibits                                                                                                                           | 40               |

 

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Table ofContents

 

**PART I — FINANCIAL INFORMATION**

 

**ITEM 1. – FINANCIALSTATEMENTS**

 

**RealDInc.**

**Condensedconsolidated balance sheets**

**(inthousands, except share and per share data)**

 

 
| ** **                                                                                                                                                                                                                                               | ** ** | **June 25,** | ** ** | **March 26,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                               | ** ** | **2010**          | ** ** | **2010**           | ** ** |
| ** **                                                                                                                                                                                                                                               | ** ** | **(unaudited)**   | ** ** | ** **         | ** ** | ** ** |
| **Assets**                                                                                                                                                                                                                                               | ** ** | ** **        | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                                                                          |       |              |       |               |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                               |       |   $     | 19,549     |               |       |   $ | 13,134 |   |   |
| Accounts receivable, net                                                                                                                                                                                                                                 |       | 50,853            |       |               | 51,184     |   |   |
| Inventories                                                                                                                                                                                                                                              |       | 11,467            |       |               | 6,539      |   |   |
| Deferred costs – eyewear                                                                                                                                                                                                                            |       | 2,407             |       |               | 1,842      |   |   |
| Deferred income taxes                                                                                                                                                                                                                                    |       | 4,349             |       |               | 4,349      |   |   |
| Prepaid expenses and  other current assets                                                                                                                                                                                                               |       | 3,093             |       |               | 1,128      |   |   |
| Total current assets                                                                                                                                                                                                                                     |       | 91,718            |       |               | 78,176     |   |   |
| Property and equipment,  net                                                                                                                                                                                                                             |       | 3,074             |       |               | 2,558      |   |   |
| Cinema systems, net                                                                                                                                                                                                                                      |       | 53,022            |       |               | 40,623     |   |   |
| Digital projectors,  net-held for sale                                                                                                                                                                                                                   |       | 11,607            |       |               | 25,521     |   |   |
| Goodwill                                                                                                                                                                                                                                                 |       | 10,657            |       |               | 10,657     |   |   |
| Other intangibles, net                                                                                                                                                                                                                                   |       | 2,016             |       |               | 2,024      |   |   |
| Other assets                                                                                                                                                                                                                                             |       | 6,430             |       |               | 2,587      |   |   |
| Total assets                                                                                                                                                                                                                                             |       |   $     | 178,524    |               |       |   $ | 162,146 |   |   |
| **Liabilities,  redeemable convertible preferred stock and equity (deficit)**                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                                                                                                     |       |              |       |               |       |   |   |
| Accounts payable                                                                                                                                                                                                                                         |       |   $     | 38,371     |               |       |   $ | 37,625 |   |   |
| Accrued expenses                                                                                                                                                                                                                                         |       | 26,409            |       |               | 24,608     |   |   |
| Deferred revenue                                                                                                                                                                                                                                         |       | 29,383            |       |               | 19,430     |   |   |
| Credit facility  agreement                                                                                                                                                                                                                               |       | 25,106            |       |               | 20,066     |   |   |
| Income taxes payable                                                                                                                                                                                                                                     |       | 1,269             |       |               | 1,254      |   |   |
| Current portion of  long-term debt                                                                                                                                                                                                                       |       | 2,963             |       |               | 9,299      |   |   |
| Total current  liabilities                                                                                                                                                                                                                               |       | 123,501           |       |               | 112,282    |   |   |
| Deferred revenue, net of  current portion                                                                                                                                                                                                                |       | 13,902            |       |               | 14,144     |   |   |
| Virtual print fee  liability and customer deposits                                                                                                                                                                                                       |       | 4,172             |       |               | 8,331      |   |   |
| Long-term debt, net of  current portion                                                                                                                                                                                                                  |       | 1,479             |       |               | 2,031      |   |   |
| Deferred tax liability                                                                                                                                                                                                                                   |       | 4,413             |       |               | 4,413      |   |   |
| **Commitments  and contingencies**                                                                                                                                                                                                                       |       |              |       |               |       |   |   |
| Series C  mandatorily redeemable convertible preferred stock, no par value, 5,139,500  shares authorized; 5,139,500 shares issued and outstanding; $17.025  redemption value per share at June 25, 2010 and March 26, 2010,  respectively |       | 66,669            |       |               | 62,831     |   |   |
| **Equity  (deficit)**                                                                                                                                                                                                                                    |       |              |       |               |       |   |   |
| Series A redeemable  convertible preferred stock, no par value, 3,000,000 shares authorized;  2,000,000 shares issued and outstanding at June 25, 2010 and  March 26, 2010 respectively                                                   |       | 1,978             |       |               | 1,978      |   |   |
| Series B redeemable  convertible preferred stock, no par value, 2,417,644 shares authorized; 2,417,644  shares issued and outstanding at June 25, 2010 and March 26, 2010,  respectively                                                  |       | 2,970             |       |               | 2,970      |   |   |
| Series D redeemable  convertible preferred stock, no par value, 1,666,667 shares authorized; 1,666,667  shares issued and outstanding at June 25, 2010 and March 26, 2010,  respectively                                                  |       | 19,952            |       |               | 19,952     |   |   |
| Common stock, $0001 par  value, 52,699,999 shares authorized; 24,690,954 shares issued and outstanding  at June 25, 2010 and March 26, 2010, respectively                                                                                      |       | 69,519            |       |               | 68,371     |   |   |
| Accumulated deficit                                                                                                                                                                                                                                      |       | (132,337          | )          |               | (137,291   | ) |   |
| Total RealD Inc.  stockholders’ deficit                                                                                                                                                                                                             |       | (37,918           | )          |               | (44,020    | ) |   |
| Noncontrolling interest                                                                                                                                                                                                                                  |       | 2,306             |       |               | 2,134      |   |   |
| Total equity (deficit)                                                                                                                                                                                                                                   |       | (35,612           | )          |               | (41,886    | ) |   |
| Total liabilities,  mandatorily redeemable convertible preferred stock and equity (deficit)                                                                                                                                                              |       |   $     | 178,524    |               |       |   $ | 162,146 |   |   |

 

*See accompanying notes to condensed consolidated financialstatements*

 

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** **

**RealDInc.**

**Condensedconsolidated statements of operations (unaudited)**

**(in thousands, except share and per share data)**

 
|                                                              | ** ** | **Three  Months Ended ** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------|------------|
|                                                              | ** ** | **June 25,**             | ** ** | **June 26, ** | ** ** |
|                                                              | ** ** | **2010**                      | ** ** | **2009 ** | ** ** |
|                                                              |       |                          |       |   |   |   |   |
| Revenue:                                                          |       |                          |       |   |   |   |   |
| Licensing                                                         |       |   $                 | 25,728     |   |   |   $ | 5,954 |   |   |
| Product and other                                                 |       | 38,792                        |       |   | 19,610 |   |   |
| Total revenue                                                     |       | 64,520                        |       |   | 25,564 |   |   |
| Cost of revenue:                                                  |       |                          |       |   |   |   |   |
| Licensing                                                         |       | 2,995                         |       |   | 2,286 |   |   |
| Product and other                                                 |       | 43,623                        |       |   | 20,415 |   |   |
| Total cost of revenue                                             |       | 46,618                        |       |   | 22,701 |   |   |
| Gross margin                                                      |       | 17,902                        |       |   | 2,863 |   |   |
| Operating expenses:                                               |       |                          |       |   |   |   |   |
| Research and  development                                         |       | 2,979                         |       |   | 2,400 |   |   |
| Selling and marketing                                             |       | 4,105                         |       |   | 3,902 |   |   |
| General and  administrative                                       |       | 6,230                         |       |   | 2,731 |   |   |
| Total operating  expenses                                         |       | 13,314                        |       |   | 9,033 |   |   |
| Operating income (loss)                                           |       | 4,588                         |       |   | (6,170 | ) |   |
| Interest expense                                                  |       | (519                          | )          |   | (282 | ) |   |
| Other income (loss)                                               |       | 6,610                         |       |   | (10 | ) |   |
| Income (loss) before  income taxes                                |       | 10,679                        |       |   | (6,462 | ) |   |
| Income tax expense                                                |       | 827                           |       |   | 527 |   |   |
| Net income (loss)                                                 |       | 9,852                         |       |   | (6,989 | ) |   |
| Net (income) loss  attributable to noncontrolling interest        |       | (1,060                        | )          |   | 237 |   |   |
| Accretion of preferred  stock                                     |       | (3,838                        | )          |   | (3,092 | ) |   |
| Undistributed earnings  attributable to preferred stockholders    |       | (2,008                        | )          |   | -     |   |   |
| Net income (loss)  attributable to RealD Inc. common stockholders |       |   $                 | 2,946      |   |   |   $ | (9,844 | ) |   |
|                                                              |       |                          |       |   |   |   |   |
| Earnings (loss) per  common share:                                |       |                          |       |   |   |   |   |
| Basic                                                             |       |   $                 | 0.12       |   |   |   $ | (0.41 | ) |   |
| Diluted                                                           |       |   $                 | 0.09       |   |   |   $ | (0.41 | ) |   |
|                                                              |       |                          |       |   |   |   |   |
| Shares used in  computing earnings per common share:              |       |                          |       |   |   |   |   |
| Basic                                                             |       | 24,690,954                    |       |   | 24,201,394 |   |   |
| Diluted                                                           |       | 31,072,835                    |       |   | 24,201,394 |   |   |
|                                                              |       |                          |       |   |   |   |   |

 

*Seeaccompanying notes to condensed consolidated financial statements*

 

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**RealDInc.**

**Condensedconsolidated statements of cash flows (unaudited)**

**(in thousands)**

 
| ** **                                                                                           | **Three Months Ended** |
|------------------------------------------------------------------------------------------------------|------------------------|
| ** **                                                                                           | ** **             | **June  25,** | ** ** | **June 26,** |
| ** **                                                                                           | ** **             | **2010** | ** ** | **2009** |
| **Cash flows from operating activities**                                                             | ** **             | ** ** | ** ** | ** ** | ** ** |
| Net  income (loss)                                                                                   |                   | $ | 9,852 |   |   | $ | (6,989 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |                   |   |   |   |   |   |
| Depreciation  and amortization                                                                       |                   | 2,668 |   |   | 1,612 |   |
| Non-cash  interest expense                                                                           |                   | 436 |   |   | 130 |   |
| Non-cash  stock compensation                                                                         |                   | 656 |   |   | 764 |   |
| Motion  picture exhibitor option reduction in revenue                                                |                   | 492 |   |   | 5,078 |   |
| Gain  on sale of digital projectors                                                                  |                   | (6,676 | ) |   | – |   |
| Impairment  of long-lived assets                                                                     |                   | 131 |   |   | 48 |   |
| Changes  in operating assets and liabilities:                                                        |                   |   |   |   |   |   |
| Accounts  receivable                                                                                 |                   | 331 |   |   | (9,434 | ) |
| Inventories                                                                                          |                   | (4,928 | ) |   | (5,187 | ) |
| Prepaid  expenses and other current assets                                                           |                   | (1,965 | ) |   | (572 | ) |
| Deferred  costs - eyewear                                                                            |                   | (565 | ) |   | 1,897 |   |
| Other  assets                                                                                        |                   | (3,843 | ) |   | (14 | ) |
| Accounts  payable                                                                                    |                   | 704 |   |   | 440 |   |
| Accrued  expenses                                                                                    |                   | 1,436 |   |   | 3,918 |   |
| Virtual  print fee liability and customer deposits                                                   |                   | 1,222 |   |   | 350 |   |
| Income  taxes payable                                                                                |                   | 15 |   |   | 221 |   |
| Deferred  revenue                                                                                    |                   | 9,711 |   |   | 4,943 |   |
| Net  cash provided by (used in) operating activities                                                 |                   | 9,677 |   |   | (2,795 | ) |
|                                                                                                 |                   |   |   |   |   |   |
| **Cash flows from investing activities**                                                             |                   |   |   |   |   |   |
| Purchases  of property and equipment                                                                 |                   | (682 | ) |   | (385 | ) |
| Purchases  of cinema systems and related components                                                  |                   | (14,590 | ) |   | (3,056 | ) |
| Purchases  of digital projectors                                                                     |                   | (537 | ) |   | – |   |
| Proceeds  from sale of digital projectors                                                            |                   | 15,354 |   |   | – |   |
| Net  cash used in investing activities                                                               |                   | (455 | ) |   | (3,441 | ) |
|                                                                                                 |                   |   |   |   |   |   |
| **Cash flows from financing activities**                                                             |                   |   |   |   |   |   |
| Noncontrolling  interest distribution                                                                |                   | (888 | ) |   | – |   |
| Repayments  of long-term debt                                                                        |                   | (6,919 | ) |   | (667 | ) |
| Proceeds  from credit facility agreement - revolving credit facility                                 |                   | 5,000 |   |   | – |   |
| Proceeds  from exercise of stock options                                                             |                   | – |   |   | 16 |   |
| Net  cash used in financing activities                                                               |                   | (2,807 | ) |   | (651 | ) |
| Net  increase (decrease) in cash and cash equivalents                                                |                   | 6,415 |   |   | (6,887 | ) |
| Cash  and cash equivalents, beginning of year                                                        |                   | 13,134 |   |   | 15,704 |   |
| Cash  and cash equivalents, end of year                                                              |                   | $ | 19,549 |   |   | $ | 8,817 |   |
|                                                                                                 |                   |   |   |   |   |   |
| **Supplemental disclosures of cash flow information**                                                |                   |   |   |   |   |   |
| Accretion  of Series C preferred stock                                                               |                   | $ | 3,838 |   |   | $ | 3,092 |   |
| Digital  projectors purchased in exchange for notes                                                  |                   | $ | – |   |   | $ | 1,094 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements*

 

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**RealDInc.**

**Notesto condensed consolidated financial statements (unaudited)**

 

**1. Businessand basis of presentation**

 

RealD Inc., including itssubsidiaries (RealD), is a global licensor of stereoscopic 3D technologies.

 

The accompanying condensedconsolidated financial statements are unaudited. These unaudited interimcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”) andapplicable rules and regulations of the Securities and Exchange Commission (“SEC”)regarding interim financial reporting and include all adjustments (consistingof only normal recurring adjustments, unless otherwise indicated) necessary fora fair presentation of our condensed consolidated financial statements. Interimresults are not necessarily indicative of results for any subsequent quarter,the full fiscal year or any future periods. Certain information and notedisclosures normally included in the financial statements prepared inaccordance with GAAP have been condensed or omitted pursuant to such rules andregulations. Accordingly these interim condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto contained in the Company’s Prospectus filed pursuantto Rule 424(b) under the Securities and Exchange Act, as amended (the “SecuritiesAct”) with the SEC on July 16, 2010 (the “Prospectus”). The consolidatedbalance sheet as of March 26, 2010, included herein was derived from theaudited financial statements as of that date, and the condensed notes to thecondensed consolidated financial statements do not include all disclosuresincluding notes required by GAAP.

 

The condensed consolidatedfinancial statements include the accounts of RealD, its wholly ownedsubsidiaries and its majority owned subsidiaries. We do not have any interestsin variable interest entities. For consolidated subsidiaries that are notwholly owned but are majority owned, the subsidiaries’ assets, liabilities andoperating results are included in their entirety in the accompanying condensedconsolidated financial statements. The noncontrolling interests in thoseassets, liabilities, and operations are reflected as non-controlling interestsin the condensed consolidated balance sheets under equity (deficit) andcondensed consolidated statements of operations.

 

On April 8, 2010, wereincorporated in Delaware. Each class of our capital stock has a par value of$0.0001 per share.

On March 6, 2007, DigitalLink II, LLC (Digital Link II) was formed between Ballantyne of Omaha, Inc. andRealD with member interests of 44.4% and 55.6%, respectively. Digital Link IIwas formed to fund the deployment of digital projector systems and servers tothird-party exhibitors.

 

All significant intercompanybalances and transactions have been eliminated in consolidation.

 

On June 28, 2010, weamended our certificate of incorporation, which increased our total authorizedcapital stock to 200 million shares, and effected a split of our commonstock, which resulted in each share of our common stock splitting into one andone-half shares (or a 1-for-1.5 forward split). The accompanying condensedconsolidated financial statements and notes to the condensed consolidatedfinancial statements have been retroactively restated to reflect the stocksplit for all periods presented.

 

We have evaluated the impactof subsequent events up to the filing date of these interim condensedconsolidated financial statements.

 

**2. Summaryof significant accounting policies**

 

***Accountingperiod***

Our fiscal year consists offour 13-week periods for a total of 52 weeks. The fiscal year for 2011 will endon March 25, 2011.

 

***Use of estimates***

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expense during the reportingperiod. Actual results could differ

 

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from those estimates.

 

***Net income(loss) per share of common stock***

Basic income (loss) per shareof common stock is computed by dividing the net income (loss) attributable toRealD Inc. common stockholders for the period by the weighted average number ofshares of common stock outstanding during the period. Because the holders ofour convertible preferred stock are entitled to participate in dividends andearnings of our company, we apply the two-class method in calculating ourearnings per share for periods when we generate net income. The two-classmethod requires net income to be allocated between the common and preferredstockholders based on their respective rights to receive dividends, whether ornot declared. No such dividends were paid. Because the convertible preferred stock was not contractually obligatedto share in our losses, no such allocation was made for periods when we have netlosses. Diluted income (loss) per share of common stock adjusts the basicweighted average number of shares of common stock outstanding for the potentialdilution that could occur if stock options, warrants and convertible preferredstock were exercised or converted into common stock. Diluted income (loss) pershare of common stock is the same as basic income (loss) per share of commonstock for the three months ended June 26, 2009 because the effects of potentiallydilutive items were anti-dilutive given our net loss.

