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EX-32.1 - EX-32.1 - RLJ ENTERTAINMENT, INC.rlje-ex321_8.htm
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EX-23.1 - EX-23.1 BDO CONSENT - RLJ ENTERTAINMENT, INC.rlje-ex231_632.htm
EX-23.2 - EX-23.2 KPMG CONSENT - RLJ ENTERTAINMENT, INC.rlje-ex232_631.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended December 31, 2015

OR

 

o

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

For the Transition Period from            To           

Commission File Number 001-35675

 

RLJ ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

 

Nevada

45-4950432

(State or other jurisdiction of

incorporation)

(I.R.S. Employer

Identification Number)

 

8515 Georgia Avenue, Suite 650, Silver Spring, Maryland, 20910

(Address of principal executive offices, including zip code)

(301) 608-2115

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of Each Class:

 

Name of Each Exchange on Which Registered:

 

 

Common Stock, par value $0.001

 

NASDAQ Capital Market

 

 

Securities registered pursuant to Section 12(g) of the Act:

Warrants to purchase Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  o    NO  x

Indicate by check mark if the registrant is not required to file report pursuant to Section 13 or Section 15(d) of the Act.    YES  o    NO  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

o

 

 

Accelerated filer

o

Non-accelerated filer

o

  (Do not check if a smaller reporting company)

 

Smaller reporting company

x

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

The aggregate market value of the voting stock held by non-affiliates computed on June 30, 2015, based on the sales price of $0.39 per share:  Common Stock - $2,919,755.  All directors and executive officers have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant; however, this determination does not constitute an admission of affiliate status for any of these shareholders.

The number of shares outstanding of the registrant’s common stock as of March 31, 2016:  14,132,820

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its proxy statement for its 2015 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.

 

 

 

 


 

RLJ ENTERTAINMENT, INC.

Form 10-K Annual Report

For The Year Ended December 31, 2015

TABLE OF CONTENTS

 

PART I

 

 

 

 

4

 

 

 

 

 

 

 

ITEM 1.

 

Business

 

4

 

ITEM 1A.

 

Risk Factors

 

16

 

ITEM 1B.

 

Unresolved Staff Comments

 

24

 

ITEM 2.

 

Properties

 

24

 

ITEM 3.

 

Legal Proceedings

 

24

 

ITEM 4.

 

Mine Safety Disclosures

 

24

 

 

 

 

 

 

PART II

 

 

 

 

25

 

 

 

 

 

 

 

ITEM 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

25

 

ITEM 6.

 

Selected Financial Data

 

26

 

ITEM 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

ITEM 8.

 

Financial Statements and Supplementary Data

 

43

 

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

81

 

ITEM 9A.

 

Controls and Procedures

 

81

 

ITEM 9B.

 

Other Information

 

82

 

 

 

 

 

 

PART III

 

 

 

 

83

 

 

 

 

 

 

 

ITEM 10.

 

Directors, Executive Officers and Corporate Governance

 

83

 

ITEM 11.

 

Executive Compensation

 

83

 

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

83

 

ITEM 13.

 

Certain Relationships and Related Transactions and Director Independence

 

83

 

ITEM 14.

 

Principal Accountant Fees and Services

 

83

 

 

 

 

 

 

PART IV

 

 

 

 

84

 

 

 

 

 

 

 

ITEM 15.

 

Exhibits and Financial Statement Schedules

 

84

 

 

 

 

 

 

SIGNATURES

 

 

 

86

 

 

 

 

 

 

Certifications

 

 

 

 

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K for the year ended December 31, 2015 (or Annual Report) includes forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Other than statements of historical fact, all statements made in this Annual Report are forward-looking, including, but not limited to, statements regarding industry prospects, future results of operations or financial position, and statements of our intent, belief and current expectations about our strategic direction, prospective and future results and condition. In some cases, forward-looking statements may be identified by words such as “will,” “should,” “could,” “may,” “might,” “expect,” “plan,” “possible,” “potential,” “predict,” “anticipate,” “believe,” “estimate,” “continue,” “future,” “intend,” “project” or similar words.

Forward-looking statements involve risks and uncertainties that are inherently difficult to predict, which could cause actual outcomes and results to differ materially from our expectations, forecasts and assumptions. Factors that might cause such differences include, but are not limited to:

 

·

Our financial performance, including our ability to achieve improved results from operations, including improved earnings before income tax, depreciation, amortization, adjusted for cash investment in content, interest expense, loss on extinguishment of debt, goodwill impairments, severance costs, costs to modify debt, change in fair value of stock, warrants and other derivatives, stock-based compensation and basis-difference amortization in equity earnings of affiliate (or Adjusted EBITDA);

 

·

The effects of limited cash liquidity on operational performance;

 

·

Our obligations under the credit agreement, including our principal repayment obligations;

 

·

Our ability to satisfy financial ratios;

 

·

Our ability to generate sufficient cash flows from operating activities;

 

·

Our ability to raise additional capital to reduce debt, improve liquidity and fund capital requirements;

 

·

Our ability to fund planned capital expenditures and development efforts;

 

·

Our inability to gauge and predict the commercial success of our programming;

 

·

Our ability to maintain relationships with customers, employees and suppliers, including our ability to enter into revised payment plans, when necessary, with our vendors that are acceptable to all parties;

 

·

Delays in the release of new titles or other content;

 

·

The effects of disruptions in our supply chain;

 

·

The loss of key personnel;

 

·

Our public securities’ limited liquidity and trading; or

 

·

Our ability to meet the NASDAQ Capital Market continuing listing standards and maintain our listing.