 

The calculation of the basicand diluted income (loss) per share of common stock for the three months endedJune 25, 2010 and June 26, 2009 was as follows:

 
|                                                              | **Three  months ended** |
|-------------------------------------------------------------------|-------------------------|
|                                                              |                    | **June  25,** |   | **June  26,** |
| **(in  thousands, except share and per share data):**             |                    | **2010** |   | **2009** |
| Numerator:                                                        |                    |   |   |   |   |
| Net income (loss)                                                 |                    | $ | 9,852 |   |   | $ | (6,989 | ) |
| Net (income) loss  attributable to noncontrolling interest        |                    | (1,060 | ) |   | 237 |   |
| Accretion of preferred  stock                                     |                    | (3,838 | ) |   | (3,092 | ) |
| Undistributed earnings  attributable to preferred stockholders    |                    | (2,008 | ) |   | – |   |
| Net income (loss)  attributable to RealD Inc. common stockholders |                    | $ | 2,946 |   |   | $ | (9,844 | ) |
|                                                              |                    |   |   |   |   |   |
| Denominator:                                                      |                    |   |   |   |   |   |
| Weighted-average common  shares outstanding (basic)               |                    | 24,690,954 |   |   | 24,201,394 |   |
| Effect of dilutive  securities                                    |                    | 6,381,881 |   |   | – |   |
| Weighted-average common  shares outstanding (diluted)             |                    | 31,072,835 |   |   | 24,201,394 |   |
|                                                              |                    |   |   |   |   |   |
| Earnings (loss) per  common share:                                |                    |   |   |   |   |   |
| Basic                                                             |                    | $ | 0.12 |   |   | $ | (0.41 | ) |
| Diluted                                                           |                    | $ | 0.09 |   |   | $ | (0.41 | ) |

 

The weighted-average numberof anti-dilutive shares excluded from the calculation of diluted income (loss)per common share for the three months ended June 25, 2010 and June 26, 2009 wasas follows:

 
| ** **                                     | **Three Months Ended** | ** **   |
|------------------------------------------------|------------------------|--------------|
| ** **                                     | ** **             | **June 25,** | ** ** | **June 26,** | ** ** |
| ** **                                     | ** **             | **2010**     | ** ** | **2009** | ** ** |
| Options and warrants to  purchase common stock |                   | -            |   | 6,445,458 |   |
| Conversion of  convertible preferred stock     |                   | 16,835,714   |   | 16,835,714 |   |
| Total                                          |                   | 16,835,714   |   | 23,281,172 |   |

 

The above anti-dilutiontable excludes 2,445,561 motion picture exhibitor options that vest upon the achievementof screen installation targets because the targets were not met as of June 25,2010.

 

***Fair value measurements***

As of June 25, 2010 andMarch 26, 2010, the fair values of our financial assets and liabilities thatwere carried at fair value on a recurring basis were not significant.

 

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***Derivativeinstruments***

Our assets and liabilitiesassociated with derivative instruments are recorded at fair value in othercurrent assets or other current liabilities, respectively, in the condensedconsolidated balance sheets. Changes in fair value are reported as a componentof other income or loss on our condensed consolidated statements of operations.For all periods presented, none of our derivative instruments were designatedas hedging instruments. We do not use foreign currency option or foreignexchange forward contracts for speculative or trading purposes.

 

We purchase foreign currencyforward contracts, generally with maturities of six months or less, to reducethe volatility of cash flows primarily related to forecasted payments andexpenses denominated in certain foreign currencies. As of June 25, 2010, we hadoutstanding forward contracts based in British pound sterling, Canadian dollarand the Euro with notional amounts totaling $4.8 million. As of June 25, 2010and March 26, 2010, the carrying amount of our foreign currency forwardcontracts was not significant and was classified as Level 2 fair valueinstruments, which is determined based on observable inputs that arecorroborated by market data. For the three months ended June 25, 2010 and June26, 2009, the net gains and losses related to the change in fair value of ourforeign currency forward contracts were not significant.

 

***Accountsreceivable***

We extend credit to ourcustomers, who are primarily in the movie production and exhibition businesses.We provide for the estimated accounts receivable that will not be collected.These estimates are based on an analysis of historical bad debts, customerconcentrations, customer creditworthiness, current economic trends and changesin the customers’ payment terms and their economic condition. Collection ofaccounts receivable may be affected by changes in economic or other industryconditions and may, accordingly, impact our overall credit risk. The allowancefor doubtful accounts and customer credits totaled $1.0 million and $1.2million as of June 25, 2010 and March 26, 2010, respectively.

 

***Inventories anddeferred costs-eyewear***

Inventories and deferredcosts eyewear represent 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, weevaluate ending inventories and deferred costs-eyewear for net realizablevalue. We also evaluate 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 stateinventories at lower of cost or market, we maintain reserves against suchinventories. If our analyses indicate that market is lower than cost, awrite-down of inventories is recorded in cost of revenue in the period the lossis identified.

 

For the three month endedJune 25, 2010 and June 26, 2009, we recorded inventory impairments of $0.9million******$1.0 million, respectively,as a result of our net realizable value analyses.

 

Domestically, we provide ourRealD eyewear free of charge to motion picture exhibitors and then receive afee from the motion picture studios for the usage of that RealD eyewear by themotion picture exhibitors’ consumers.

 

The number of domesticRealD-enabled screens and related usage of RealD eyewear is expected to grow.Accordingly, for RealD eyewear located at a motion picture exhibitor, webelieve that it is not operationally practical to perform physical counts orrequest the motion picture exhibitor to perform physical counts and confirmquantities held to ensure that losses due to damage, destruction, and shrinkageare specifically recognized in the period incurred. We believe that the cost tomonitor shrinkage or usage significantly outweighs the financial reportingbenefits of using a specific identification methodology of expensing. Webelieve that utilizing a composite method of expensing RealD eyewear inventorycosts provides a rational and reasonable approach to ensuring that shrinkage isprovided for in the period incurred and that inventory costs are expensed inthe periods that reasonably reflect the periods in which the related revenue isrecognized. In doing so, we believe the following methodology reasonably andgenerally reflects periodic income or loss under these facts and circumstances:

 

·                  For anestimated period of time following shipment to domestic motion pictureexhibitors, no expense is recognized between the time of shipment and until thedelivery is made as the inventory unit is in transit and unused.

 

·                  The inventoryunit cost is expensed on a straight-line basis over an estimated usage periodbeginning when we believe usage of the inventory unit has started. Inestimating the expensing start date and related expense period, we considervarious factors including, but not limited to, those relating to a 3D motionpicture’s opening release date, a 3D motion picture’s expected release period,the number of currently playing 3D motion pictures, the motion pictureexhibitor’s buying and stocking patterns and practices and the quantitiesshipped per inventory unit.

 

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We believe that theexpensing methodology described above rationally and reasonably approximatesthe period the related usage occurs resulting in our RealD eyewear productrevenue. The expensing start date following the date of shipment is meant toapproximate the date at which usage begins. Additionally, as the expenserecognition period has been and is expected to continue to be short, we believeit adequately recognizes inventory impairments due to loss and damage on atimely basis. We further believe that exposures due to loss or damage, if any,are considered normal shrinkage and a necessary and expected cost to generatethe revenue per 3D motion picture earned through RealD eyewear usage. Wecontinue to monitor the reasonableness of this methodology to ensure that itapproximates the period over which the related RealD eyewear product revenue isearned and realizable. RealD eyewear inventory costs that have not yet beenexpensed are reported as deferred costs-eyewear.

 

***Deferredoffering costs***

There was $5.4 million ofdeferred offering costs incurred through June 25, 2010 and recorded asother assets on our condensed consolidated balance sheets. On July 21,2010, amounts incurred were offset against the proceeds of our initial publicoffering.

 

***Impairment of long-livedassets***

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

 

For the three months ended June 25,2010 and June 26, 2009, impairment charges for impaired RealD CinemaSystems charged to cost of revenue were not significant.

 

***Revenue recognition and revenue reductions***

We derive substantially allof our revenue from the license of our RealD Cinema Systems and the productsale of our RealD eyewear. We evaluate revenue recognition for transactionsusing the criteria set forth by the SEC in Staff Accounting BulletinNo. 104, Revenue Recognition (SAB 104) and Accounting StandardsCodification Topic 605, Revenue Recognition ASC 605. The revenuerecognition guidance states that revenue is recognized when all of thefollowing criteria are met: persuasive evidence of an arrangement exists,delivery has occurred or services have been rendered, the seller’s price to thebuyer is fixed or determinable and collectability is reasonably assured.

 

*Licenserevenue*

License revenue is accountedfor as an operating lease. License revenue is primarily derived underper-admission, periodic fixed fee, or per-motion picture basis with motionpicture exhibitors. Amounts received up front, less estimated allowances, aredeferred and recognized over the lease term using the straight-line method.Additional lease payments that are contingent upon future events outside ourcontrol, including those related to admission and usage, are recognized asrevenues when the contingency is resolved and we have no more obligations toour customers specific to the contingent payment received. Certain of ourlicense revenue from leasing our RealD Cinema Systems is earned upon admissionby the motion picture exhibitor’s consumers. Our licensees, however, do notreport and pay for such license revenue until after the admission has occurred,which may be received subsequent to our fiscal period end. We estimate andrecord licensing revenue related to motion picture exhibitor consumeradmissions in the quarter in which the admission occurs, but only whenreasonable estimates of such amounts can be made. We determine that there ispersuasive evidence of an arrangement upon the execution of a license agreementor upon the receipt of a licensee’s admissions report. Revenue is deemed fixedor determinable upon verification of a licensee’s admissions report inaccordance with the terms of the underlying executed agreement or, in certaincircumstances, receipt of a licensee’s admissions report. We determinecollectability based on an evaluation of the licensee’s recent payment history.

 

*Productrevenue*

We recognize productrevenue, net of allowances, when title and risk of loss have passed and whenthere is persuasive evidence of an arrangement, the payment is fixed ordeterminable, and collectability of payment is reasonably assured. In theUnited States and Canada, certain of our product revenue from the sale of ourRealD eyewear is earned upon admission and usage by the motion pictureexhibitor’s consumers. Our customers, however, do not report admission or usageinformation until after the admission and usage has occurred, and suchinformation may be received subsequent to our fiscal period end. 

 

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We estimate and record suchproduct revenue in the quarter in which the admission and usage occurs, butonly when reasonable estimates of such amounts can be made.

 

*Revenuereductions*

We record revenue net ofmotion picture exhibitor stock options and estimated revenue allowances. Inconnection with certain exhibitor licensing agreements, we issued the motionpicture exhibitors a 10-year option to purchase shares of our common stock at approximately$0.00667 per share. The stock options vest upon the achievement of screeninstallation targets. Motion picture exhibitor stock options are valued at theunderlying stock price at each reporting period until the targets are met.Amounts recognized are based on the number of RealD-enabled screens as apercentage of total screen installation targets. The stock options do not havenet cash settlement features. Amounts recorded as a revenue reduction totaled$0.5 million and $5.1 million for the three months ended June 25, 2010 andJune 26, 2009, respectively.

 

***Shipping andhandling costs***

Amounts billed to customersfor shipping and handling costs are included in revenue. Shipping and handlingcosts that we incur consist primarily of packaging and transportation chargesand are recorded in cost of revenue. Shipping and handling costs recognized incost of revenue were $5.1 million and $1.4 million for the three months ended June 25,2010 and June 26, 2009, respectively.

 

***Recentaccounting pronouncements***

In January 2010,Accounting Standards Update 2010-6, *FairValue Measurements and Disclosures: Improving Disclosures About Fair ValueMeasurements*(ASU 2010-6) was issued**which requires entities to make new disclosures about recurring ornonrecurring fair value**measurementsincluding significant transfers into and out of Level 1 and Level 2 fair value**measurements and information onpurchases, sales, issuances and settlements on a gross basis**in the reconciliation of Level 3 fairvalue measurements. We adopted ASU 2010-6 beginning in the first quarter offiscal 2010, except for Level 3 reconciliation disclosures which**are effective for us beginning in thefirst quarter of fiscal 2011. The adoption of the amended disclosurerequirements for fair value measurements did not affect our disclosures becausewe did not transfer financial assets or liabilities between levels in the fairvalue hierarchy.

 

Accounting Standards Update No. 2009-13,*Revenue Recognition (Topic605)—Multiple-Deliverable Revenue Arrangements—a consensus of the EmergingIssues Task Force*(ASU**2009-13)amends Accounting Standards Codification Subtopic 605-25, *Revenue Recognition— Multiple-Element Arrangements*(ASC605-25). The amendments in ASU 2009-13 enable vendors**to account for products or services separately rather thanas a combined unit upon meeting**certaincriteria and establish a hierarchy for determining the selling price of adeliverable. In**addition, avendor can determine a best estimate of selling price, in a manner that isconsistent**with that used todetermine the price to sell the deliverable on a standalone basis, if a vendor**does not have vendor-specific objectiveevidence or third-party evidence of selling price. ASC**605-25 is also amended to eliminate theuse of the residual method and requires a vendor to**allocate revenue using the relative selling price method.The amendments in ASU 2009-13 will**beeffective prospectively, with an option for retrospective restatement of thefinancial**statements, for revenuearrangements entered into or materially modified in fiscal years**beginning on or after June 15, 2010with early adoption permitted at the beginning of an**entity’s fiscal year. We expect to prospectively adopt theamendments in ASU 2009-13**beginningin the first quarter of fiscal year 2012. We are currently evaluating theimpact the**adoption of newguidance will have on consolidated financial statements.

 

**3. Propertyand equipment, RealD Cinema Systems and digital projectors**

 

Property and equipment,RealD Cinema Systems and digital projectors consist of the following:

 
| ** **                                                           | ** ** | **June 25,** | ** ** | **March 26,** | ** **    |
|----------------------------------------------------------------------|------------|-------------------|------------|--------------------|---------------|
| **(in thousands)**                                                   | ** ** | **2010**          | ** ** | **2010**           | ** **    |
| RealD  Cinema Systems                                                |       |   $     | 62,874     |               |   $ | 48,508 |   |
| Digital  projectors                                                  |       | 13,739            |       | 33,196             |          |
| Leasehold  improvements                                              |       | 719               |       | 719                |          |
| Machinery  and equipment                                             |       | 2,289             |       | 2,247              |          |
| Furniture  and fixtures                                              |       | 13                |       | 13                 |          |
| Computer  equipment and software                                     |       | 595               |       | 356                |          |
| Construction  in process                                             |       | 1,165             |       | 767                |          |
| Total                                                                |       |   $     | 81,394     |               |   $ | 85,806 |   |
| Less  accumulated depreciation                                       |       | (13,691)          |       | (17,104)           |          |
| Property  and equipment, RealD Cinema Systems and digital projectors |       |   $     | 67,703     |               |   $ | 68,702 |   |

 

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Depreciation expenseamounted to $2.6 million and $1.6 million for the three months ended June 25,2010 and June 26, 2009, respectively.

 

We receive virtual printfees (VPFs) from third-party motion picture studios. VPFs represent amountsfrom third-party motion picture studios that are paid to us when a motion pictureis played on one of our digital projectors. VPFs are deferred and deducted fromthe selling price of the digital projector. VPFs are recorded as a liability onthe accompanying condensed consolidated balance sheets and totaled $1.5 millionand $6.8 million as of June 25, 2010 and March 26, 2010,respectively.

 

During the three monthsended June 25, 2010, we received $15.4 million in cash from motion pictureexhibitor customers for the sale of digital projectors, resulting in a gain of$6.7 million in other income (loss). With the proceeds, we repaid an aggregateof $5.3 million of notes payable to the equipment providers.

 

**4.Borrowings**

 

***Revolving creditfacility and term loan***

As of June 25, 2010, wehad a $35.0 million credit facility agreement with City National Bank thatprovided for a maximum amount of borrowing under a revolving credit facility of$25.0 million and a term loan of $10.0 million. We have used amounts drawnunder our credit facility agreement for working capital, capital expenditures andto finance operations. The revolving credit facility provides for, at ouroption, Revolving LIBOR loans, which bear interest at the London InterbankOffered Rate (LIBOR) plus a margin of 4.25% and Revolving Prime loans whichbear interest at the fluctuating Prime Rate plus a margin of 2.75%. Theborrowings under the term loan bear interest at the LIBOR plus a margin ofseven and one-half percent (7.50%). The credit facility agreement iscollateralized by a first priority perfected security interest in certainassets, including substantially all of our tangible and intangible property.

 

Under the credit facilityagreement, we were subject to limitations, including limitations on our abilityto incur additional debt, make certain investments or acquisitions and enterinto certain merger and consolidation transactions. The credit facilityagreement also contained a material adverse change clause, and we were requiredto maintain compliance with certain covenants, including a minimum AdjustedEBITDA target, a minimum fixed charge coverage ratio and a minimum number ofscreens installed. As of June 25, 2010, we were in compliance with allfinancial covenants in our credit facility agreement. All amounts outstandingunder the credit facility agreement become due upon the closing of our initialpublic offering on July 21, 2010. If we had failed to comply with any of the covenants or experience amaterial adverse change, the lenders could have elected to prevent us fromborrowing and declare the indebtedness to be immediately due and payable.

 

Borrowings outstanding underthe term loan totaled $10.0 million as of June 25, 2010 and March 26,2010 at an interest rate of 8.625%. Borrowings under the revolving loan creditfacility totaled $15.1 million as of June 25, 2010 and $10.2 million as ofMarch 26, 2010. The interest rates at June 25, 2010 related to ourborrowings under the revolving loan credit facility ranged from 4.6% to 6.0%.Interest expense related to our borrowings under the credit facility agreementwas $0.3 million and $0.1 for the three months ended June 25, 2010 and June 26,2009, respectively. As of June 25, 2010, there was $9.9 million availableto borrow under the credit facility agreement.

 

We have entered into a newcredit and security agreement with City National Bank, dated as of June 24,2010, which provides for a revolving credit facility of up to $15.0 million andwhich will mature on June 30, 2012. This agreement and the revolvingcredit facility provided thereunder became effective on July 21, 2010.

 

***Notes payable***

From time to time, we enterinto equipment purchase agreements with certain of our vendors for the purchaseof digital projectors, digital servers, lenses and accessories. We pay aportion of the cost of the equipment upon delivery and finance a portion of thepurchase price by issuing notes payable. The equipment is included in digitalprojectors in the accompanying condensed consolidated balance sheets. Certainof these notes payable are non-interest bearing. In those cases, we record thenet present value of the notes payable assuming an implied annual interest ratewhich is approximately 8.0%. The notes are secured by the underlying equipment.Notes payable totaled $4.4 million and $11.3 million as of June 25, 2010and March 26, 2010, respectively. Interest expense is based on annualinterest rates ranging from 7.0% to 8.4%. Interest expense related to notespayable was $0.2 million and $0.2 million for the three months ended June 25,2010 and June 26, 2009, respectively.

 

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**5.Commitments and contingencies**

 

***Indemnities andcommitments***

During the ordinary courseof business, we make certain indemnities and commitments under which we may berequired to make payments in relation to certain transactions. Theseindemnities include indemnities of certain customers and licensees of ourtechnologies, and indemnities to our directors and officers to the maximumextent permitted under the laws of the State of California. The duration ofthese indemnities and commitments varies, and in certain cases, is indefinite.The majority of these indemnities and commitments do not provide for anylimitation of the maximum potential future payments we could be obligated tomake. We have not recorded any liability for these indemnities and commitmentsin the accompanying condensed consolidated balance sheets. We do, however,accrue for losses for any known contingent liability, including those that mayarise from indemnification provisions, when future payment is probable andestimable.

 

We have entered intocontracts with certain of our vendors. Future obligations under such contractstotaled $9.8 million at June 25, 2010 and include revolving 90-day supplycommitments.******Many of the contractscontain cancellation penalty provisions requiring payment of up to 20.0% of theunused contract.

 

**6.Mandatorily redeemable convertible preferred stock and equity (deficit)**

 

***Convertiblepreferred stock***

Our outstanding Series A,B and D convertible preferred stock and common stock was classified as part ofpermanent equity within the condensed consolidated balance sheets based ontheir rights and preferences set forth under the certificate of incorporation,California and Delaware law and the accounting standards pertaining toclassification within the condensed consolidated balance sheet. We thereforerecorded the Series A, B and D preferred stock at their original issuanceprice net of applicable issuance costs.

 

***Mandatorilyredeemable convertible preferred stock***

Our Series Cmandatorily redeemable convertible preferred stock was classified in temporaryequity under the SEC’s guidance provided in ASR 268 because the holders of our Series Cmandatorily redeemable convertible preferred stock have the right to cause usto redeem the instrument for cash for a specified period.

 

We accreted the carryingvalue of the Series C mandatorily redeemable convertible preferred stockup to liquidation value through December 2011. Accretion is provided usingthe effective interest-rate method. During the three months ended June 25,2010 and June 26, 2009, we recorded accretion of $3.8 million and $3.1million, respectively.

 

***Motion pictureexhibitor stock options***

In connection with motionpicture exhibitor licensing agreements, we issued to motion picture exhibitorsa 10-year option to purchase 3,668,340 shares of our common stock at $0.00667per share. These stock options to our motion picture exhibitor licensees vestupon the achievement of screen installation targets and are valued at theunderlying stock price at each reporting period until the targets are met.

 

Amounts recorded as arevenue reduction totaled $0.5 million and $5.1 million for the three monthsended June 25, 2010 and June 26, 2009, respectively. As of June 25,2010, unrecognized motion picture exhibitor stock options reductions in revenuetotaled $17.0 million based upon an estimated fair value of our common stock of$15.00 per share and 100% achievement of screen installation targets. As of June 25,2010, 1,222,779 of the motion picture exhibitor stock options had vested.Reductions of revenue resulting from motion picture exhibitor stock options mayincrease as compared to a previous period as the estimated fair value of ourcommon stock and number of screen installations increase.

 

***Warrants***

As of June 25, 2010,there were warrants outstanding to purchase 1,089,000 shares of common stock.The warrants’ weighted-average exercise price is $0.83 per share. As of June 25,2010, the weighted-average remaining term of the warrants was 5.7 years.

 

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**7.Share-based compensation**

 

Share-based compensationexpense for the three months ended June 25, 2010 and June 26, 2009was as follows:

 
| ** **                 | ** ** | **Three months ended** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **June 25,**      | ** ** | **June 26,** | ** ** |
| **(in thousands)**         | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Cost of revenue            |       |   $          | 13         |   |   $ | 20 |   |
| Research and development   |       | 202                    |       | 328 |   |
| Selling and marketing      |       | 381                    |       | 348 |   |
| General and administrative |       | 60                     |       | 68 |   |
| Total                      |       |   $          | 656        |   |   $ | 764 |   |

 

**8. Equity (deficit)**

 

A summary of the changes in total equity (deficit)for the three months ended June 25, 2010 was as follows:

 
| ** **                                           | ** ** | **RealD  Inc.**        | ** ** | ** **         | ** ** | ** ** | ** **            | ** ** |
|------------------------------------------------------|------------|------------------------|------------|--------------------|------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **stockholders’** | ** ** | **Noncontrolling** | ** ** | ** ** | **Total**             | ** ** |
| **(in thousands)**                                   | ** ** | **deficit**            | ** ** | **interest**       | ** ** | ** ** | **equity  (deficit)** | ** ** |
|                                                 |       |                   |       |               |       |       |                  |       |
| Balance, March 26, 2010                         |       |   $          | (44,020)   |               | $          | 2,134      |                  |       | $ | (41,886) |   |
| Accretion of Series C preferred stock           |       | (3,838)                |       | -                  |       |       | (3,838)               |       |
| Share-based compensation                             |       | 656                    |       | -                  |       |       | 656                   |       |
| Motion picture exhibitor option reduction in revenue |       | 492                    |       | -                  |       |       | 492                   |       |
| Noncontrolling interest distribution                 |       | -                      |       | (888)              |       |       | (888)                 |       |
| Comprehensive income:                                |       |                   |       |               |       |       |                  |       |
| Net income                                           |       | 8,792                  |       | 1,060              |       |       | 9,852                 |       |
| Total comprehensive income                           |       |                   |       |               |       |       | 9,852                 |       |
| Balance, June 25, 2010                          |       |   $          | (37,918)   |               | $          | 2,306      |                  |       | $ | (35,612) |   |
|                                                 |       |                   |       |               |       |       |                  |       |

 

**9. Subsequent Events**

 

On July 21, 2010, we completedan initial public offering (“IPO”) of our common stock in which we sold andissued 6 million shares of common stock at an issue price of $16.00 per share.In addition, we issued 111,706 shares of common stock upon the exercise ofoutstanding options. A total of approximately $96 million in gross proceedswere raised from the IPO or $82.6 million in net proceeds after deductingunderwriting discounts and commissions of approximately $6.7 million and otheroffering costs of approximately $6.7 million. On July 21, 2010, all sharesof our then-outstanding convertible preferred stock automatically convertedinto 16,835,714****shares of common stock.

 

Weused the net proceeds from the IPO to repay $25.1 million of amountsoutstanding under the credit facility agreement.

 

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OnJuly 21, 2010, our amended and restated certificate of incorporationbecame effective.

 

Ournew credit and security agreement became effective on July 21, 2010, whichprovides for a revolving credit facility of up to $15 million and is scheduledto mature on June 30, 2012. Our obligations under the new credit andsecurity agreement are secured by a first priority security interest insubstantially all of our tangible and intangible assets in favor of CityNational Bank and are guaranteed by our subsidiaries, ColorLink andStereographics. Under the new credit and security agreement, our business willbe subject to certain limitations, including limitations on our ability toincur additional debt, make certain investments or acquisitions, enter intocertain merger and consolidation transactions, and sell our assets other thanin the ordinary course of business. We will also be required to maintaincompliance with certain financial covenants, including a minimum fixed chargecoverage ratio and a maximum leverage ratio. If we fail to comply with any ofthe covenants or if any other event of default, as defined in the agreement,should occur, the bank could elect to prevent us from borrowing and declare theindebtedness to be immediately due and payable.

 

OnJuly 23, 2010, 407,593 shares were issued pursuant to the exercise ofmotion picture exhibitor stock options.

 

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

***Forward-looking statements***

 

*The following discussion andanalysis should be read in conjunction with our interim condensed consolidatedfinancial statements and the related notes that appear elsewhere in this Form 10-Q.These discussions contain forward-looking statements reflecting our currentexpectations that involve risks and uncertainties. In some cases, you canidentify forward-looking statements by terminology such as “may,” “will,” “should,”“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”“continue” or the negative of these terms or other comparable terminology.Forward-looking statements include, but are not limited to: statementsregarding the extent and timing of future licensing, products and servicesrevenue levels and mix, expenses, margins, net income per diluted share, incometaxes, tax benefits, acquisition costs and related amortization, and othermeasures of results of operations; our expectations regarding demand andacceptance for our technologies; growth opportunities and trends in the marketin which we operate; our plans, strategies and expected opportunities; thedeployment of and demand for our products and products incorporating ourtechnologies; and future competition. Actual results may differ materially fromthose 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, Item1A of this Quarterly Report on Form 10-Q and elsewhere in this filing.Although we believe that the expectations reflected in the forward-lookingstatements are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements. Moreover, neither we nor any otherperson assumes responsibility for the accuracy and completeness of theseforward-looking statements. We are under no duty to update any of theforward-looking statements after the date of this Quarterly Report on Form 10-Qto conform our prior statements to actual results.*

 

**Overview**

 

We are a leading globallicensor of 3D technologies. Our extensive intellectual property portfolioenables a premium 3D viewing experience in the theater, the home and elsewhere.We license our RealD Cinema Systems to motion picture exhibitors that show 3Dmotion pictures and alternative 3D content. We also provide our RealD Format,active and passive eyewear, and display and gaming technologies to consumerelectronics manufacturers and content providers and distributors to enable thedelivery and viewing of 3D content on high definition televisions, laptops andother displays. Our cutting-edge 3D technologies have been used forapplications such as piloting the Mars Rover.

 

For financial reportingpurposes, we currently have one reportable segment. We have three operatingsegments: cinema, consumer electronics and professional within which we marketour various applications. Operating segments are defined as components of anenterprise about which separate financial information is available that isevaluated regularly by the chief operating decision maker, or decision-makinggroup, in deciding how to allocate resources and in assessing performance. Ourchief operating decision maker is our Chief Executive Officer. We aggregate ourthree operating segments into one reportable segment based on qualitativefactors, including similar economic characteristics and the nature of theproducts and services. Our product portfolio is used in applications thatenable a premium 3D viewing experience across these segments. We currentlygenerate substantially all of our revenue from the license of our RealD CinemaSystems and the use and sale of our eyewear.

 

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**Key business metrics**

 

Our management regularlyreviews a number of business metrics, including the following key metrics toevaluate our business, monitor the performance of our business model, identifytrends affecting our business, determine the allocation of resources, makedecisions regarding corporate strategies and evaluate forward-lookingprojections. The measures that we believe are the primary indicators of ourquarterly and annual performance are as follows:

 

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

 

·      **Number of locations.**Domestic locations aremotion picture exhibition complexes in the United States or Canada with one ormore screens enabled with our RealD Cinema Systems. International locations aremotion picture exhibition complexes outside the United States and Canada withone or more screens enabled with our RealD Cinema Systems.

 

·      **Number of 3D motion pictures.**Total 3D motion pictures arethe number of 3D motion pictures that are exhibited for more than threeshowings per day and for a period in excess of one week and for which wereceive a license fee from the motion picture exhibitor during the relevantperiod.

 

·      **AdjustedEBITDA.** We use Adjusted EBITDA as a supplemental measure of our performance.We define Adjusted EBITDA as net loss, plus interest expense, net, income taxesand depreciation and amortization, as further adjusted to eliminate the impactof certain items that we do not consider indicative of our core operatingperformance. We consider our core operating performance to be that which can beaffected by our managers in any particular period through their management ofthe resources that affect our underlying revenue and profit generatingoperations that period. However, Adjusted EBITDA is not a recognized measurementunder U.S. GAAP and should not be considered in isolation or as a substitutefor performance measures calculated in accordance with U.S. GAAP. For furtherdiscussion regarding Adjusted EBITDA, see ‘‘—Non-U.S. GAAP discussion.’’

 

The following table setsforth additional performance highlights of key business metrics for the periodspresented (approximate numbers):

 

| ** **                                                      | ** ** | **Three  months ended ** |
|-----------------------------------------------------------------|------------|-------------------------------|
| ** **                                                      | ** ** | **June 25,  2010**       | ** ** | **June 26,  2009** | ** ** | ** ** |
| ** **                                                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** |
| Number  of RealD-enabled screens (at period end)                |       |                          |   |   |   |   |
| Total domestic RealD-enabled screens                            |       | 4,400                         |   | 2,000 | ** ** |   |
| Total international RealD-enabled screens                       |       | 3,100                         |   | 600 |   |   |
| Total RealD-enabled screens                                     |       | 7,500                         |   | 2,600 |   |   |
| Number of locations with RealD-enabled screens (at  period end) |       |                          |   |   |   |   |
| Total domestic locations with RealD-enabled screens             |       | 1,900                         |   | 1,300 |   |   |
| Total international locations with RealD-enabled  screens       |       | 1,600                         |   | 500 |   |   |
| Total locations with RealD-enabled screens                      |       | 3,500                         |   | 1,800 |   |   |
| Number of 3D motion pictures (released during  period)          |       | 3                             |   | 2 |   |   |

 

Ifwe are successful in expanding our business with consumer electronicsmanufacturers and content producers and distributors to incorporate our RealDFormat and display and gaming technologies into their products and platforms,our key business metrics in future periods may include the number of units of3D-enabled plasma and LCD televisions, interactive gaming consoles and laptopcomputers shipped in that period.

 

**Opportunities, trends and factors affecting comparability**

 

We have rapidly evolved andexpanded our business since we acquired ColorLink in March 2007. Thisexpansion has included hiring most of our senior management team, acquiring andgrowing our research and development facilities in Boulder, Colorado, andbuilding infrastructure to support our business. These investments in andchanges to our business have allowed us to significantly increase our revenueand key business metrics. We expect to continue to invest for the foreseeablefuture in expanding our business as we increase our direct sales and marketingpresence in the United States, 

 

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Europe, Asia and othergeographic regions, enhance and expand our technology and product offerings andpursue strategic acquisitions.

 

***Cinema***

The shift in the motionpicture industry from analog to digital over the past decade has created anopportunity for new and transformative 3D technologies. As of June 25,2010, there were approximately 7,500 RealD-enabled screens worldwide ascompared to approximately 2,600 RealD-enabled screens worldwide as of June 26,2009, an increase of 4,900 RealD-enabled screens or 188%.****** Digital Cinema Implementation Partners (“DCIP”),recently completed its financing and is expected to fund the digital conversionof approximately 14,000 additional domestic theater screens operated by ourlicensees AMC, Cinemark and Regal. We believe the increasing number of theaterscreens to be financed by DCIP provides us with significant opportunity todeploy additional RealD Cinema Systems and furthers our penetration of thedomestic market. Based on the slate announcements by motion picture studios, weanticipate that 23 3D motion pictures will be released worldwide during 2010,including sequels to successful major motion picture franchises such as *Harry Potter*, *Tron*and *Chronicles of Narnia*and 33 3D motionpictures will be released worldwide in 2011. As the number of RealD-enabledscreens and 3D motion pictures released increases, we expect that our revenueand capital needs will continue to grow.

 

***Consumer electronics***

We have recently madeavailable our RealD Format, active and passive eyewear, and display and gamingtechnologies to consumer electronics manufacturers and content distributors toenable 3D in high definition televisions, laptops and other displays in thehome and elsewhere. We believe that the recent success of major 3D motionpictures, including *Avatar,**Alice in Wonderland,**Shrek Forever After* and *Toy Story 3* is leading to thecreation and distribution of 3D content for the consumer electronics market.The development of this market represents a significant opportunity for newrevenue.

 

***Motion picture exhibitor stock options***

We expect to incurvariability in our license revenue in connection with stock options issued tosome of our motion picture exhibitor licensees that vest upon the achievementof screen installation targets. For further discussion regarding exhibitorstock options, see “Critical accounting policies and estimates.”

 

***RealD eyewear shipping expenses***

We anticipate incurringapproximately $0.5 million to $2.0 million of expedited shipping expenses inthe three months ended September 24, 2010 to satisfy anticipated demand andbuild sufficient inventory to mitigate the risk of future inventory shortages.