You should carefully consider and evaluate all of the information in this Annual Report, including the risk factors listed above and elsewhere, including “Item 1A. Risk Factors” below. If any of these risks occur, our business, results of operations and financial condition could be harmed, the price of our common stock could decline and you may lose all or part of your investment, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements contained in this Annual Report. Unless otherwise required by law, we undertake no obligation to release publicly any updates or revisions to any such forward-looking statements that may reflect events or circumstances occurring after the date of this Annual Report.

3


 

PART I

 

 

ITEM 1.

BUSINESS

Overview

RLJ Entertainment, Inc. (or RLJE) is a global entertainment content distribution company with a direct presence in North America, the United Kingdom (or U.K.) and Australia with strategic sublicense and distribution relationships covering Europe, Asia and Latin America. RLJE was incorporated in Nevada in April 2012. On October 3, 2012, we completed the business combination of RLJE, Image Entertainment, Inc. (or Image) and Acorn Media Group, Inc. (or Acorn Media or Acorn), which is referred to herein as the “Business Combination.” The use of “we,” “our” or “us” within this Annual Report is referring to RLJE and its subsidiaries.

A summary of our significant corporate entities and structure is as follows:

 

4


 

We acquire content rights in various categories, with particular focus on British mysteries and dramas, urban-themed programming and full-length motion pictures. We acquire this content in two ways:

 

·

Through long-term exclusive licensing agreements where we secure multiple rights to third-party programs. Generally, the rights we secure include broadcast, theatrical, digital (transactional and streaming), and physical (DVD and Blu-ray), and;

 

·

Through development, production and ownership of original drama television programming through our wholly-owned U.K. subsidiary, RLJ Entertainment Limited (or RLJE Ltd.) and our 64%-owned subsidiary, Agatha Christie Limited (or ACL).

We control an extensive program library in genres such as British mysteries and dramas, urban/African-American, action/thriller and horror, fitness/lifestyle and long-form documentaries.

We monetize our library content through carefully managed distribution windows across multiple platforms including broadcast/cable channels, digital distribution formats (which are subscription video on demand (or SVOD), ad-supported video on demand (or AVOD), download-to-own and download-to-rent), and DVD and Blu-ray retail and online e-commerce.

We market our products through a multi-channel strategy encompassing:

 

·

The licensing of original program offerings through our wholly-owned subsidiary, RLJE Ltd. and our 64%-owned subsidiary, ACL (our Intellectual Property Licensing or IP Licensing segment);

 

·

Wholesale through digital, mobile, broadcast, cable partners, e-commerce and brick and mortar (our Wholesale segment); and

 

·

Direct-to-consumer activities in the United States (or U.S.) and United Kingdom (or U.K.) including traditional and e-commerce offerings and our proprietary subscription-based digital platforms (our Direct-to-Consumer segment).

RLJE Ltd. manages and develops our intellectual property rights on British drama and mysteries. Our owned content includes 28 Foyle’s War made-for-TV films; multiple instructional Acacia titles; and through our 64% ownership interest of ACL, the Agatha Christie library. ACL is home to some of the world’s greatest literary works of mystery fiction, including Murder on the Orient Express, Death on the Nile and And Then There Were None and includes publishing and TV/film rights to iconic sleuths such as Hercule Poirot and Miss Marple. The Agatha Christie library contains a variety of short story collections, more than 80 novels, 19 plays and a film library of over 100 made-for-television films. In the third quarter of 2014, ACL published its first book, The Monogram Murders, since the death of Agatha Christie. Our television productions are typically financed by the pre-sale of certain distribution rights, typically being international TV distribution rights, as well as tax credits. The pre-sale of these rights, alongside the realization of tax incentives, allows RLJE Ltd. to reduce production risks.

Our wholesale partners are broadcasters, digital outlets and major retailers in the U.S., Canada, U.K. and Australia, including, among others, Amazon, Netflix, Walmart, Target, Costco, Barnes & Noble, iTunes, BET, Showtime, PBS, DirecTV and Hulu. We have a catalog of owned and long-term licensed content that is segmented into brands such as Acorn (British drama/mystery, including content produced by ACL), RLJE Films (independent feature films, action/thriller horror), Urban Movie Channel (or UMC) (urban), Acacia (fitness), and Athena (documentaries).

Our Direct-to-Consumer segment includes the continued roll-out of our proprietary subscription-based digital channels, such as our British mystery and drama network, Acorn TV and UMC, a channel focused on quality urban content showcasing feature films, documentaries, original series, stand-up comedy and other exclusive content for African-American and urban audiences. As of December 31, 2015, Acorn TV had over 195,000 paying subscribers, compared to 118,000 as of the end of December 2014. We expect the subscriber base to continue to grow in 2016 for all of our subscription-based digital channels as we add more exclusive content to the channels.