 

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**Results of operations**

 

The following table setsforth our condensed consolidated statements of operations for each of theperiods indicated:

 
| ** **                                                        | ** ** | **Three  Months Ended** | ** **   |
|-------------------------------------------------------------------|------------|-------------------------|--------------|
| ** **                                                        | ** ** | **June 25,**       | ** **   | **June 26,** | ** ** |
| **(in thousands)**                                                | ** ** | **2010**                | ** **   | **2009** | ** ** |
| **Consolidated  statements of operations data:**                  |       |                    |         |   |   |
| Gross  revenue                                                    |       | $                       | 65,012  |   | $ | 30,642  |   |
| Motion  picture exhibitor options                                 |       | (492)                   |         | (5,078) |   |
| Net  revenue                                                      |       | 64,520                  |         | 25,564 |   |
| Cost  of revenue                                                  |       | 46,618                  |         | 22,701 |   |
| Gross  margin                                                     |       | 17,902                  |         | 2,863 |   |
| Operating  expenses:                                              |       |                    |         |   |   |
| Research  and development                                         |       | 2,979                   |         | 2,400 |   |
| Selling  and marketing                                            |       | 4,105                   |         | 3,902 |   |
| General  and administrative                                       |       | 6,230                   |         | 2,731 |   |
| Total  operating expenses                                         |       | 13,314                  |         | 9,033 |   |
| Operating  income (loss)                                          |       | 4,588                   |         | (6,170) |   |
| Interest  expense                                                 |       | (519)                   |         | (282) |   |
| Other  income (loss)                                              |       | 6,610                   |         | (10) |   |
| Income  (loss) before income taxes                                |       | 10,679                  |         | (6,462) |   |
| Income  tax expense                                               |       | 827                     |         | 527 |   |
| Net  income (loss)                                                |       | 9,852                   |         | (6,989) |   |
| Net  (income) loss attributable to noncontrolling interest        |       | (1,060)                 |         | 237 |   |
| Accretion  of preferred stock                                     |       | (3,838)                 |         | (3,092) |   |
| Undistributed  earnings attributable to preferred stockholders    |       | (2,008)                 |         | - |   |
| Net  income (loss) attributable to RealD Inc. common stockholders |       | $                       | 2,946        |   | $ | (9,844) |   |
|                                                              |       |                    |         |   |   |
| **Other  data:**                                                  |       |                    |         |   |   |
| Adjusted  EBITDA (1)                                              |       | $                       | 10,974       |   | $ | 2,252 |   |

 

(1)          Adjusted EBITDA is not arecognized 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”.

 

In the period to periodcomparative discussion below, we describe our net revenue, license revenue(composed principally of revenue from our RealD Cinema Systems), and productand other revenue (principally composed of our RealD eyewear and, to a muchlesser extent, professional product revenue).

 

**Three-months ended June 26, 2009 compared to three-months ended June 25,2010**

 

***Revenue***

 
| ** **                       | ** ** | **Three  months ended** | ** ** | ** **              | ** ** | ** **         | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|
| **(in thousands)**               | ** ** | **June 25,  2010** | ** ** | **June 26,  2009** | ** ** | **Amount  change** | ** ** | **Percentage  change** | ** ** |
| **Revenue:**                     |       |                    |       |                    |       |               |       |   |   |
| Gross license                    |       | $                       | 26,220     |                    | $          | 11,032             |       | $ | 15,188 |   | 137.7% |   |
| Motion picture exhibitor options |       | (492)                   |       | (5,078)                 |       | 4,586              |       | (90.3)% |   |
| Net license                      |       | 25,728                  |       | 5,954                   |       | 19,774             |       | 332.1% |   |
| Product and other                |       | 38,792                  |       | 19,610                  |       | 19,182             |       | 97.8% |   |
| Total net revenue                |       | $                       | 64,520     |                    | $          | 25,564             |       | $ | 38,956 |   | 152.4% |   |
|                             |       |                    |       |                    |       |               |       |   |   |

 

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The significant increase innet revenue recorded during the three months ended June 25, 2010 comparedto the three months ended June 26, 2009 was primarily due to an increasein the number of RealD-enabled screens, an increase in the number of 3D motionpictures released and the resulting increase in the box office of 3D motion pictureson RealD-enabled screens. Our international markets comprised approximately 50%of gross revenue for the three months ended June 25, 2010.

 

Net license revenue for thethree months ended June 25, 2010 includes admission-based fees related tothe following motion pictures: *Shrek ForeverAfter*($4.2 million)*, How to Train Your Dragon* ($5.2 million),*Clash of the Titans*($4.1 million),  *Toy Story 3*($2.7 million)**and*  Alice inWonderland* ($4.2 million). Net license revenue for thethree months ended June 26, 2009 includes admission-based fees related tothe following motion pictures: *Monsters vs.Aliens* ($4.9 million) and *Up*($4.2 million). Both domestically and internationally, our net licenserevenue increased during the period as a result of the increased number ofRealD-enabled screens and the number of 3D motion pictures increasing the boxoffice. Reduction to revenue resulting from motion picture exhibitor stockoptions decreased $4.6 million based upon the change in the estimated fairvalue of our common stock and the number of RealD-enabled screens of therelated exhibitor. The reduction to revenue resulting from motion pictureexhibitor stock options in the three months ended June 25, 2010 reflectsan estimated fair value of our common stock of $15.00 per share and 1,932deployed RealD Cinema Systems out of 4,500 RealD Cinema Systems set forth inthe performance vesting targets. As of June 25, 2010, unrecognized motionpicture exhibitor stock options reductions to revenue totaled $17.0 million basedupon an estimated fair value of our common stock of $15.00 per share and 100%achievement of screen installation targets. Reductions to revenue resultingfrom motion picture exhibitor stock options may increase as compared to aprevious period to the extent that the value of our common stock and number ofRealD-enabled screen installations increase.

 

Net license revenuescomprised 40% and 23% of total revenues for the three months ended June 25,2010 and June 26, 2009, respectively.

 

The increase in our netproduct revenue in the three months, as compared to the three ended June 26,2009, was primarily a result of an increase in the number of consumersattending 3D motion pictures using our RealD eyewear.

 

We expect our futurerevenue, particularly in our license business, will be driven by the number ofRealD-enabled screens and motion pictures released in 3D. As the volume ofRealD eyewear usage increases as a result of an expanding 3D motion pictureslate and box office, we may experience additional price pressure from ourcustomers. As a result, we expect our net revenues will increase at a slowerrate in future periods.

 

***Cost of revenue***
| ** **            | ** ** | **Three  months ended** | ** ** | ** **              | ** **                     | ** **         | ** ** |
|-----------------------|------------|-------------------------|------------|-------------------------|--------------------------------|--------------------|------------|
| **(in thousands)**    | ** ** | **June 25,  2010** | ** ** | **June 26,  2009** | ** **                     | **Amount  change** | ** ** | **Percentage  change** | ** ** |
| **Revenue**           |       | $                       | 64,520     |                    | $  25,564            |               | $          | 38,956 |   | 152.4% |   |
| **Cost of  revenue**: |       |                    |       |                    |                           |               |       |   |   |
| License               |       | 2,995                   |       | 2,286                   |                           | 709                |       | 31.0% |   |
| Product and other     |       | 43,623                  |       | 20,415                  |                           | 23,208             |       | 113.7% |   |
| Total cost of revenue |       | $                       | 46,618     |                    | $  22,701            |               | $          | 23,917 |   | 105.4% |   |
| Gross profit          |       | $                       | 17,902     |                    | $    2,863 |               | $          | 15,039 |   | 525.3% |   |
| Gross margin          |       | 27.7%                   |       | 11.2%                   |                           |               |       |   |   |

 

Our cost of revenueincreased primarily due to increased RealD eyewear sales. Cost of revenuedecreased, as a percentage of revenue, to 72.3% for the three months endedJune 25, 2010, as compared to 88.8% for the three months ended June 26,2009. The increase in gross margin was primarily due to an increase in licenserevenues and a decrease in the reduction to revenue resulting from motionpicture exhibitor stock options, which partially offset the increased use ofRealD eyewear which generates lower gross margin. The $4.6 million decrease inreduction to revenue resulting from motion picture exhibitor stock optionsdirectly contributed to a $4.6 million increase in gross profit.

 

Excluding the impact ofmotion picture exhibitor stock options, gross profit would have increased $0.5million from $17.9 million for the three months ended June 25, 2010to $18.4 million and gross margin would have been 28.5%. Excluding the impactof motion picture stock options, gross profit would have increased $5.1 millionfrom $2.9 million for the three months ended June 26, 2009 to $7.9million and gross margin would have been 30.9%. The increased use of RealDeyewear was driven by increased attendance.

 

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License cost of revenueincreased primarily as a result of a $1.0 million increase in depreciationexpense partially offset by a decrease in overhead expenses.

 

We had a negative productand other gross profit of $4.8 million for the three months ended June 25,2010, primarily due to RealD eyewear. The increase in our cost of productrevenue and negative gross margins are a result of the increase in the volumeof RealD eyewear. Inbound and outbound freight expense increased by anaggregate of $4.4 million as a result of the increased use of RealD eyewear. Ofthis increase, $3.0 million is related to expedited shipping expenses weincurred in the three months ended June 25, 2010 to satisfy a significantincrease in demand.

 

Significant costs associatedwith the establishment and expansion of the recycling program have beenexpensed in the period incurred, which further reduced gross margin. Recyclingcosts increased $1.4 million to $2.2 million for the three months ended June 25,2010 from $0.8 million for the three months ended June 26, 2009, andincluded the cost to transport RealD eyewear between theaters and the recyclingproduction facility and costs to process the RealD eyewear for reuse.

 

Our cost of revenue as apercentage of net revenue will be affected in the future by the relative mix ofnet license and net product revenue and the impact of motion picture exhibitoroptions. As the number of RealD-enabled screens and the number of 3D motionpictures and attendance increase, we expect our total cost of revenue willcontinue to increase.

 

***Operating expenses***
| ** **                 | ** ** | **Three  months ended** | ** ** | ** **              | ** **               | ** **         | ** **                   |
|----------------------------|------------|-------------------------|------------|-------------------------|--------------------------|--------------------|------------------------------|
| **(in thousands)**         | ** ** | **June 25,  2010** | ** ** | **June 26,  2009** | ** **               | **Amount  change** | ** **                   | **Percentage  change** | ** ** |
| Research and development   |       | $                       | 2,979      |                    | $   2,400 |               | $    579 |   | 24.1 | % |
| Selling and marketing      |       | 4,105                   |       | 3,902                   |                     | 203                |                         | 5.2 | % |
| General and administrative |       | 6,230                   |       | 2,731                   |                     | 3,499              |                         | 128.1 | % |
| Total operating expenses   |       | $                       | 13,314     |                    | $   9,033 |               | $ 4,281                 |   | 47.4 | % |

 

*Researchand development.*  Our researchand development expenses increased primarily due to a $0.4 million increase inpersonnel costs, as we increased the number of research and developmentpersonnel to 32 at June 25, 2010 from 27 at June 26, 2009 to increaseour product development and engineering capabilities. We expect to increase ourresearch and development expenses to support our anticipated growth in consumerelectronics projects and initiatives, primarily for additional personnel,consultants and prototype and materials costs, as well as for continuedinvestment in our cinema business.

 

*Sellingand marketing.*  Our sellingand marketing expenses increased primarily due to our expansioninternationally, primarily into Europe.  Costs were primarily from increases in personnel, as well as, advertisingand marketing initiatives. Personnel costs, advertising and marketing spendingare expected to continue to increase in order to drive revenue growth. Weexpect to incur additional selling and marketing expenses in fiscal year 2011as we increase our international marketing efforts, particularly in Asia, andbuild our consumer electronics business worldwide.

 

*Generaland administrative.*  Our generaland administrative expenses increased primarily due to a $1.5 million increasein sales and use taxes as a result of increased revenue. We absorb the majorityof all sales and use taxes in the United States and do not pass such costs onto our customers. Personnel costs increased $0.8 million, including an increasein executive and other discretionary bonuses of $0.4 million, as we increasedthe number of general and administrative employees to 18 at June 25, 2010from 12 at June 26, 2009 to support our overall growth. Legal expenses andprofessional fees increased $0.7 million to support the growth in ouroperations. We expect to incur additional general and administrative expensesfor sales and use taxes as our revenue in the United States grows, as well asto comply with SEC reporting requirements, stock exchange listing standards andprovisions of the Sarbanes-Oxley Act of 2002.

 

***Other***

*Interestexpense.*  Interestexpense increased $0.2 million primarily due to increases in borrowings underour credit facility agreement. Our borrowings under the credit facilityagreement increased to $25.1 million as of June 25, 2010 from $20.2million as of March 26, 2010.

 

*Otherincome (loss).*  Other income increased primarily due to a$6.7 million gain from the sale of digital projectors partially offset by aforeign exchange loss in the three months ended June 25, 2010.

 

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*Incometax.*  Our income tax expense was $0.8million for the three months ended June 25, 2010 primarily due to anincrease in our foreign tax expense. We have net operating losses that maypotentially be offset against future earnings. We expect to incur an increasingamount of income tax expenses that relate primarily to federal, state incometax and international operations. We file federal income tax returns and incometax returns in various state and foreign jurisdictions. Due to the netoperating loss carryforwards, our United States federal and state returns areopen to examination by the Internal Revenue Service and state jurisdictions forall years since inception.

 

*Noncontrollinginterest.* Noncontrolling interest represents a 44.4% interest in our subsidiary,Digital Link II, LLC, or Digital Link II. Digital Link IIwas formed for purposes of funding the deployment of digital projector systemsand servers to our motion picture exhibitor licensees. The increase in the netincome attributable to noncontrolling interest was primarily due to the gainfrom the sale of digital projectors in the three months ended June 25,2010.

 

***Seasonality***

 

Althoughnot apparent in our results of operations due to our rapid growth rate, ouroperations are generally subject to the number of 3D motion pictures releasedand the box office of those 3D motion pictures. We expect to experienceseasonal fluctuations in results of operations as a result of changes in thenumber of 3D motion pictures released and the box office of those 3D motionpictures. Our quarterly financial results have fluctuated in the past and maycontinue to fluctuate in the future based on a number of factors, many of whichare beyond our control. Factors that may cause our operating results to vary orfluctuate include those discussed in Part II, Item 1.A  below under the caption “Risk factors.”

 

Our gross revenue wasapproximately $65 million in the three months ended June 25, 2010, adecrease of approximately 15.3% compared to gross revenue of $76.7 million inthe three months ended March 26, 2010. Our gross revenue decreased as aresult of the period-to-period decline in the 3D motion picture box office. Theperiod-to-period variance was primarily attributable to the seasonal releasepatterns of 3D motion pictures and the performance of *Avatar* (the highest grossing motionpicture of all time) during the three months ended March 26, 2010, whichwas not replicated during the three months ended June 25, 2010. Our netrevenue for the three months ended June 25, 2010 was $64.5 million (afteradjustment to revenue of $0.5 million relating to motion picture exhibitoroptions), increasing by approximately 16.4% compared to net revenue of $55.4million (after adjustment to revenue of $21.3 million relating to motionpicture exhibitor options) for the three months ended March 26, 2010. Ournet revenue increased primarily as a result of a significant decrease in ouradjustment to revenue relating to motion picture exhibitor options in the threemonths ended June 25, 2010, attributable to a decrease in the estimatedstock price and an increase in screen installation targets. See “Criticalaccounting policies and estimates.

 

Our net income was $9.9million in the three months ended June 25, 2010, improving from the netloss of $17.9 million reported for the three months ended March 26, 2010.The improvement is primarily attributable to the increase in net revenuediscussed above, as well as an increase in other income, primarily attributableto the sale of digital projectors to motion picture exhibitors.

 

**Liquidityand capital resources**

 

Since our inception andthrough June 25, 2010, we have financed our operations through the sale ofredeemable convertible preferred stock, borrowings under our credit facilityagreement with City National Bank and through the issuance of notes payable tostockholders and vendors, and net cash provided by operating activities. Ourcash flow from operating activities has historically been significantlyimpacted by the contractual payment terms and patterns related to the license ofour RealD Cinema Systems and use and sale of our RealD eyewear, as well assignificant investments in research, development, selling and marketingactivities and corporate infrastructure.

 

Cash provided by operatingactivities is expected to be a primary recurring source of funds in futureperiods and will be driven by increased revenue generated from the growingnumber of 3D motion pictures exhibited on our RealD Cinema Systems and anincrease in the number of RealD-enabled screens, partially offset by increasedworking capital requirements associated with installing new RealD CinemaSystems as well as for building inventory, logistics and recycling costs forour RealD eyewear. Depending on our operating performance in any given periodand the installation rate of additional RealD Cinema Systems, we expect tosupplement our liquidity needs primarily with proceeds from the IPO andborrowings under our new revolving credit facility with City National Bank.

 

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At June 25, 2010, ourprimary sources of liquidity were our cash and cash equivalents of$19.5 million and our credit facility agreement with City National Bank providingfor a revolving credit facility of $25 million, $9.9 million of whichwas available for borrowing. Our cash equivalents primarily consist of moneymarket funds. The carrying amount of cash equivalents reasonably approximatesfair value due to the short maturities of these instruments. The primaryobjective of our investment activities is preservation of capital, fulfillmentof liquidity needs and fiduciary control of cash and investments. We also seekto maximize income from our investments without assuming significant risk. Wedo not enter into investments for trading or speculative purposes.

 

We have entered into a newcredit and security agreement with City National Bank, dated as of June 24,2010, which provides for a revolving credit facility of up to $15.0 million andwhich will mature on June 30, 2012. This agreement and the revolvingcredit facility provided thereunder became effective on July 21,2010.  On July 21, 2010, we repaid$25.1 million under our previous revolving credit facility.

 

On July 21, 2010, wecompleted the IPO of our common stock in which we sold and issued 6 millionshares of common stock at an issue price of $16.00 per share. A total ofapproximately $96 million in gross proceeds were raised from the IPO, or $82.6million in net proceeds after deducting underwriting discounts and commissionsof approximately $6.7 million and other offering costs of approximately $6.7million. On July 21, 2010, all shares of our then-outstanding convertiblepreferred stock automatically converted into**16,835,714shares of common stock.  We used the netproceeds from the IPO to repay $25.1 million of amounts outstanding underthe credit facility agreement.

 

OnJuly 23, 2010, 407,593 shares were issued pursuant to the exercise ofmotion picture exhibitor stock options.

 

We believe that our cash,cash equivalents, and potential cash flows from operations will be sufficientto satisfy our currently anticipated cash requirements through at least thenext 12 months.

 

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

 
| ** **           | ** ** | **Three  months ended** | ** ** |
|----------------------|------------|-------------------------|------------|
| **(in thousands)**   | ** ** | **June 25,  2010** | ** ** | **June 26,  2009** | ** ** |
| Operating activities |       | $                       | 9,667      |   | $ | (2,795) |   |
| Investing activities |       | (455)                   |       | (3,441) |   |
| Financing activities |       | $                       | (2,807)    |   | $ | (651) |   |

 

***Cash flow from operating activities***

Net cash inflows fromoperating activities during the three months ended June 25, 2010 primarilyresulted from improved operating performance as RealD Cinema Systeminstallations and admissions increased. Net cash inflows from operatingactivities also benefited from increases in deferred revenue from internationaleyewear sales, accrued expenses, partially offset by an increase in glassesinventories and deferred offering costs. Increases in accrued expenses were dueto increased business activities at quarter end, resulting in significantamounts due to vendors and employees. Glasses inventories grew in order tosupport an increase in RealD Cinema System installations and admissions.

 

Net cash outflows fromoperating activities during the three ended June 26, 2009 primarilyresulted from a net loss, an increase in accounts receivable and inventoriespartially offset by increases in deferred costs-eyewear, deferred revenue andaccrued expenses. Accounts receivable increased as a result of an increase inrevenue. Inventories grew in order to support an increase in RealD CinemaSystem installations and admissions.

 

***Cash flow from investing activities andcapital resources***

For the three months ended June 25,2010 and June 26, 2009, cash outflow for investing activities is primarilyrelated to the establishment of our initial infrastructure and for the purchaseof component parts for our RealD Cinema Systems, digital projectors, and otherproperty, equipment and leasehold improvements. In the three months ended June 25,2010, we received proceeds of $15.4 million as a result of the sale of digitalprojectors to certain of our motion picture exhibitors. Capital expenditureswere $15.8 million for the three months ended June 25, 2010 and $3.4million in for the three months ended June 26, 2009. We expect our capitalexpenditures to be approximately $45.0 million to $55.0 million for thefiscal year ending March 25, 2011. In the future, we will continue toinvest in our business to grow sales and develop new products and

 

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support the relatedincreasing employee headcount. We expect capital expenditures to represent adecreasing percentage of net revenue in the future.

 

***Cash flow from financing activities***

Net cash outflows fromfinancing activities for the three months ended June 25, 2010 primarilyresulted from repayments of long-term debt of $6.9 million and a noncontrollinginterest distribution of $0.9 million offset from proceeds from our revolvingcredit facility of $5.0 million.  Netcash outflows from financing activities for the three months ended June 26,2009 primarily resulted from repayments of long-term debt of $0.7 million.

 

From time to time, we enterinto equipment purchase agreements with certain of our vendors for the purchaseof digital projectors, digital servers, lenses and accessories. We pay a portionof the cost of the equipment upon delivery and finance a portion of thepurchase price by issuing notes payable. Certain of these notes payable arenon-interest bearing. In those cases, we record the net present value of thenotes payable assuming an implied annual interest rate which is approximately8%. Interest expense is based on annual interest rates ranging from 7.0% to8.4%. The notes are secured by the underlying equipment. Notes payable totaled$4.4 million at June 25, 2010 and $11.3 million at March 26,2010.

 

As of June 25, 2010, wehad $25.1 million of credit facilities pursuant to a credit facility agreementwith City National Bank that provides for a maximum amount of borrowing under arevolving credit facility of $25 million and a term loan of $10 million. Wehave used amounts drawn under our credit facility agreement for workingcapital, capital expenditures and to finance operations. The revolving creditfacility provides for, at our option, revolving LIBOR loans, which bearinterest at the London Interbank Offered Rate (LIBOR) plus a margin of 4.25%and revolving prime loans which bear interest at the fluctuating Prime Rateplus a margin of 2.75%. The borrowings under the term loan currently bearinterest at the LIBOR plus a margin of 7.5%. The credit facility agreement iscollateralized by a first priority perfected security interest in certainassets, including substantially all of our tangible and intangible property.

 

Under the credit facilityagreement, we are subject to limitations, including limitations on our abilityto incur additional debt, make certain investments or acquisitions and enterinto certain merger and consolidation transactions. We are also required tomaintain compliance with certain financial covenants, including a minimumEBITDA target and minimum fixed charge coverage ratio. As of June 25,2010, we were in compliance with all financial covenants in our credit facilityagreement. If we fail to comply with any of the covenants, or if any otherevent of default, as defined in the agreement, occurs, the bank could elect toprevent us from borrowing and declare the indebtedness to be immediately dueand payable. Additionally, on July 21, 2010, all amounts outstanding underthe credit facility agreement became due and were repaid in an aggregate amountof $25.1 million.

 

The credit facilityagreement matured on July 21, 2010. Borrowings outstanding under the termloan totaled $10 million at June 25, 2010 and bear interest atinterest at the LIBOR plus a margin of seven and one-half percent (7.50%).Borrowings under the revolving loan credit facility totaled $15.1 millionat June 25, 2010. The interest rates at June 25, 2010 related to ourborrowings under the revolving loan credit facility ranged from 4.6% to 6.0%.As of June 25, 2010, there was $9.9 million available to borrow underthe credit facility agreement.

 

We have entered into a newcredit and security agreement with City National Bank, dated as ofJune 24, 2010, which provides for a revolving credit facility of up to $15million. The new credit and security agreement became effective on July 21,2010 and is scheduled to mature on June 30, 2012. Our obligations underthe new credit and security agreement are secured by a first priority securityinterest in substantially all of our tangible and intangible assets in favor ofCity National Bank and are guaranteed by our subsidiaries, ColorLink andStereographics. Under the new credit and security agreement, our business willbe subject to certain limitations, including limitations on our ability toincur additional debt, make certain investments or acquisitions, enter intocertain merger and consolidation transactions, and sell our assets other thanin the ordinary course of business. We will also be required to maintain compliancewith certain financial covenants, including a minimum fixed charge coverageratio and a maximum leverage ratio. If we fail to comply with any of thecovenants or if any other event of default, as defined in the agreement, shouldoccur, the bank could elect to prevent us from borrowing and declare theindebtedness to be immediately due and payable.

 

In the future, we maycontinue to utilize commercial financing, lines of credit and term loans forgeneral corporate purposes, including investing in technology.

 

To date, proceeds fromemployee stock option exercises have not been significant. From time to time,we expect to receive cash from the exercise of employee stock options andwarrants in our common stock. Proceeds from the exercise of employee

 

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stock options and warrantsoutstanding will vary from period to period based upon, among other factors,fluctuations in the market value of our common stock relative to the exerciseprice of such stock options and warrants.

 

On July 21, 2010, wecompleted the IPO of our common stock in which we sold and issued 6 millionshares of common stock at an issue price of $16.00 per share. A total ofapproximately $96 million in gross proceeds were raised from the IPO, or $82.6million in net proceeds after deducting underwriting discounts and commissionsof approximately $6.7 million and other offering costs of approximately $6.7million. On July 21, 2010, all shares of our then-outstanding convertiblepreferred stock automatically converted into**16,835,714shares of common stock.  We used the netproceeds from the IPO to repay $25.1 million of amounts outstanding underthe credit facility agreement.

 

OnJuly 23, 2010, 407,593 shares were issued pursuant to the exercise ofmotion picture exhibitor stock options.

 

**Off-balance sheet arrangements**

 

We do not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entitiesthat would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. As such,we are not exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in those types of relationships. We enter intoguarantees in the ordinary course of business related to the guarantee of ourown performance and the performance of our subsidiaries.

 

**Non-U.S. GAAP discussion**

 

In addition to our U.S. GAAPresults, we present Adjusted EBITDA as a supplemental measure of ourperformance. However, Adjusted EBITDA is not a recognized measurement underU.S. GAAP. We define Adjusted EBITDA as net income (loss), plus interestexpense, net, income taxes and depreciation and amortization, as furtheradjusted to eliminate the impact of certain items that we do not considerindicative of our core operating performance. Management considers our coreoperating performance to be that which can be affected by our managers in anyparticular period through their management of the resources that affect ourunderlying revenue and profit generating operations that period. Non-U.S. GAAPadjustments to our results prepared in accordance with U.S. GAAP are itemizedbelow. You are encouraged to evaluate these adjustments and the reasons weconsider them appropriate for supplemental analysis. In evaluating AdjustedEBITDA, you should be aware that in the future we may incur expenses that arethe same as or similar to some of the adjustments in this presentation. Ourpresentation of Adjusted EBITDA should not be construed as an inference thatour future results will be unaffected by unusual or non-recurring items.

 

Set forth below is areconciliation of Adjusted EBITDA to net income (loss) for the three monthsended June 25, 2010 and June 26, 2009:

 
| ** **                                | ** ** | **Three  Months Ended** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **June 25,**       | ** ** | **June 26,** | ** ** |
| **(in thousands)**                        | ** ** | **2010**                | ** ** | **2009** | ** ** |
| ** **                                |       |                    |       |   |   |
| Net income (loss)                         |       | $                       | 9,852      |   | $ | (6,989) |   |
| Add  (deduct):                            |       |                    |       |   |   |
| Interest  expense                         |       | 519                     |       | 282 |   |
| Income  tax expense                       |       | 827                     |       | 527 |   |
| Depreciation  and amortization            |       | 2,668                   |       | 1,612 |   |
| Other  (income) loss (1)                  |       | (6,610)                 |       | 10 |   |
| Share-based  compensation expense (2)     |       | 656                     |       | 764 |   |
| Exhibitor  option expense (3)             |       | 492                     |       | 5,078 |   |
| Impairment  of assets and intangibles (4) |       | 131                     |       | 48 |   |
| Sales  and use tax (5)                    |       | 2,145                   |       | 720 |   |
| Property  tax (6)                         |       | 206                     |       | 112 |   |
| Management  fee (7)                       |       | 88                      |       | 88 |   |
| Adjusted  EBITDA                          |       | $                       | 10,974     |   | $ | 2,252 |   |

 

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(1)          Includesamortization of debt issue costs, unrealized foreign currency exchange gainsand losses and gain of $6.7 million from the sale of digital projectors.

(2)          Representsshare-based compensation expense of nonstatutory and incentive stock options toemployees, officers, directors and consultants.

(3)          Representsstock options granted to some of our motion picture exhibitor licensees. Theamounts are recorded as contra revenue in the condensed consolidated financialstatements.

(4)          Representsimpairment of long-lived assets, such as fixed assets, theatrical equipment andidentifiable intangibles.

(5)          Representstaxes incurred by us for cinema license and product revenue.

(6)          Representsproperty taxes on RealD Cinema Systems and digital projectors.

(7)          Representspayment of management fees to our Series C mandatorily redeemableconvertible preferred stockholder (included in general and administrativeexpense, which will terminate upon the completion of our offering).

 

We present Adjusted EBITDA because we believe itassists investors and analysts in comparing our performance across reportingperiods on a consistent basis by excluding items that we do not believe are indicativeof our core operating performance. In addition, we use Adjusted EBITDA indeveloping our internal budgets, forecasts and strategic plan; in analyzing theeffectiveness of our business strategies; to evaluate potential acquisitions;in making compensation decisions; in communications with our board of directorsconcerning our financial performance and because our credit facility agreementuses Adjusted EBITDA to measure our compliance with certain covenants. AdjustedEBITDA has limitations as an analytical tool. Some of these limitations are:

 

·                  AdjustedEBITDA does not reflect our cash expenditures, or future requirements, forcapital expenditures or contractual commitments;

·                  AdjustedEBITDA does not reflect changes in, or cash requirements for, our workingcapital needs;

·                  AdjustedEBITDA does not reflect the significant interest expense, or the cashrequirements necessary to service interest or principal payments, on our debts;

·                  althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated and amortized will often have to be replaced in the future, andAdjusted EBITDA does not reflect any cash requirements for such replacements;

·                  non-cashcompensation is and will remain a key element of our overall long-term incentivecompensation package, although we exclude it as an expense when evaluating ourongoing operating performance for a particular period;

·                  AdjustedEBITDA does not reflect the impact of certain cash charges resulting frommatters we consider not to be indicative of our ongoing operations; and

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

 

Because of these limitations, Adjusted EBITDA shouldnot be considered in isolation or as a substitute for performance measurescalculated in accordance with U.S. GAAP. We compensate for these limitations byrelying primarily on our U.S. GAAP results and using Adjusted EBITDA onlysupplementally. Our condensed consolidated financial statements and the notesto those statements included elsewhere are prepared in accordance with U.S.GAAP.

 

**Critical accounting policies and estimates**

 

This discussion is basedupon our condensed consolidated financial statements, which have been preparedin accordance with U.S. GAAP. The preparation of our financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, estimates andjudgments 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 basedon historical experience and on various other assumptions that we believe to bereasonable under the circumstances, which form the basis for our judgmentsabout the carrying values of assets and liabilities not readily apparent fromother sources. By their nature, estimates are subject to an inherent degree ofuncertainty. Actual results may differ from these estimates.

 

We believe the followingcritical accounting policies, among others, affect our more significantjudgments and estimates used in the preparation of our condensed consolidatedfinancial statements.

 

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***Revenue recognition and revenue reductions***

We derive substantially allof our revenue from the license of our RealD Cinema Systems and the productsale of our RealD eyewear. We evaluate revenue recognition for transactionsusing the criteria set forth by the SEC in Staff Accounting BulletinNo. 104, Revenue Recognition (SAB 104) and Accounting StandardsCodification Topic 605, Revenue Recognition ASC 605. The revenuerecognition guidance states that revenue is recognized when all of thefollowing criteria are met: persuasive evidence of an arrangement exists,delivery has occurred or services have been rendered, the seller’s price to thebuyer is fixed or determinable and collectability is reasonably assured.

 

*Licenserevenue.*  Licenserevenue is accounted for as an operating lease. License revenue is primarilyderived under per-admission, periodic fixed fee, or per-motion picture basiswith motion picture exhibitors. Amounts received up front, less estimatedallowances, are deferred and recognized over the lease term using thestraight-line method. Additional lease payments that are contingent upon futureevents outside our control, including those related to admission and usage, arerecognized as revenues when the contingency is resolved and we have no moreobligations to our customers specific to the contingent payment received.Certain of our license revenue from leasing our RealD Cinema Systems is earnedupon admission by the motion picture exhibitor’s consumers. Our licensees,however, do not report and pay for such license revenue until after theadmission has occurred, which may be received subsequent to our fiscal periodend. We estimate and record licensing revenue related to motion pictureexhibitor consumer admissions in the quarter in which the admission occurs, butonly when reasonable estimates of such amounts can be made. We determine thatthere is persuasive evidence of an arrangement upon the execution of a licenseagreement or upon the receipt of a licensee’s admissions report. Revenue isdeemed fixed or determinable upon verification of a licensee’s admissionsreport in accordance with the terms of the underlying executed agreement or, incertain circumstances, receipt of a licensee’s admissions report. We determinecollectability based on an evaluation of the licensee’s recent payment history.

 

*Productrevenue.*  We recognizeproduct revenue, net of allowances, when title and risk of loss have passed andwhen there is persuasive evidence of an arrangement, the payment is fixed ordeterminable, and collectability of payment is reasonably assured. In theUnited States and Canada, certain of our product revenue from the sale of ourRealD eyewear is earned upon admission and usage by the motion pictureexhibitor’s consumers. Our customers, however, do not report admission or usageinformation until after the admission and usage has occurred, and suchinformation may be received subsequent to our fiscal period end. We estimateand record such product revenue in the quarter in which the admission and usageoccurs, but only when reasonable estimates of such amounts can be made.

 

*Revenuereductions.*  We recordrevenue net of motion picture exhibitor stock options and estimated revenueallowances. In connection with certain exhibitor licensing agreements, weissued the motion picture exhibitors a 10-year option to purchase shares of ourcommon stock at approximately $0.00667 per share. The stock options vest upon theachievement of screen installation targets. Motion picture exhibitor stockoptions are valued at the underlying stock price at each reporting period untilthe targets are met. Amounts recognized are based on the number ofRealD-enabled screens as a percentage of total screen installation targets. Thestock options do not have net cash settlement features. Amounts recorded as arevenue reduction totaled $0.5 million and $5.1 million for the three monthsended June 25, 2010 and June 26, 2009, respectively.

 

***Fair value of common stock***

The fair values of ourcommon stock were estimated by our board of directors. To date, we have notobtained an independent valuation of our common stock. In the absence of apublic trading market and an independent valuation, our board of directorsconsidered numerous, contemporaneous objective and subjective factors todetermine its best estimate of the fair market value of our common stock,including but not limited to, the following factors:

 

·                  third-party tradingtransactions in our common stock and preferred stock;

·                  the rights, preferences andprivileges of our preferred stock relative to the common stock;

·                  the development andcompletion of our 3D technologies;

·                  projected Adjusted EBITDA (See‘‘—Non-U.S. GAAP discussion’’);

·                  projected number ofRealD-enabled domestic and international screens;

·                  projected number of 3Dmotion picture releases;

·                  the likelihood of achievinga liquidity event for shares of our common stock, such as an initial publicoffering or sale of our company, given prevailing market conditions; and

·                  preliminary valuations frominvestment banks.