Acorn TV was launched in July 2011 and features British mysteries and dramas with exclusive streaming of certain series such as Agatha Christie’s Poirot, Foyle’s War, Doc Martin, Murdoch Mysteries and Midsomer Murders. Acorn TV can be accessed through AppleTV, iDevices, Roku, Amazon Prime, Samsung SmartTVs and Blu-ray players and on fixed and mobile web at www.acorn.tv.

5


 

During 2015, we built brand awareness and increased programming for UMC, our proprietary urban digital network targeting a broad range of urban/African-American households in the U.S. The channel provides a broad range of titles to an audience that is underserved in viewing African-American and urban content. The channel leverages our current urban content library along with investments in new content in the form of licensing acquisitions which premiere on UMC such as: The Sin Seer, Blackbird, Playin’ for Love, Hiding in Plain Sight, Find A Way, Chasing Ghosts, My Name is David and The Things We Do for Love. UMC offers a 14-day free trial to attract new subscribers and can be accessed through Roku, Amazon Prime, FireTV and on fixed and mobile web at www.UrbanMovieChannel.com.

During 2015, we refocused our health and lifestyle offering by re-launching Acacia TV with newly produced original content and a fitness questionnaire to offer personalized recommendations for customers based on their health and fitness goals. This new digital channel is available on computers, tablets and smartphones and the internet at www.acacia.tv, and on Roku. In addition we entered into an agreement with Lukup, an Indian ISP, to offer Acacia TV as part of their OTT service on their proprietary set top box.

In Q4 2015, our three SVOD channels were featured in Amazon Prime’s add-on streaming video service launch. This strategic expansion into 3rd party distribution of our proprietary SVOD services offers us a significant increase in addressable audience and brand awareness.

Strategic Direction of the Company

RLJE’s management believes that the continued convergence of television and the internet will deepen competition for the attention of viewers and increase the value of content, in particular for scripted television, independent feature films and niche programming. RLJE intends to create long-term value for its shareholders by investing in its program library and building proprietary SVOD channels for its target audiences:

 

·

Program library: RLJE intends to focus its content investments primarily in the development of IP rights for television dramas and the licensing of exclusive rights for scripted television, independent feature films, urban content and documentaries.

 

·

Proprietary SVOD channels: RLJE will continue to invest in the development of proprietary SVOD channels such as Acorn TV and UMC in order to develop a direct and ongoing relationship with viewers with specific interests. We plan to explore additional third-party distribution opportunities with digital delivery partners such as Amazon, but also with traditional Multichannel Video Programming Distributors (or MVPDs) who see the value in placing niche SVOD channels alongside traditional free-to-air and cable channels.

 

·

Other long-term growth strategies include:

 

·

The increased exploitation of our film and television library outside the U.S. with a particular emphasis on key markets such as Europe and Asia.

 

·

The acquisition of content libraries that either fits or complements our genre-based focus.

 

·

The evaluation and pursuit of opportunities to own broader digital distribution platforms, including cable/satellite networks or VOD providers, where we can directly distribute our content and expand our brands.

Investments in Content

Our business model relies on developing and acquiring content that satisfies the desire of niche audiences for higher quality entertainment within specific genres. We then monetize content agnostically across all platforms through carefully orchestrated windows of distribution. When developing content, we develop new treatments from the intellectual property (or IP) we own. We also acquire finished programs through long-term exclusive contracts. We invest in content offerings that we believe will meet or exceed management’s 20% return-on-investment (or ROI) threshold. Our definition of ROI is the return on investment over the life of the investment (generally 7 - 10 years), and it is calculated by dividing estimated content earnings by its initial investment. Content earnings are calculated by estimating the future earnings, which is after subtracting costs (including overhead) necessary to maintain the investment, and discounting the earnings using a risk-appropriate rate.

RLJE invests approximately $40 million to $45 million annually in content.  These investments are added to our balance sheet as program rights and are expensed through the statement of operations as either amortization of advances or as overage royalty payments. During 2015, management worked extensively on the reallocation of our content investments pursuing content with higher financial returns and strong strategic value. Management terminated content genres and content agreements that were either not profitable, not meeting our financial goals, or areas where we could not acquire comprehensive long-term distribution rights or control over the content. Additionally, Management completed the re-alignment of the Company’s investment across key genres, mainly British mystery and dramas, urban, action-thriller and horror and documentaries.

6


 

Our investments in content provide us with significant cash flows and generate working capital, which are continuously re-deployed to acquire or produce new content and fund strategic initiatives. Some of the key program releases in 2015, which generated a significant amount of revenues for us, and planned releases for 2016 are as follows:

 

British Mystery and Drama

·Foyle's War, Set 8 (Series 9)

·Foyle’s War, The Complete Saga

·Partners In Crime

·Doc Martin, Series 7

·Doc Martin, Six Surly Seasons + Movies

·A Place to Call Home, Seasons 1 & 2

·Anzac Girls

·Detectorists

·Vera, Set 5

·Miss Fisher’s Murder Mysteries, Series 3

·Murdoch Mysteries, Season 8

·Murdoch Mysteries, The Movies

·Midsomer Murders, Set 25,

·Midsomer Murders, Series 16 & 17

·The Code, Series 1

·Brokenwood Mysteries, Series 1

·New Tricks, Season 11

·George Gently, Series 7

·Restless

 