 

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Our management and boardof directors considered the methods outlined in the American Institute ofCertified Public Accountants Practice Aid, Valuation of Privately-Held-CompanyEquity Securities Issued as Compensation. For each valuation date in whichprojected Adjusted EBITDA was considered the primary basis for estimating thefair value of our common stock, we prepared a financial forecast to be used inestimating our projected Adjusted EBITDA. The financial forecasts took into accountour past experience and future expectations. Therefore, in those cases, ourvaluations have been heavily dependent on our estimates of revenue, costs andrelated cash flows. These estimates are highly subjective and subject tofrequent change based on both new operating data as well as variousmacroeconomic conditions that impact our business. Each of our valuations wasprepared using data that was consistent with our then-current operating plansthat we were using to manage our business. The risks associated with achievingthese financial forecasts were assessed and applied in determining our bestestimates of our financial forecasts. As with all financial forecasts, there isinherent uncertainty in these estimates. Once we estimated our projected AdjustedEBITDA, we applied trading multiples of comparable companies to determine ourenterprise value. For our estimated common stock fair value for the threemonths ended June 25, 2010, we did not apply a discount factor to the estimatedenterprise value given our anticipated growth, the IPO, and performancerelative to other companies within our industry. The estimated enterprise valuewas then divided by the number of fully diluted common stock outstanding toarrive at the per share common stock value.

 

For the periods below, our board of directorsestimated the fair value of our common stock as follows:

 
|  Period                                |   | Estimated fair value of  common stock |   | Primary basis for  estimated  fair value of common stock                                                   |   |
|---------------------------------------------|--------|---------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|
| Three months  ended June 26, 2009      |   | $10.00                                |   | Most recent third-party trading transactions in  our common stock; we were not a party to the negotiations |   |
| Three months  ended September 25, 2009 |   | $10.00                                |   | Most recent third-party trading transaction in  our common stock; we were not a party to the negotiations  |   |
| Three months  ended December 25, 2009  |   | $14.00                                |   | Multiple of projected Adjusted EBITDA(1)                                                                   |   |
| Three months  ended March 26, 2010     |   | $23.07                                |   | Multiple of projected Adjusted EBITDA(1)                                                                   |   |
| Three months  ended June 25, 2010           |   | $15.00                                |   | High end of price range in IPO Prospectus                                                                  |   |
|                                        |   |                                  |   |                                                                                                       |   |

(1)          Calculated based on trading multiples ofcomparable companies. For a discussion regarding Adjusted EBITDA and areconciliation of Adjusted EBITDA to net income (loss), see “—Non-U.S. GAAPdiscussion”.

 

The substantial increase in value during fiscal2010 was principally due to a significant increase in the number ofRealD-enabled screens and in the number of projected 3D motion picturereleases.

 

***Share-based compensation***

Stockoptions granted generally vest over a four-year period, with 25.0% of theshares vesting after one year and monthly vesting thereafter. The optionsgenerally expire ten years from the date of grant.

 

Share-based compensationexpense for the three months ended June 25, 2010 and June 26, 2009 was asfollows:

 
| ** **                 | ** ** | ** ** | **Three months ended** | ** ** |
|----------------------------|------------|------------|------------------------|------------|
| ** **                 | ** ** | ** ** | **June 25,**           | ** ** | **June 26,** | ** ** |
| **(in thousands)**         | ** ** | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Cost of revenue            |       |       | $                      | 13         |   | $ | 20 |   |
| Research and development   |       |       | 202                    |       | 328 |   |
| Selling and marketing      |       |       | 381                    |       | 348 |   |
| General and administrative |       |       | 60                     |       | 68 |   |
| Total                      |       |       | $                      | 656        |   | $ | 764 |   |

 

***Inventories***

Domestically, we provide ourRealD eyewear free of charge to motion picture exhibitors and then receive afee from the motion picture studios for the usage of that RealD eyewear by themotion picture exhibitors’ consumers.

 

The number of domesticRealD-enabled screens and related usage of RealD eyewear is expected to grow.Accordingly, for RealD eyewear located at a motion picture exhibitor, webelieve that it is not operationally practical to perform physical

 

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counts or request the motionpicture exhibitor to perform physical counts and confirm quantities held toensure that losses due to damage, destruction, and shrinkage are specificallyrecognized in the period incurred. We believe that the cost to monitorshrinkage or usage significantly outweighs the financial reporting benefits ofusing a specific identification methodology of expensing. We believe thatutilizing a composite method of expensing RealD eyewear inventory costsprovides a rational and reasonable approach to ensuring that shrinkage isprovided for in the period incurred and that inventory costs are expensed inthe periods that reasonably reflect the periods in which the related revenue isrecognized. In doing so, we believe the following methodology reasonably andgenerally reflects periodic income or loss under these facts and circumstances:

 

·                  For anestimated period of time following shipment to domestic motion pictureexhibitors, no expense is recognized between the time of shipment and until thedelivery is made as the inventory unit is in transit and unused.

·                  The inventoryunit cost is expensed on a straight-line basis over an estimated usage periodbeginning when we believe usage of the inventory unit has started. Inestimating the expensing start date and related expense period, we considervarious factors including, but not limited to, those relating to a 3D motionpicture’s opening release date, a 3D motion picture’s expected release period,the number of currently playing 3D motion pictures, the motion pictureexhibitor’s buying and stocking patterns and practices and the quantities shippedper inventory unit.

 

We believe that theexpensing methodology described above rationally and reasonably approximatesthe period the related usage occurs resulting in our RealD eyewear productrevenue. The expensing start date following the date of shipment is meant toapproximate the date at which usage begins. Additionally, as the expenserecognition period has been and is expected to continue to be short, we believeit adequately recognizes inventory impairments due to loss and damage on atimely basis. We further believe that exposures due to loss or damage, if any,are considered normal shrinkage and a necessary and expected cost to generatethe revenue per 3D motion picture earned through RealD eyewear usage. Wecontinue to monitor the reasonableness of this methodology to ensure that itapproximates the period over which the related RealD eyewear product revenue isearned and realizable. RealD eyewear inventory costs that have not yet beenexpensed are reported as deferred costs-eyewear.

 

***Impairment of long-livedassets***

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

 

For the three months endedJune 25, 2010 and June 26, 2009, impairment charges for impaired RealD CinemaSystems charged to cost of revenue were not significant.

 

***Deferred tax asset valuation and taxexposures***

As of June 25, 2010, we havedetermined based on the weight of the available evidence, both positive andnegative, to provide for a valuation allowance against substantially all of thenet deferred tax assets. The current deferred tax assets not reserved for bythe valuation allowance are those in foreign jurisdictions or amounts that maybe carried back in future years. If there is a change in circumstances thatcauses 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 theperiod when such change occurs.

 

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

 

Significant judgment isrequired in determining the provision for income taxes, deferred tax assets andliabilities, the valuation allowance against our deferred tax assets anduncertainty in income tax positions. Our financial position and results ofoperations may be materially impacted if actual results significantly differfrom these estimates or the estimates are adjusted in future periods.

 

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***Contingencies and assessments***

We are subject to variousloss contingencies and assessments arising in the course of our business, someof which relate to litigation, claims, property taxes and sales and use orgoods and services tax assessments. We consider the likelihood of the loss orthe incurrence of a liability, as well as our ability to reasonably estimatethe amount of loss in determining loss, contingencies and assessments. Anestimated loss contingency or assessment is accrued when it is probable that a liabilityhas been incurred and the amount of loss can be reasonably estimated. Weregularly evaluate current information available to us to determine whethersuch accruals should be adjusted. Based on the information presently available,including discussion with counsel and other consultants, management believesthat resolution of these matters will not have a material adverse effect on ourbusiness, consolidated results of operations, financial condition or cashflows.

 

***Recentaccounting pronouncements***

In January 2010, AccountingStandards Update 2010-6, *Fair ValueMeasurements and Disclosures: Improving Disclosures About Fair ValueMeasurements*(ASU 2010-6) was issued**which requires entities to make new disclosures about recurring ornonrecurring fair value**measurementsincluding significant transfers into and out of Level 1 and Level 2 fair value**measurements and information onpurchases, sales, issuances and settlements on a gross basis**in the reconciliation of Level 3 fairvalue measurements. We adopted ASU 2010-6 beginning in the first quarter offiscal 2010, except for Level 3 reconciliation disclosures which**are effective for us beginning in thefirst quarter of fiscal 2011. The adoption of the amended disclosurerequirements for fair value measurements did not affect our disclosures becausewe did not transfer financial assets or liabilities between levels in the fairvalue hierarchy.

 

Accounting Standards UpdateNo. 2009-13, *Revenue Recognition (Topic605)—Multiple-Deliverable Revenue Arrangements—a consensus of the EmergingIssues Task Force*(ASU**2009-13)amends Accounting Standards Codification Subtopic 605-25, *Revenue Recognition— Multiple-Element Arrangements*(ASC605-25). The amendments in ASU 2009-13 enable vendors**to account for products or services separately rather thanas a combined unit upon meeting**certaincriteria and establish a hierarchy for determining the selling price of adeliverable. In**addition, avendor can determine a best estimate of selling price, in a manner that isconsistent**with that used todetermine the price to sell the deliverable on a standalone basis, if a vendor**does not have vendor-specific objectiveevidence or third-party evidence of selling price. ASC**605-25 is also amended to eliminate theuse of the residual method and requires a vendor to**allocate revenue using the relative selling price method.The amendments in ASU 2009-13 will**beeffective prospectively, with an option for retrospective restatement of thefinancial**statements, for revenuearrangements entered into or materially modified in fiscal years**beginning on or after June 15, 2010 withearly adoption permitted at the beginning of an**entity’s fiscal year. We expect to prospectively adopt theamendments in ASU 2009-13**beginningin the first quarter of fiscal 2012. We are currently evaluating the impact the**adoption of new guidance will have onconsolidated financial statements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

We have operations outsidethe United States. We are exposed to market risks in the ordinary course of ourbusiness. These risks primarily include interest rate, foreign exchange andinflation risks as well as changes in the general economic conditions in thecountries where we conduct business. To reduce certain of these risks, wemonitor the financial condition of our large customers and limit creditexposure by collecting in advance and setting credit limits, as we deemappropriate. In addition, our investment strategy currently has been to investin financial instruments that are highly liquid, readily convertible into cashand which mature within three months from the date of purchase. We also enterinto foreign exchange derivative hedging transactions as part of our riskmanagement program. For accounting purposes, we do not designate any of ourderivative instruments as hedges and we do not use derivatives for speculatingtrading purposes and are not a party to leveraged derivatives.

 

***Interest rate risk***

We are exposed to marketrisk related to changes in interest rates.

 

Our investments areconsidered cash equivalents and primarily consist of money market funds. AtJune 25, 2010, we had cash equivalents of $19.5 million. The carrying amount ofcash equivalents reasonably approximates fair value due to the short maturitiesof these instruments. The primary objective of our investment activities ispreservation of capital, fulfillment of liquidity needs and fiduciary controlof cash and investments. We also seek to maximize income from our investmentswithout assuming significant risk. We do not enter into investments for tradingor speculative purposes. Our investments are exposed to market risk due to afluctuation in interest rates, which may affect our interest income and thefair market value of our investments. Due to the short-term nature of ourinvestment portfolio, however, we do not believe an immediate 10%

 

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increase or decrease ininterest rates would have a material effect on the fair market value of ourportfolio, and therefore we do not expect our operating results or cash flowsto be materially affected by a sudden change in market interest rates.

 

We do not believe our cashequivalents have significant risk of default or illiquidity. While we believeour cash equivalents do not contain excessive risk, we cannot provide absoluteassurance that in the future our investments will not be subject to adversechanges in market value. In addition, we maintain significant amounts of cashand cash equivalents at one or more financial institutions that are in excessof federally insured limits. We cannot be assured that we will not experiencelosses on these deposits.

 

At June 25, 2010 we hadborrowings outstanding with carrying values of $25.1 million. The carryingamount of borrowings approximates fair value based on borrowing rates currentlyavailable to us. Our outstanding borrowings consist of both fixed and variableinterest rate financial instruments. The revolving credit facility providesfor, at our option, Revolving LIBOR loans, which bear interest at the LondonInterbank Offered Rate (LIBOR) plus a margin of 4.25% and Revolving Prime loanswhich bear interest at the fluctuating Prime Rate plus a margin of 2.75%. Theborrowings under the term loan bore interest at the LIBOR plus a margin ofseven and one-half percent (7.50%). Changes in interest rates do not affectoperating results or cash flows on our fixed rate borrowings but would impactour variable rate borrowings. A hypothetical 10% increase or decrease ininterest rates relative to interest rates at June 25, 2010 would not have amaterial impact on operating results and cash flows with respect to our variablerate borrowings. Changes in interest rates would, however, affect the fairvalues of all of our outstanding borrowings, including, to a lesser extent, ourvariable rate borrowings outstanding at June 25, 2010 for which the interestrate reset semi-annually. A hypothetical 10% decrease in interest ratesrelative to interest rates at June 25, 2010 would result in an increase ofapproximately $0.2 million in the aggregate fair value of our outstandingborrowings. A hypothetical 10.0% increase in interest rates relative tointerest rates at June 25, 2010 would result in a decrease of approximately$0.2 million in the aggregate fair value of our outstanding borrowings.

 

***Foreign currency risk***

We have foreign currencyrisks related to our revenue and operating expenses denominated in currenciesother than the United States dollar. Our historical revenue has generally beendenominated in United States dollars, and a significant portion of our currentrevenue continues to be denominated in United States dollars; however, weexpect an increasing portion of our future revenue to be denominated incurrencies other than the United States dollar, primarily the Euro, Britishpound sterling, Canadian dollar and Japanese yen. Our operating expenses aregenerally denominated in the currencies of the countries in which ouroperations are located, primarily the United States and United Kingdom.Increases and decreases in our international revenue from movements in foreignexchange rates are partially offset by the corresponding increases or decreasesin our international operating expenses. To further reduce our net exposure toforeign exchange rate fluctuations on our results of operations, we haveentered into foreign currency forward contracts.

 

As of June 25, 2010, wehad outstanding forward contracts based in British pound sterling, Canadiandollar and the Euro with notional amounts totaling $4.8 million. We do notdesignate any of our forward contracts as hedges for accounting purposes. Forthe three months ended June 26, 2009 and June 25, 2010, the net gains andlosses related to the change in fair value of our foreign currency forwardcontracts were not significant. With regard to these contracts, a hypothetical10.0% adverse movement in foreign exchange rates compared with the U.S. dollarrelative to exchange rates on June 25, 2010 would result in a reduction in fairvalue of these forward contracts and a corresponding foreign currency loss ofapproximately $0.5 million. This analysis does not consider the impact thathypothetical changes in foreign currency exchange rates would have onanticipated transactions and assets and liabilities that these foreign currencysensitive instruments were designed to offset.

 

As our internationaloperations grow, our risks associated with fluctuation in currency rates willbecome greater, and we will continue to reassess our approach to managing thisrisk. In addition, currency fluctuations or a weakening United States dollarcan increase the costs of our international expansion.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Wemaintain “disclosure controls and procedures,” as such term is defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”), that are designed to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified inSecurities and Exchange Commission rules and forms, and that such informationis accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to

 

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allowfor timely decisions regarding required disclosure. In designing and evaluatingour disclosure controls and procedures, management recognized that disclosurecontrols and procedures, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the disclosurecontrols and procedures are met. Additionally, in designing disclosure controlsand procedures, our management necessarily was required to apply its judgmentin evaluating the cost-benefit relationship of possible disclosure controls andprocedures. The design of any disclosure controls and procedures also is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions.

 

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

 

**Changes in Internal Control Over Financial Reporting**

 

Therewere no changes in our internal control over financial reporting during thefiscal quarter ended June 25, 2010, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.**

**OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

We are involved in variouslegal proceedings from time to time arising from the normal course of businessactivities, including claims of alleged infringement of intellectual propertyrights, commercial, employment and other matters. In our opinion, resolution ofthese proceedings is not expected to have a material adverse effect on ouroperating results or financial condition. However, it is possible that anunfavorable resolution of one or more such proceedings could materially affectour future operating results or financial condition in a particular period.

 

**ITEM 1A. RISK FACTORS**

 

*The following risk factors andother information included in this Quarterly Report on Form 10-Q should becarefully considered. The risks and uncertainties described below are not theonly ones we face. Additional risks and uncertainties not presently known to usor that we presently deem less significant may also impair our businessoperations. If any of the following risks actually occur, our business,operating results and financial condition could be materially adverselyaffected.*

 

**Risks relating to our business**

 

***If motion pictures that can be viewed withRealD Cinema Systems are not made or are not commercially successful, ourrevenue could decline.***

 

Almost all of our revenue iscurrently dependent upon both the number of 3D motion pictures released and thecommercial success of those 3D motion pictures. We have not developed any ofour own 3D content and rely on motion picture studios producing and releasing3D motion pictures compatible with our RealD Cinema Systems. There is noguarantee an increasing number of 3D motion pictures will be released or thatmotion picture studios will continue to produce 3D motion pictures at all.Motion picture studios may refrain from producing and releasing 3D motionpictures for any number of reasons, including their lack of commercial success.The commercial success of a 3D motion picture depends on a number of factorsthat are outside of our control, including whether it achieves criticalacclaim, timing of the release, marketing efforts and promotional support forthe release. In the past, consumer interest in 3D motion pictures was episodicand motion picture studios tended to use 3D motion pictures as a gimmick ratherthan as an artistic tool to enhance the experience. If consumers’ recentrenewed interest in the 3D viewing experience fails to grow or it declines forany reason, box office performance may suffer and motion picture studios mayreduce the number of 3D motion pictures they produce. Poor box officeperformance of 3D motion pictures, disruption or reduction in 3D motion pictureproduction, changes in release schedules, a reduction in marketing efforts for3D motion pictures by motion picture studios or a lack of consumer demand for3D motion pictures could result in lower 3D motion picture attendance, whichcould substantially reduce our revenue.