Urban

·Blackbird

·Daddy’s Home

·Mysterious Ways

·Where the Children Play

 

Feature Films

·The Cobbler

·The Rewrite

·Bone Tomahawk

·Pay the Ghost

·Catching Faith

·The Journey Home

 

7


 

Horror

·Some Kind of Hate

·A Christmas Horror Story

·Condemned

·The Invoking 2

·June

·Zombieworld

·Burying the Ex

·Return to Sender

·Infected

·Dark Was the Night

·Frankenstein vs. The Mummy

·Digging Up the Marrow

·Wolfcop

·The Houses October Built

·The Town That Dreaded Sundown

 

DocumentarY

·The Story of Women and Art

·Understanding Art: Baroque & Rococo

·World War One: The People’s Story

·The Story of Women and Power

·The Art of the Heist

 

2016 Planned Releases

·Criminal Activities

·Kickboxer

·And Then There Were None

·Murdoch Mysteries, Season 9

·The Fall, Series 2

·Humans

·Soundbreaking

·The Last Panthers

·Vera, Series 6

·19-2, Season 1

·Agatha Raisin, Series 1

·Suspects, Set 1

·Nina

·Adulterers

·#LuckyNumber

·Bound: Africans vs. African Americans

 

 

8


 

Growth Strategy

The last 12 months were primarily dedicated to the acquisition and development of content and the growth of the subscriber base and addressable audience for our proprietary digital channels. Our growth strategy for the next 12 to 18 months is focused on improving operating results and increasing EBITDA primarily through the expansion of our proprietary SVOD channels Acorn TV and UMC and the continued optimization of our distribution activities.

 

·

Acquisition of long-term and exclusive broad exploitation rights for finished programs across key genres that meet financial criteria of at least 20% targeted ROI including allocation of all direct and indirect costs through net income before taxes;

 

·

Production and purchase of new intellectual property rights, particularly for British scripted dramas and mysteries, and urban/African-American content;

 

·

Expansion of content offerings on Acorn TV and UMC. In particular, through new investments in exclusive content, promotion and improved information technology (or IT) infrastructure. Our proprietary digital platforms also create opportunities for RLJE to improve gross margin as the cost to deliver can be considerably lower;

 

·

Expansion of international distribution footprint. Expand licensing and direct exploitation efforts in territories such as Europe and Asia.

Our business model minimizes production and box-office risks by acquiring finished products with long-term rights over multiple platforms. Our business goals are to grow our digital streaming channels through the development, acquisition and distribution of exclusive rights of program franchises and feature film content.  In addition, our business is complemented, particularly in the British mystery and drama genre, by the development of our own IP, whereby we leverage the operations of RLJE Ltd. and our relationships in the U.K. including our 64% ownership of ACL. We strive to maximize the value of our program library by pursuing the development and acquisition of content with long-term value and by actively managing all windows of exploitation. Also, our brands and long-running franchises promote customer loyalty and lower our overall investment risk.

9


 

Our Primary Brands

We focus on high-quality British mystery and drama television, action and thriller independent feature films and diverse urban content, and documentary lines. Titles are segmented into genre-based, franchise and content program lines and are exploited through our various brands. Our brands are as follows:

 

 

 

 

 

 

 

Known for specializing in the best of British television, Acorn Media Group (or Acorn) monetizes high-quality dramas and mysteries to the broadcast/cable and home video windows within the North American, U.K. and Australian markets. We further leverage the Acorn brand in our direct-to-consumer outlets in the U.S. and U.K. for our home-video releases and other complementary merchandise. With a mission to provide exceptional entertainment, imaginative gifts and uncommon quality, we market to consumers via print catalogs, online e-commerce, and our subscription-based digital channel, Acorn TV. Acorn TV, offers viewers over 1,000 hours of high-quality British television programming, streaming 24/7 without commercials and on demand. New content is added on a weekly basis. Paid subscribers have access to all of the available programming, but Acorn TV offers several options to “try before you buy” through Apple TV and iDevices, Roku, Samsung SmartTVs and fixed and mobile web. Some of the series currently airing on Acorn TV are Jack Irish, 19-2, Janet King, Vera: Set 6, Midwinter of the Spirit, Suspects, Detectorists and A Place to Call Home. As of December 31, 2015, Acorn TV surpassed 195,000 paid subscribers. The Acorn catalog (www.acornonline.com) focuses on British television, specialty programming and other distinctive merchandise. Our Acorn brand generates revenues that are reported in the IP Licensing (Agatha Christie revenues), Wholesale (DVD and digital download sales) and Direct-to-Consumer segments (catalog sales and digital channels revenues).

 

 

RLJE Ltd. provides us access to new content as a permanent presence in the U.K. television programming community, and manages and develops our intellectual property rights. Our owned content includes the Agatha Christie branded library, through our 64% ownership interest in Agatha Christie Limited (or ACL) acquired in February 2012. The bestselling novelist of all time, Agatha Christie has sold more than 2 billion books, and her work contains a variety of short story collections, more than 80 novels, 19 plays and a film library of over 100 TV productions. Acorn is known for mystery and drama franchises and has been releasing TV movie adaptations featuring Agatha Christie’s two most famous characters, Hercule Poirot and Miss Marple, for over a decade; both series ranking among our all-time bestselling lines. Through ACL, we manage the vast majority of Agatha Christie publishing and television/film assets worldwide and across all mediums and actively develop new content and productions. In addition to film and television projects, in the third quarter of 2014, ACL published its first book, The Monogram Murders, since the death of Agatha Christie. The Agatha Christie family retains a 36% holding, and James Prichard, Agatha Christie’s great-grandson, remains Chairman of ACL.

 

 

RLJ Entertainment (or RLJE) is a leading film and television licensee focusing on action, thriller and horror independent feature films. RLJE licenses exclusive long-term exploitation rights across all distribution channels, with terms ranging generally from 5 to 25 years. RLJE content is currently distributed primarily in the U.S. and Canada through broadcast/cable, physical and digital platforms. In 2014, we began to exploit RLJE content in the U.K. and Australia. Our RLJE titles that generated the highest amount of revenues in 2015 were Pay the Ghost, Bone Tomahawk and The Cobbler. All of the revenues generated by the RLJE brand are included in our Wholesale segment.

10


 

 

 

UMC, or Urban Movie Channel, was created by Robert L. Johnson, Chairman of RLJ Entertainment and founder of Black Entertainment Television (BET).  UMC is a premium subscription-based service which features quality urban content showcasing feature films, documentaries, original series, stand-up comedy and other exclusive content for African American and urban audiences.  New titles added weekly include live stand-up specials like Martin Lawrence Presents:  1st Amendment Stand Up and Comedy Underground Series, and performances featuring Academy Award® winner Jamie Foxx and comedic rock star Kevin Hart; dramas including Blackbird starring Academy Award® winning actress and comedian Mo'Nique, Isaiah Washington, and directed by Patrik-Ian Polk, and Playin’ For Love, starring and directed by Robert Townsend; documentaries including Bill Duke’s Dark Girls and I Ain’t Scared of You: A Tribute to Bernie Mac; action/thrillers including The Colony starring Laurence Fishburne; and stage play productions including What My Husband Doesn’t Know by David E. Talbert.  Subscribers can access UMC from multiple devices (tablet, phone and laptop), on Roku, Amazon Prime and Amazon FireTV to watch movies from today’s most recognizable talent available on demand and commercial-free.

 

 

Other Brands

Acacia is a healthy-living brand that encompasses original programming on DVD, a direct-to-consumer catalog and a recently launched digital channel called Acacia TV. Acacia provides distinctive, nature-oriented products to enhance customers’ enjoyment of their surroundings and to improve their appearance and well-being. We cater to customers seeking quality products that focus on physical and spiritual well-being, fitness and natural decor.

Athena is a branded line of home-video products providing a rich and enjoyable learning experience to intellectually curious consumers. These in-depth, entertaining, long-form documentaries facilitate the pursuit of lifelong learning on a diverse range of subjects. Programs include 8- to 20-page booklets with title-specific content, DVD extras and exclusive web content to enhance the learning experience and provide viewers with valuable supplementary information. Our Athena products are available through the Acorn direct-to-consumer catalog.

The Madacy library includes classic television and historical footage, as well as numerous special-interest projects. Some of the widely distributed titles include The Three Stooges, The John Wayne Collection, The Lone Ranger Collection, Bonanza and The Beverly Hillbillies, as well as documentaries about World War I and II, the Civil War, the Vietnam War, NASA, dream cars, trains and various travel collections.

Trademarks

We currently use several registered trademarks including: RLJ Entertainment, Acorn, Acorn Media, Acorn TV and UMC - Urban Music Channel. We also currently use registered trademarks through our 64%-owned subsidiary ACL including: Agatha Christie, Miss Marple and Poirot.

The above-referenced trademarks, among others, are registered with the U.S. Patent and Trademark Office and various international trademark authorities. In general, trademarks remain valid and enforceable as long as the marks are used in connection with the related products and services and the required registration renewals are filed. We believe our trademarks have value in the marketing of our products. It is our policy to protect and defend our trademark rights.

Segments

Management views the operations of the Company based on three distinct reporting segments: (1) Intellectual Property Licensing (or IP Licensing); (2) Wholesale; and (3) Direct-to-Consumer. Operations and net assets that are not associated with any of these operating segments are reported as “Corporate” when disclosing and discussing segment information. The IP Licensing segment includes intellectual property rights that we own, produce and then exploit worldwide in various formats including DVD, Blu-ray, digital, broadcast (including cable and satellite), VOD, streaming video, downloading and sublicensing. Our Wholesale and Direct-to-Consumer segments consist of the acquisition, content enhancement and worldwide exploitation of exclusive content in the same markets as our owned content. The Wholesale segment exploits the content to third parties such as Walmart, Best Buy, Target, Amazon and Costco while the Direct-to-Consumer segment distributes directly to the consumer through different exploitation channels. The Direct-to-Consumer segment distributes film and television content through our proprietary, subscription-based, digitally streaming channels (Acorn TV and UMC), our e-commerce websites and mail-order catalogs. The segment also sells complementary merchandise through our mail-order catalogs: Acorn and Acacia.