 

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***If motion picture exhibitors do notcontinue to use our RealD Cinema Systems or experience financial difficulties,our growth and results of operations could be adversely affected.***

 

Our primary licensees in themotion picture industry are motion picture exhibitors. Our license agreementswith motion picture exhibitors do not obligate these licensees to deploy aspecific number of our RealD Cinema Systems. We cannot predict whether any ofour existing motion picture exhibitor licensees will continue to perform undertheir license agreements with us, whether they will renew their licenseagreements with us at the end of their term or whether we may now or in the futurebe in breach of those agreements. If motion picture exhibitors reduce oreliminate the number of 3D motion pictures that are exhibited in theaters, thenmotion picture studios may not produce and release 3D motion pictures and ourrevenue could be adversely affected.

 

In addition, net licenserevenue from AMC, Cinemark and Regal together comprised approximately 13% ofour net consolidated revenue in the year ended March 31, 2008, 16% in theyear ended March 27, 2009 and 18% in the year ended March 26, 2010.Any inability or failure by AMC, Cinemark or Regal to pay us amounts due in atimely fashion or at all could substantially reduce our cash flow and couldmaterially and adversely impact our financial condition and results ofoperations.

 

***A deterioration in our relationships withthe major motion picture studios could adversely affect our business.***

 

The six major motion picturestudios accounted for approximately 83% of domestic box office revenue and 9 ofthe top 10 grossing 3D motion pictures in 2009. License fees generated frommotion pictures released by these studios represented nearly 100% of our motionpicture exhibitor license revenue. Total revenue generated for motion picturesreleased by these motion picture studios represented nearly 100% of our totalrevenue in the year ended March 26, 2010. In addition, for our domestic operations and in certain internationalmarkets, these major motion picture studios pay us a per use fee for our RealDeyewear. To the extent that our relationship with any of these major motionpicture studios deteriorates or any of these studios stop making motionpictures that can be viewed at RealD-enabled theater screens, refuse toco-brand with us or stop using our RealD eyewear, our costs could increase andour revenue could decline, which could adversely affect our business andresults of operations.

 

***If motion picture exhibitors do notcontinue converting analog theaters to digital or the pace of conversionsslows, our future prospects could be limited and our business could beadversely affected.***

 

Our RealD Cinema Systemsonly work in theaters equipped with digital cinema projection systems, whichenable 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 to digital cinemaover the last several years, giving us the opportunity to deploy our RealDCinema Systems. After motion picture exhibitors convert their projectors todigital cinema, they must install a silver screen and our RealD Cinema System.The conversion by motion picture exhibitors of their projectors and screensfrom analog to digital cinema requires significant expense. In 2009, motionpicture exhibitors installed approximately 7,500 digital cinema projectors, anapproximately 86% growth rate from 2008, and in 2008, motion picture exhibitorsinstalled approximately 2,300 digital cinema projectors, an approximately 36%growth rate from 2007. Although DCIP recently completed its financing that isproviding funding for the digital conversion of approximately 14,000 additionaldomestic theater screens operated by our licensees AMC, Cinemark and Regal, wecannot predict the pace or success of this conversion. As of December 31,2009, approximately 18% of domestic theater screens had converted to digitaland a much smaller percentage of international theater screens had beenconverted. If the market for digital cinema develops more slowly than expected,the motion picture exhibitors we have agreements with, including AMC, Cinemarkand Regal, delay or abandon the conversion of their theaters, our ability togrow our revenue and our business could be adversely affected.

 

***If the deployment of our RealD CinemaSystems is delayed or not realized, our future prospects could be limited andour business could be adversely affected.***

 

We have license agreementswith motion picture exhibitors that give us the right, subject to certainexceptions, to deploy our RealD Cinema Systems if a location under contract isalready equipped with our systems and they choose to install additional 3Ddigital projector systems. As of June 25, 2010, we were working with ourmotion picture exhibitor licensees to deploy our RealD Cinema Systems on up toapproximately 4,000 additional screens under our existing agreements with them.However, our license agreements do not obligate our licensees to deploy aspecific number of our RealD Cinema Systems. Numerous factors beyond ourcontrol could influence when and whether our RealD Cinema Systems will bedeployed, including motion picture exhibitors’ ability to fund capitalexpenditures, or their decision to delay or abandon the conversion of theirtheaters to 

 

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digital projection or reducethe number of 3D motions pictures exhibited in their theaters. If motionpicture exhibitors delay, postpone or decide not to deploy RealD Cinema Systemsat the number of screens they have announced, or we are unable to deploy ourRealD Cinema Systems in a timely manner, our future prospects could be limitedand our business could be adversely affected.

 

***We have a history of net losses and maycontinue to suffer losses in the future.***

 

We have incurred net lossesin each of our last five fiscal years, and incurred a net loss of approximately$39.7 million for the year ended March 26, 2010. If we cannot becomeprofitable, our financial condition will deteriorate, and we may be unable toachieve our business objectives.

 

***Any inability to protect our intellectualproperty rights could reduce the value of our 3D technologies and brand, whichcould adversely affect our financial condition, results of operations andbusiness.***

 

Our business is dependentupon our patents, trademarks, trade secrets, copyrights and other intellectualproperty rights. Effective intellectual property rights protection, however,may not be available under the laws of every country in which we and ourlicensees operate, such as China. The efforts we have taken to protect ourproprietary rights may not be sufficient or effective. Any significantimpairment of our intellectual property rights could harm our business or ourability to compete. In addition, protecting our intellectual property rights iscostly and time consuming. It may not be practicable or cost effective for usto fully protect our intellectual property rights in some countries orjurisdictions. If we are unable to successfully identify and stop unauthorizeduse of our intellectual property, we could lose potential revenue andexperience increased operational and enforcement costs, which could adverselyaffect our financial condition, results of operations and business.

 

It is possible that some ofour 3D technologies may not be protectable by patents. In addition, given thecosts of obtaining patent protection, we may choose not to protect particularinnovations that later turn out to be important. Even where we do have patentprotection, the scope of such protection may be insufficient to prevent thirdparties from designing around our particular patent claims or otherwiseavoiding infringement. Furthermore, there is always the possibility that an issuedpatent may later be found to be invalid or unenforceable, or a competitor mayattempt to engineer around our issued patent. Additionally, patents only offera limited term of protection. Moreover, the intellectual property we maintainas trade secrets could be compromised by third parties, or intentionally oraccidentally by our employees, which would cause us to lose the competitiveadvantage resulting from them.

 

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

 

Our RealD Cinema Systems andother technologies are generally designed for use with third-party technologiesand hardware, such as Christie projectors, Doremi servers, Harkness Hallscreens and Sony Electronics 4K SXRD® digitalcinema 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 RealD Cinema Systems, RealDFormat and other 3D technologies can change without prior notice to us, whichcould result in increased costs or our inability to provide our 3D technologiesto our licensees. If we are unable to maintain the ability of our RealD CinemaSystems, RealD Format and other 3D technologies to work with these third-party technologiesand hardware, our business and operating results could be adversely affected.

 

***We may in the future be subject tointellectual property rights claims that are costly to defend, could require usto pay damages and could limit our ability to use particular 3D technologies inthe future.***

 

We may be exposed to, orthreatened with, future litigation by other parties alleging that our 3Dtechnologies infringe their intellectual property rights. Any intellectualproperty claims, regardless of their merit, could be time consuming, expensiveto litigate or settle and could divert management resources and attention. Anadverse determination in any intellectual property claim could require us topay damages and/or stop using our 3D technologies, trademarks, copyrightedworks and other material found to be in violation of another party’s rights andcould prevent us from licensing our 3D technologies to others. In order toavoid these restrictions, we may have to seek a license. This license may notbe available on reasonable terms, could require us to pay significant licensefees and may significantly increase our operating expenses. A license also maynot be available to us at all. As a result, we may be required to use and/ordevelop non-infringing alternatives, which could require significant effort andexpense. If we cannot obtain a license or develop alternatives for anyinfringing aspects of our 

 

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business, we may be forcedto limit our 3D technologies and may be unable to compete effectively. Incertain instances, we have contractually agreed to provide indemnification tolicensees relating to our intellectual property. This may require us to defendor hold harmless motion picture exhibitors, consumer electronics manufacturersor other licensees. We have from time to time corresponded with one or morethird parties regarding patent enforcement issues and in-bound and out-boundpatent licensing opportunities. In addition, from time to time we may beengaged in disputes regarding the licensing of our intellectual propertyrights, including matters related to our license fee rates and other terms ofour licensing arrangements. These types of disputes can be asserted by ourlicensees or prospective licensees or by other third parties as part ofnegotiations with us or in private actions seeking monetary damages orinjunctive relief or in regulatory actions. Requests for monetary andinjunctive remedies asserted in claims like these could be material and couldhave a significant impact on our business. Any disputes with our licensees,potential licensees or other third parties could adversely affect our business,results of operations and prospects.

 

***If we are unable to maintain our brand andreputation for providing high quality 3D technologies, our business andprospects could be materially harmed.***

 

Our business and prospectsdepend, in part, on maintaining and strengthening our brand and reputation forproviding high quality 3D technologies in the markets we serve. If problemswith our 3D technologies cause motion picture exhibitors, consumer electronicsmanufacturers or other licensees to experience operational disruption orfailure or delays in the delivery of their products and services to theircustomers, our brand and reputation could be diminished. Maintaining andstrengthening our brand and reputation may be particularly challenging as weenter markets in which we have limited experience, such as the 3D consumerelectronics market. If we fail to promote and maintain our brand and reputationsuccessfully, our business and prospects could be materially harmed.

 

***Competition from other providers of 3Dtechnologies to the motion picture industry could adversely affect ourbusiness.***

 

The motion picture industryis highly competitive, particularly among providers of 3D technologies. Ourprimary competitors include Dolby, Laboratories, Inc., or Dolby, IMAXCorporation, or IMAX, MasterImage 3D, LLC, or MasterImage, and X6DLimited, or Xpand. In addition, other companies, including motion pictureexhibitors and studios, may develop their own 3D technologies in the future.Consumers may also perceive the quality of 3D technologies delivered by some ofour competitors to be equivalent or superior to our 3D technologies. Inaddition, some of our current or future competitors may have significantlygreater financial, technical, marketing and other resources than we do or mayhave more experience or advantages in the markets in which we compete that willallow them to offer lower prices or higher quality technologies, products orservices. If we do not successfully compete with these providers, we could losemarket share and our business could be adversely affected.

 

***We face potential competition fromcompanies with greater brand recognition and resources in the consumerelectronics industry.***

 

The 3D consumer electronicsmarket is new and rapidly developing, and we must compete with companies thatenjoy competitive advantages, including:

 

·                  more developeddistribution channels and deeper relationships with consumer electronicsmanufacturers;

 

·                  a moreextensive customer base;

 

·                  technologiesthat may be better suited for 3D consumer electronics products;

 

·                  broadertechnology, product and service offerings; and

 

·                  greaterresources for competitive activities, such as research and development,strategic acquisitions, alliances, joint ventures, sales and marketing, andlobbying industry and government standards.

 

As a result, these currentand potential competitors may be able to respond more quickly and effectivelythan we can to new or changing opportunities, products, technologies orstandards in the 3D consumer electronics market.

 

We also face competitionwhere existing licensees relying on our RealD Cinema Systems in the motionpicture industry may become current or potential competitors in the 3D consumerelectronics market, or vice versa. For example, Sony Pictures 

 

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Entertainment, Inc., orSony Pictures, is a major motion picture studio, but certain of its affiliatesalso design, manufacture and market consumer electronics products andcomponents and are entering the 3D consumer electronics market. In 2009, wesigned an agreement with Sony Electronics making available to it some of our 3Dtechnologies for potential use with their consumer electronics products. To theextent that Sony Electronics or our other licensees choose to utilize competing3D technologies that they have developed or in which they have an interest,rather than use our 3D technologies, our growth prospects could be adverselyaffected.

 

***The introduction of new 3D technologies andchanges in the way that our competitors operate could harm our business. If wefail to keep up with rapidly changing 3D technologies or the growth of new andexisting markets, our 3D technologies could become less competitive orobsolete.***

 

The motion picture andconsumer electronics industries in general are undergoing significant changes.Due to technological advances and changing consumer tastes, numerous companieshave developed, and are expected to continue to develop, new 3D technologiesthat may compete directly with our 3D technologies. Competitors may developalternative 3D technologies that are more attractive to consumers, contentproducers and distributors, motion picture exhibitors, consumer electronicsmanufacturers and others, or more cost effective than our technologies, andwhich make our 3D technologies less competitive. As a result of thiscompetition, we could lose market share, which could harm our business andoperating results. We expect to expend considerable resources on research anddevelopment in response to changes in the motion picture and consumerelectronics industries. However, we may not be able to develop and effectivelymarket new 3D technologies that adequately or competitively address the needsof these changing industries, which could have an adverse effect on ourbusiness and prospects.

 

***If our 3D technologies fail to be widelyadopted by or are not compatible with the needs of our licensees, our businessprospects could be limited and our operating results could be adverselyaffected.***

 

Our motion picture andconsumer electronics licensees depend upon our 3D technologies being compatiblewith a wide variety of motion picture and consumer electronics systems, productsand infrastructure. We make significant efforts to design our 3D technologiesto address capability, quality and cost considerations so that they either meetor, where possible, exceed the needs of our licensees in the motion picture andconsumer electronics industries. To have our 3D technologies widely adopted inthe motion picture and consumer electronics industries, we must convince abroad spectrum of professional organizations worldwide, as well as motionpicture studios and exhibitors and consumer electronics manufacturers who aremembers of such organizations, to adopt them and to ensure that our 3Dtechnologies are compatible with their systems, products and infrastructure.

 

If our 3D technologies arenot widely adopted or retained or if we fail to conform our 3D technologies tothe expectations of, or standards set by, industry participants, they may notbe compatible with other products and our business, operating results andprospects could be adversely affected. We expect that meeting and maintainingthe needs of our licensees for compatibility with them will be significant toour business in the future. In addition, the market for broadcast technologieshas traditionally been heavily regulated by governments or other regulatorybodies, and we expect this to continue to be the case in the future. If our 3Dtechnologies are not compatible with the broadcasting infrastructure inparticular geographic areas, our ability to compete in these markets could beadversely affected.

 

***Other forms of entertainment may be moreattractive to consumers than those using our 3D technologies, which could harmour growth and operating results.***

 

We face competition forconsumer attention from other forms of entertainment that may drive down motionpicture box office and license revenue from motion picture exhibitors. Wecompete with a number of alternative motion picture distribution channels, suchas cable, satellite, broadcast, packaged media and the Internet. There are alsoother forms of entertainment competing for consumers’ leisure time anddisposable income such as concerts, amusement parks and sporting events. Asignificant increase in the popularity of these alternative motion picturechannels and competing forms of entertainment could reduce the demand for theatricalexhibition of 3D motion pictures, including those viewed with our RealD CinemaSystems, and have an adverse effect on our business and operating results.

 

***Motion picture exhibitor stock options, ourshare price and the pace of theater conversions to RealD-enabled screens couldcreate volatility in our reported revenue and earnings.***

 

In connection with some ofour motion picture exhibitor licensing agreements, we issued to the motionpicture exhibitors a 

 

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10-year option to purchaseshares of our common stock at approximately $0.00667 per share. The stockoptions vest upon the achievement of screen installation targets. Motionpicture exhibitor stock options are valued at the underlying stock price ateach reporting period until the targets are met. Amounts recognized are basedon the number of screens installed as a percentage of total screen installationtargets. We record revenue net of motion picture exhibitor stock options, theamount of which is determined by changes in our share price and the number ofRealD-enabled screens relative to certain targets. If our share price were toincrease or decrease significantly during a reporting period, it could impactour reported revenue and earnings including potentially leading us to reportnegative revenue under certain circumstances.

 

***Our limited operating history in the 3Dconsumer electronics market presents risk to our ability to achieve success inthis area.***

 

Our 3D technologies haveonly recently been made available to consumer electronics manufacturers,including JVC, Panasonic, Samsung, Sony Electronics and Toshiba, to enable 3Dviewing on high definition televisions, laptops and other displays. To date, wehave not generated revenue of any material significance from our arrangementswith these and other consumer electronics manufacturers. The 3D consumerelectronics market is rapidly developing, as manufacturers are working to setstandards and content producers and distributors are working on increasing theavailability of new 3D content. However, the demand for our 3D technologies andthe income potential from the 3D consumer electronics market are unproven. Inaddition, because the 3D consumer electronics market is new and quicklyevolving, we have limited insight into trends that may emerge and affect ourbusiness. We may make errors in predicting and reacting to relevant businesstrends. We also may not be able to successfully address these risks on a timelybasis or at all.