11


 

Net revenues by reporting segment for the periods presented are as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

IP Licensing

 

$

3,107

 

 

$

8,752

 

Wholesale

 

 

86,241

 

 

 

91,379

 

Direct-to-Consumer

 

 

35,569

 

 

 

37,558

 

Total revenues

 

$

124,917

 

 

$

137,689

 

 

Assets for each reporting segment and Corporate as of December 31, 2015 and 2014 are as follows:

 

 

 

December 31,

 

(In thousands)

 

2015

 

 

2014

 

IP Licensing

 

$

22,707

 

 

$

30,197

 

Wholesale

 

 

112,066

 

 

 

140,935

 

Direct-to-Consumer

 

 

10,514

 

 

 

12,049

 

Corporate

 

 

6,173

 

 

 

8,873

 

 

 

$

151,460

 

 

$

192,054

 

IP Licensing

A summary of the IP Licensing segment’s revenues and expenses is as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

Revenue

 

$

3,107

 

 

$

8,752

 

Operating costs and expenses

 

 

(2,276

)

 

 

(6,662

)

Depreciation and amortization

 

 

(143

)

 

 

(115

)

Share in ACL earnings

 

 

2,217

 

 

 

2,580

 

IP Licensing segment contribution

 

$

2,905

 

 

$

4,555

 

 

Our IP Licensing segment includes owned intellectual property that is either acquired or created by us and is licensed for exploitation worldwide. The operating activities primarily consist of our 100% interest in Foyle’s War Series 8 and Series 9, as well as certain distribution rights pertaining to content acquired from ACL. Our IP Licensing segment does not include revenues generated or costs incurred from the exploitation of Foyle’s War Series by our Wholesale segment. Also included is our 64% interest in ACL. ACL is accounted for using the equity method of accounting given the voting control of the Board of Directors by the minority shareholder. Gross margin percentages generated from content that is owned is generally higher than margins realized from content that is not owned.

As part of our growth strategy, we plan to continue to produce and own more intellectual property with an emphasis in British mysteries and dramas and urban programming.

Wholesale

A summary of the Wholesale segment’s revenues and expenses is as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

Revenue

 

$

86,241

 

 

$

91,379

 

Operating costs and expenses

 

 

(80,972

)

 

 

(85,595

)

Depreciation and amortization

 

 

(2,213

)

 

 

(1,684

)

Goodwill impairment

 

 

(30,260

)

 

 

 

Wholesale segment contribution

 

$

(27,204

)

 

$

4,100

 

 

The Wholesale segment consists of acquisition of content, content enhancement and worldwide exploitation of exclusive content in various formats to third parties such as Amazon, Best Buy, Costco, Target and Walmart. We market and exploit our exclusive

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content through agreements that generally range from 5 to 25 years in duration. The revenues generated in our Wholesale segment are historically our most consistent revenue stream.

While standard DVD comprise a majority of our revenues within this segment, Blu-ray titles and related revenues continue to increase given the format’s growing acceptance. We believe that the affordability of larger screen high-definition television (or HDTV) and ease of use as an entertainment hub in consumer households will continue to accelerate the conversion from standard DVD to Blu-ray formats for all demographics. We also believe there is a significant opportunity for us to realize increased revenues from customers of Acorn branded British mystery and drama product who will be converting their standard DVD collection to Blu-ray. It is expected that future revenues generated from DVD and Blu-ray sales will decline and sale of content to consumers through digital, streaming video and downloading will increase in future years.

We engage in the exclusive licensing of the digital rights to our library of audio and video content. The demand for the types of programming found in our library continues to increase as new digital retailers enter the online marketplace. We seek to differentiate ourselves competitively by being a one-stop source for these retailers who desire a large and diverse collection of entertainment represented by our digital library. We enter into non-exclusive arrangements with retail and consumer-direct entities whose business models include the digital delivery of content. We continue to add video and audio titles to our growing library of exclusive digital rights. The near-term challenges faced by all digital retailers are to develop ways to increase consumer awareness and integrate this awareness into their buying and consumption habits. Some of our digital retailers include Amazon, Cinedigm, Google Play, Hoopla, Hulu, iTunes, Microsoft Xbox, Netflix, Overdrive, Shudder (AMC), Sony PlayStation, Vimeo, Vudu and YouTube.

We further exploit our product in the ‘traditional’ VOD channels, wherein consumers pay a fee to watch programming via their cable or satellite operators. This business model has expanded in recent years to include exclusive windows for VOD monetization prior to other channels of exploitation. For example, a high-profile release may be released on VOD prior to theatrical exploitation. In that instance, we would receive higher price points and better placement with our VOD providers. Our partners in the VOD space include AT&T, Cablevision, Comcast, DirecTV, Dish, iNDemand, Verizon and Vubiquity. We also exploit our product to cable networks in the United States. Traditionally, our Acorn product has been sold to PBS or its affiliated stations, while our feature-length product has been sold to a wide array of customers. These cable networks include BET, Foxtel, HBO, Ovation, Showtime and Starz.

Outside North America and the U.K., we sublicense distribution in the areas of home entertainment, television and digital through distribution partners such as BET International, Universal Music Group International, Universal Pictures Australia and Warner Music Australia, each of which pays us a royalty for their distribution of our products.

Direct-to-Consumer

A summary of the Direct-to Consumer segment’s revenues and expenses is as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

Revenue

 

$

35,569

 

 

$

37,558

 

Operating costs and expenses

 

 

(41,303

)

 

 

(41,413

)

Depreciation and amortization

 

 

(3,084

)

 

 

(3,415

)

Goodwill impairment

 

 

 

 

 

(981

)

Direct-to-Consumer segment contribution

 

$

(8,818

)

 

$

(8,251

)

 

The Direct-to-Consumer segment exploits the same film and television content as the Wholesale segment but exploits the content directly in the U.S. and the U.K. to consumers through various proprietary SVOD channels and in our catalogs (Acorn and Acacia) and our e-commerce websites. To date, we have three proprietary digital subscription channels, which are Acorn TV, UMC and Acacia TV. We are continually rolling-out new content on our digital channels and attracting new subscribers. As of December 31, 2015, Acorn TV had over 195,000 subscribers compared to 118,000 subscribers at December 31, 2014.

During 2015, we delivered 18.9 million catalogs and flyers of which 17.9 million were delivered in the U.S. and 950,000 were delivered in the U.K. We had approximately 3.5 million visitors in 2015 to our e-commerce websites with 4.4% of the visitors purchasing our products. The catalogs and online businesses have diverse product offerings marketed to a select audience. Through our brands, Acorn and Acacia, our product offering includes DVDs, lifestyle products for the discerning British mystery consumer, apparel, jewelry and decorative household items. Proprietary DVD revenue was negatively impacted by the 2015 release calendar as compared to the previous year, but remains as the dominant revenue driver for the Direct-To-Consumer segment.  

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Despite generating revenues in excess of $10.0 million for each of the past two years, the Acacia catalog has not secured a large enough market share to become profitable. The health and fitness sector has become increasingly competitive and digital in nature, thereby reducing opportunities for merchandise cross and up-selling. Management has therefore decided to exit the Acacia catalog and online business and focus on distributing Acacia content through RLJE’s third-party wholesale channels and its direct-to-consumer SVOD service Acacia TV.

Outsourced Services  

Under a Distribution Services and License Agreement with Sony Pictures Home Entertainment (or SPHE), SPHE acts as our exclusive manufacturer in North America to meet our hard good manufacturing requirements (DVD and Blu-ray) and to provide related fulfillment and other logistics services in exchange for certain fees. Our agreement with SPHE expires in August 2019. Under our relationship with SPHE, we are responsible for the credit risk from the end customer with respect to accounts receivable and also the risk of inventory loss with respect to the inventory they manage on our behalf.

In addition to conventional manufacturing, we also utilize SPHE’s capability to manufacture-on-demand (or MOD). MOD services are provided for replication of slower moving titles, which helps avoid replicating larger minimum quantities of certain titles, and can be used for direct-to-consumer sales as needed. Under our agreement, SPHE also provides certain operational services at our direction, including credit and collections, merchandising, returns processing and certain IT functions.

We believe the SPHE agreement provides us with several significant advantages, including:

 

·

The ability to sell directly to key accounts such as Walmart, Best Buy and Costco, which eliminates other third-party distributor fees, provides incremental revenues, higher gross margins and the ability to better manage retail inventories;

 

·

Access SPHE’s point-of-sale reporting systems to better manage replenishment of store inventories on a daily basis; and

 

·

Access SPHE’s extensive scan-based trading network that features product placement in over 20,000 drug and grocery outlets.

We also outsource certain post-production and creative services necessary to prepare a disc master for manufacturing and packaging/advertising materials for marketing of our products. Such services include:

 

·

Packaging design;

 

·

DVD/Blu-ray authoring and compression;

 

·

Menu design;

 

·

Video master quality control;

 

·

Music clearance; and

 

·

For some titles, the addition of enhancements, such as:

 

·

multiple audio tracks;

 

·

commentaries;

 

·

foreign language tracks;

 

·

behind-the-scenes footage; and

 

·

interviews.

In the U.S., Brightcove is our outsourced video delivery partner powering our proprietary SVOD channels and streaming services. Also in the U.S., Amazon Web Services is our cloud hosting partner powering our entire web portfolio and proprietary SVOD channels.

In the U.K., we have a fulfillment and logistics services arrangement with Sony DADC UK Limited, which is similar to the arrangement we have with SPHE in North America.

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In the U.S., Trade Global is our outsourced fulfillment partner that assists with managing our Direct-to-Consumer segment’s catalog business. They provide the following services: customer service, order management and fulfillment, cash collection, credit card processing, merchandise return processing and inventory management.

Marketing and Sales

Our in-house marketing department manages promotional efforts across a wide range of off-line and online platforms. Our marketing efforts include:

 

·

Point-of-sale advertising;

 

·

Print advertising in trade and consumer publications;

 

·

Television, outdoor, in-theater and radio advertising campaigns;

 

·

Internet advertising, including viral and social network marketing campaigns;

 

·

Direct-response campaigns;

 

·

Dealer incentive programs;

 

·

Trade show exhibits;

 

·

Bulletins featuring new releases and catalog promotions; and

 

·

Public relations outreach programs.