 

***If consumer electronics manufacturers limittheir use of our 3D technologies in high definition televisions, laptops andother displays or such products are not accepted by consumers, our potentialgrowth in this market will be significantly reduced.***

 

We are dependent on consumerelectronics manufacturers to use our RealD Format, active and passive eyewear,and display and gaming technologies with their high definition televisions,laptops and other displays, and for content distributors to deliver 3D contentvia cable, satellite, broadcast, packaged media and the Internet. While we haveentered into agreements with some consumer electronics manufacturers regardingthe use of our 3D technologies in various consumer electronics products, theseagreements are not exclusive, and we can give no assurances that these consumerelectronics manufacturers will utilize our 3D technologies or that there willbe sufficient consumer demand for 3D electronics products. In addition, sincethe 3D consumer electronics market is emerging, it is unclear if consumers willaccept viewing 3D content in the home and elsewhere. The lack of consumerinterest in 3D technologies may cause consumer electronics manufacturers tolimit their use of our 3D technologies. As a result, our future prospects couldbe adversely affected if consumer electronics manufacturers choose not to useour 3D technologies.

 

***Acquisition activities could result inoperating difficulties, dilution to our stockholders and other harmfulconsequences.***

 

We have built our business,in part, through acquisitions of intellectual property and other assets. We mayselectively pursue strategic acquisitions in the future. Future acquisitionscould divert management’s time and focus from operating our business. Inaddition, integrating an acquired company, business or technology is risky andmay result in unforeseen operating difficulties and expenditures. Foreignacquisitions also involve unique risks related to integration of operationsacross different cultures and languages, currency risks and the particulareconomic, political and regulatory risks associated with specific countries.

 

We may not accurately assessthe value or prospects of acquisition candidates, and the anticipated benefitsfrom our future acquisitions may not materialize. In addition, futureacquisitions or dispositions could result in potentially dilutive issuances ofour equity securities, including our common stock, the incurrence of debt,contingent liabilities or amortization expenses, or write-offs of goodwill, anyof which could harm our financial condition.

 

***Our growth may place a strain on ourresources, which could harm our operations or increase our costs.***

 

We have experiencedsignificant growth since we acquired ColorLink in 2007. The growth that we haveexperienced in the past, as well as any further growth that we experience, mayplace a significant strain on our resources and increase demands on ourmanagement, our information and reporting systems and our internal controlsover financial reporting. We will incur additional general and administrativeexpenses to comply with the U.S. Securities and Exchange Commission, orSEC, reporting requirements, the listing standards of the New York StockExchange, or NYSE, and provisions of the 

 

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Sarbanes-Oxley Act of 2002,and will continue to incur additional research and development expenses. If weare unable to manage our growth effectively while maintaining appropriateinternal controls, we may experience operating inefficiencies that couldincrease our costs.

 

***We face risks from doing businessinternationally that could harm our business, financial condition and resultsof operations.***

 

We are dependent oninternational business for a portion of our total revenue. International grossrevenue accounted for approximately 27% of our total gross revenue in fiscal2008, 27% in fiscal 2009 and 46% in fiscal 2010. We expect that ourinternational business will continue to represent a significant portion of ourrevenue for the foreseeable future. This future revenue will depend to a largeextent on the continued use and expansion of our 3D technologies in the motionpicture and consumer electronics industries worldwide. As a result, ourbusiness is subject to certain risks inherent in international business, manyof which are beyond our control. These risks include:

 

·                  fluctuatingforeign exchange rates;

 

·                  laws andpolicies affecting trade, investment and taxes, including laws and policiesrelating to the repatriation of funds and withholding taxes and changes inthese laws;

 

·                  changes inlocal regulatory requirements, including restrictions on content;

 

·                  differingcultural tastes and attitudes;

 

·                  differingdegrees of protection for intellectual property;

 

·                  the need toadapt our business model to local requirements;

 

·                  the instabilityof foreign economies and governments; and

 

·                  politicalinstability, natural disaster, war or acts of terrorism.

 

Events or developmentsrelated to these and other risks associated with international business couldadversely affect our revenue from those sources, which could have a materialadverse effect on our business, financial condition and results of operations.

 

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

 

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

 

·                  the timing ofwhen a 3D motion picture is released. These motion pictures tend to be releasedbased on specific consumer entertainment dynamics, which results in seasonalpatterns, with the largest number of motion pictures being released in summerand early winter;

 

·                  the rate ofinstallation of new RealD Cinema Systems. In connection with some of our motionpicture exhibitor license agreements, we issued to three motion pictureexhibitors 10-year options to purchase an aggregate of 3,668,340 shares of ourcommon stock at an exercise price of approximately $0.00667 per share, whichvests upon the achievement of screen installation targets. Reductions torevenue resulting from motion picture exhibitor stock options may increase asthe estimated fair value of our common stock and number of RealD-enabled screeninstallations increase.

 

·                  the timing ofexpenses. Our expenses, including depreciation expense of our RealD CinemaSystems deployed at a motion picture exhibitor’s premises, digital projectordepreciation expenses, RealD eyewear costs (including shipping, handling andrecycling costs) and occupancy costs, have in the past, and may in the future,increase significantly, including in quarters when we do not experience asimilar growth in revenue; and

 

·                  the timing andaccuracy of license fee reports. It is not uncommon for license fee reports toinclude positive or negative 

 

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correctiveor retroactive license fees that cover extended periods of time.

 

In addition, variances inour operating results from analysts’ expectations could adversely affect ourstock price. See also “Management’s discussion and analysis of financialcondition and results of operations—Quarterly results and seasonality.”

 

***Our RealD eyewear may, in the future, beregulated by the Food and Drug Administration, or FDA, or by state or foreignagencies, which could increase our costs and adversely impact ourprofitability.***

 

Currently, polarizedeyewear, including our RealD eyewear, is not regulated by the FDA, or by stateor foreign agencies. However, certain eyewear, such as non-prescription readingglasses and sunglasses, are considered to be medical devices by the FDA and aresubject to regulations imposed by the FDA and various state and foreignagencies. With the rising popularity of polarized 3D eyewear, there has been anincreasing level of public scrutiny examining its potential health risks.Polarized 3D eyewear, including our RealD eyewear, may at some point be subjectto federal, state or foreign regulations that could potentially restrict howour RealD eyewear is produced, used or marketed, and the cost of complying withthose regulations may adversely affect our profitability.

 

***If 3D viewing with active or passiveeyewear 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 toliability, which could adversely affect our results of operations, financialcondition, business and prospects.***

 

Research conducted byinstitutions unrelated to us has suggested that 3D viewing with active orpassive 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 insome consumers. If these potential health risks are substantiated or consumersbelieve in their validity, demand for the 3D viewing experience in the theater,the home and elsewhere may decline. As a result, major motion picture studiosand other content producers and distributors may refrain from developing 3Dcontent, motion picture exhibitors may reduce the number of 3D-enabled screens(including RealD-enabled screens) they currently deploy or plan to deploy, orthey may reduce the number of 3D motion pictures exhibited in their theaters,which would adversely affect our results of operations, financial condition andprospects. A decline in consumer demand may also lead consumer electronicsmanufacturers and content distributors to reduce or abandon the production of3D products, which could adversely affect our prospects.

 

In addition, if health risksassociated with our RealD eyewear materialize, we may become subject togovernmental regulation or product liability claims, including claims forpersonal injury. Successful assertion against us of one or a series of largeclaims could materially harm our business. Also, if our RealD eyewear is foundto be defective, we may be required to recall it, which may result insubstantial expense and adverse publicity that could adversely impact oursales, operating results and reputation. Potential product liability claims mayexceed the amount of our insurance coverage or may be excluded under the termsof the policy, which could adversely affect our financial condition. Inaddition, we may also be required to pay higher premiums and accept higherdeductibles in order to secure adequate insurance coverage in the future, whichcould adversely affect our results of operations, financial condition andbusiness.

 

***Our agreements with motion picture studiosdomestically and motion picture exhibitors internationally require us to managethe supply chain of our RealD eyewear, and any interruption to the supply chainfor our RealD eyewear components could adversely affect our results ofoperations, financial condition, business and prospects.***

 

Our RealD eyewear is anintegral part of our RealD Cinema Systems. We have entered into non-exclusiveagreements with several manufacturers to produce RealD eyewear. We managemanufacturing, distribution and recycling of RealD eyewear for motion picturestudios and exhibitors worldwide. Domestically, we provide our RealD eyewearfree of charge to motion picture exhibitors and then receive a fee from themotion picture studios for the usage of that RealD eyewear by the motionpicture exhibitors’ consumers. Most international motion picture exhibitorspurchase RealD eyewear directly from us and sell them to consumers as part oftheir admission or as a concession item. Any interruption in the supply ofRealD eyewear from manufacturers, increase in shipping cost, logistics orrecycling interruption or other disruption to our global supply chain couldadversely affect our results of operations, financial condition, business andprospects. For example, in connection with recent major 3D motion picturereleases and increased consumer demand, we exhausted our inventory of RealDeyewear and have incurred increased shipping costs to accelerate delivery.

 

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***Economic conditions beyond our controlcould reduce consumer demand for motion pictures and consumer electronics usingour 3D technologies and, as a result, adversely affect our business, revenueand growth prospects.***

 

The global economicenvironment in late 2008 and 2009 was volatile and continues to pose risks. Theeconomy could remain significantly challenged for an indeterminate period oftime. Present economic conditions could lead to a decrease in discretionaryconsumer spending, resulting in lower motion picture box office. In the eventof declining box office revenue, motion picture studios may be less willing torelease 3D motion pictures and motion picture exhibitors may be less willing tolicense our RealD Cinema Systems. Further, a decrease in discretionary consumerspending may adversely affect future demand for 3D consumer electronicsproducts that may use our 3D technologies, which could cause our business,revenue and growth prospects to suffer.

 

***The loss of members of our management orresearch and development teams could substantially disrupt our business operations.***

 

Our success depends to asignificant degree upon the continued individual and collective contributionsof our management and research and development teams. A limited number ofindividuals have primary responsibility for managing our business, includingour relationships with motion picture studios and exhibitors and consumerelectronics manufacturers and the research and development of our 3Dtechnologies. The loss of any of these individuals, including Michael V. Lewis,our Chairman and Chief Executive Officer, or Joshua Greer, our President, orour failure to attract and retain other qualified and experienced personnel onacceptable terms, could impair our ability to sustain and grow our business. Inaddition, because we operate in a highly competitive industry, our hiring ofqualified executives, scientists, engineers or other personnel may cause us orthose persons to be subject to lawsuits alleging misappropriation of tradesecrets, improper solicitation of employees or other claims.

 

***Our ability to use our net operating losscarryforwards could be subject to additional limitation if our ownership haschanged or will change by more than 50%, which could potentially result inincreased future tax liability.***

 

While currently subject to afull valuation allowance for purposes of preparing our consolidated financialstatements (see the discussion below under the heading “Management’s discussionand analysis of financial condition and results of operations—Criticalaccounting policies and estimates—Deferred tax asset valuation and taxexposures”), we intend to use our U.S. net operating loss carryforwards toreduce any future U.S. corporate income tax liability associated with ouroperations. Section 382 of the U.S. Internal Revenue Code of 1986, asamended, generally imposes an annual limitation on the amount of net operatingloss carryforwards that may be used to offset taxable income when a corporationhas undergone significant changes in stock ownership. We have not determinedwhether such ownership change has previously occurred. It is possible that ourIPO, either on a standalone basis or when combined with past or futuretransactions (including, but not limited to, significant increases during theapplicable testing period in the percentage of our stock owned directly orconstructively by (i) any stockholder who owns 5% or more of our stock or(ii) some or all of the group of stockholders who individually own lessthan 5% of our stock), will cause us to undergo one or more ownership changes.In that event, our ability to use our net operating loss carryforwards could beadversely affected. To the extent our use of net operating loss carryforwardsis significantly limited under the rules of Section 382 (as a resultof the IPO or otherwise), our income could be subject to U.S. corporate incometax earlier than it would if we were able to use net operating losscarryforwards, which could result in lower profits.

 

**Risks related to our common stock**

 

***The price of our common stock may fluctuatesignificantly, and you could lose all or part of your investment.***

 

Volatility in the marketprice of our common stock may prevent you from being able to sell your sharesat or above the price you paid for your shares. The market price of our commonstock could fluctuate significantly for various reasons, which include:

 

·                  our quarterlyor annual earnings or those of our competitors;

 

·                  the public’sreaction to our press releases, our other public announcements and our filingswith the SEC;

 

·                  changes inearnings estimates or recommendations by research analysts who track our commonstock or the stocks of our competitors;

 

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·                  new laws orregulations or new interpretations of laws or regulations applicable to ourbusiness;

 

·                  changes inaccounting standards, policies, guidance, interpretations or principles;

 

·                  changes ingeneral conditions in the domestic and global economies or financial markets,including those resulting from war, incidents of terrorism or responses to suchevents;

 

·                  litigationinvolving our company or investigations or audits by regulators into theoperations of our company or our competitors; and

 

·                  sales of commonstock by our directors, executive officers and significant stockholders.

 

In addition, the stockmarket in general, and the market for technology and media companies inparticular, has experienced extreme price and volume fluctuations that haveoften been unrelated or disproportionate to the operating performance of thosecompanies. Broad market and industry factors may seriously affect the marketprice of our common stock, regardless of actual operating performance. Inaddition, in the past, following periods of volatility in the overall marketand the market price of a particular company’s securities, securities classaction litigation has often been instituted against these companies. Iflitigation is instituted against us, it could result in substantial costs and adiversion of our management’s attention and resources.

 

***Your percentage ownership in us may bediluted by future issuances of capital stock, which could reduce your influenceover matters on which stockholders vote.***

 

Our board of directors hasthe authority, without action or vote of our stockholders, to issue all or anypart of our authorized but unissued shares of common stock, including sharesissuable upon the exercise of options, shares that may be issued to satisfy ourobligations under our equity incentive plans or shares of our authorized butunissued preferred stock. Issuances of common stock or preferred voting stockcould reduce your influence over matters on which our stockholders vote and, inthe case of issuances of preferred stock, likely could result in your interestin us being subject to the prior rights of holders of that preferred stock.

 

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

 

We do not expect to paydividends on shares of our common stock in the foreseeable future, and we intendto use cash to grow our business. Consequently, your only opportunity toachieve a positive return on your investment in us will be if the market priceof our common stock appreciates.

 

***Provisions in our certificate ofincorporation and bylaws and Delaware law may discourage, delay or prevent achange of control of our company or changes in our management and, therefore,may depress the trading price of our stock.***

 

Our certificate ofincorporation and bylaws will contain provisions that could depress the tradingprice of our stock by acting to discourage, delay or prevent a change ofcontrol of our company or changes in our management that the stockholders ofour company may deem advantageous. These provisions:

 

·                  authorize theissuance of “blank check” preferred stock that our board of directors couldissue to increase the number of outstanding shares to discourage a takeoverattempt;

 

·                  provide for aclassified board of directors (three classes);

 

·                  provide thatstockholders may only remove directors for cause;

 

·                  provide thatstockholders may only remove directors prior to the expiration of their termupon a supermajority vote of at least 80% of our outstanding common stock;

 

·                  provide thatany vacancy on our board of directors, including a vacancy resulting from anincrease in the size of the board, may only be filled by the affirmative voteof a majority of our directors then in office, even if less than a quorum;

 

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·                  provide that aspecial meeting of stockholders may only be called by our board of directors orby our chief executive officer;

 

·                  provide thataction by written consent of the stockholders may be taken only if the board ofdirectors first approves such action; provided that, notwithstanding theforegoing, we will hold an annual meeting of stockholders in accordance withNYSE rules, for so long as our shares are listed on NYSE, and as otherwiserequired by the bylaws;

 

·                  provide thatthe board of directors is expressly authorized to make, alter or repeal ourbylaws; and

 

·                  establishadvance notice requirements for nominations for elections to our board ofdirectors or for proposing matters that can be acted upon by stockholders atstockholder meetings.

 

Additionally, we will besubject to Section 203 of the Delaware General Corporation Law, whichgenerally prohibits a Delaware corporation from engaging in any of a broadrange of business combinations with any “interested” stockholder for a periodof three years following the date on which the stockholder became an “interested”stockholder.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

Thefollowing exhibits are attached hereto and filed herewith:

 

**EXHIBITINDEX**

 
| **ExhibitNumber** | ** ** | **Description**                                                                                                                                                                                                             |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)            |       | Amended and Restated  Certificate of Incorporation.                                                                                                                                                                         |
|              |       |                                                                                                                                                                                                                        |
| 3.2(2)            |       | Amended and Restated  Bylaws.                                                                                                                                                                                               |
|              |       |                                                                                                                                                                                                                        |
| 4.1(3)            |       | Form of specimen common  stock certificate.                                                                                                                                                                                 |
|              |       |                                                                                                                                                                                                                        |
| 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 (filed herewith). |
|              |       |                                                                                                                                                                                                                        |
| 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 (filed herewith). |

 

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| 32.1‡ |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                  |
| 32.2‡ |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |

 

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(1)  Incorporated by reference to exhibit 3.2filed with the Registrant’s Registration Statement on Form S-1 (No. 333-165988)on April 9, 2010.

(2)Incorporated by reference to exhibit 3.4 filed with the Registrant’sRegistration Statement on Form S-1 (No. 333-165988) on April 9, 2010.

(3)Incorporated by reference to exhibit of same number filed with the Registrant’sRegistration Statement on Form S-1/A (No. 333-165988) on May 26, 2010.

 

‡                   Filed herewith

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

|   | RealD Inc. |
|--------|------------|
|   |       |   |
|   |       |   |
|   | By:   | /s/ Andrew A. Skarupa |
|   |       | **Andrew  A. Skarupa****Chief Financial Officer and Chief Operating  Officer** |

 

Date:August 2, 2010

 

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