RLJE maintains its own sales force and has a direct selling relationship with the majority of its broadcast and cable/satellite partners, and retail customers. We sell our programs to broadcasters, cable and satellite providers, traditional and specialty retailers, internet retailers, rental outlets, wholesale distributors and through alternative exploitation efforts, which includes direct-to-consumer print catalogs, proprietary e-commerce websites, direct-response campaigns, subscription service/club sales, proprietary SVOD subscription channels, home shopping television channels, other non-traditional sales channels, kiosks and sub-distributors. Examples of our key broadcast/cable/satellite partners are BET, DirecTV, Starz and public television stations. Examples of our key customers are Amazon.com, Best Buy Co., Costco, HMV, Target and Walmart,. Examples of our key distribution partners are All3Media, Alliance Entertainment, Ingram Entertainment and ITV Global Enterprises. Examples of key rental customers are Netflix and Redbox.

We also focus on special-market sales channels, to take advantage of our large and diverse catalog and to specifically target niche sales opportunities. Examples of our key customers within special markets are Midwest Tapes and Waxworks. Another special-market channel is scanned-based trading in conjunction with SPHE.

Additionally, in connection with our Distribution Services and License Agreement with SPHE, SPHE agreed to perform certain sales and inventory management functions at Best Buy, Target and Walmart. By using SPHE, we benefit from having a major studio present RLJE’s product alongside its own releases, which include well known motion pictures. SPHE is our primary vendor of record for shipments of physical product to North American retailers and wholesalers, and as the vendor of record, they are responsible for collecting these receivables and remitting these proceeds to us. In the U.K., similar services are provided by Sony DADC UK Limited.

Customer Concentration

For the year ended December 31, 2015, sales to Amazon accounted for 21.7% of our net revenues and sales to Walmart accounted 12.6% of our net revenues.  We do not have any other customers which accounted for more than 10.0% of our net revenues for the year.  Our top five customers accounted for approximately 54.8% of our net revenues for 2015, which includes Amazon and Walmart.  At December 31, 2015, SPHE and Netflix accounted for approximately 38.4% and 22.1%, respectively, of our gross accounts receivables.

Competition

We face competition from other independent distribution companies, major motion picture studios and broadcast and internet outlets in securing exclusive content distribution rights. We also face competition from online and direct-to-consumer retailers, as well as alternative forms of leisure entertainment, including video games, the internet and other computer-related activities. The success of any of our products depends upon consumer acceptance of a given program in relation to current events as well as the other products released into the marketplace at or around the same time. Consumers can choose from a large supply of competing entertainment content from other suppliers. Many of these competitors are larger than us. Our DVD and Blu-ray products compete for a finite amount of brick-and-mortar retail and rental shelf space. Sales of digital downloading, streaming, VOD and other broadcast formats

15


 

are largely driven by what is visually available to the consumer, which can be supported by additional placement fees or previous sales success. Programming is available online, delivered to smartphones, tablets, laptops personal computers, or direct to the consumers’ TV set through multiple internet-ready devices and cable or satellite VOD. Digital and VOD formats are growing as an influx of new delivery devices, such as the Apple iPad and the Microsoft Xbox, gain acceptance in the marketplace. According to Pew Research based on a survey conducted in early 2015, 45% of U.S. adults own a tablet. We face increasing competition as these platforms continue to grow and programming providers enter into distribution agreements for a wider variety of formats.

Our ability to continue to successfully compete in our markets is largely dependent upon our ability to develop and secure unique and appealing content, and to anticipate and respond to various competitive factors affecting the industry, including new or changing product formats, changes in consumer preferences, regional and local economic conditions, discount pricing strategies and competitors’ promotional activities.

Industry Trends

According to The Digital Entertainment Group (or DEG), consumer home entertainment spending in calendar 2015 exceeded $18 billion, up slightly from 2014. This slight increase was driven by the 16.4% increase in total digital spending showing that consumers are continuing to build their digital film libraries.

Digital-format revenues include electronic sell-through (or EST), VOD and subscription-based streaming. EST revenues for 2015 increased by 18.1% compared to 2014.  Total subscription-based programing revenues, including streaming and disc, increased by 18.3% in 2015 compared to 2014.

DEG reported that in 2015 the number of homes with Blu-ray playback devices, including set-top boxes and game consoles, was 104 million. DEG also reported that the number of households with HDTV is now more than 114 million.

According to PricewaterhouseCoopers LLP’s Global Entertainment and Media Outlook for 2015 to 2019, consumer spending for the overall physical home entertainment segment in the U.S. is projected to decline at a 9.4% compound annual rate over the 2015‑2019 period to approximately $5.3 billion in 2019. While the decline in consumer spending on physical home entertainment continues, it is substantially offset by the increase in consumer spending on electronic home video, primarily as a result of the growth of over-the-top (OTT) and SVOD services. Consumer spending in the U.S. on electronic distribution is projected to increase at a 14.6% compound annual rate over the 2015-2019 period, reaching $16.5 billion in 2019.

Employees

As of February 29, 2016, we had 88 U.S.-based employees at our Maryland, California and Minnesota locations.  We had 26 employees at our U.K. and Australia locations.  Our employees are primarily employed on a full-time basis.

Available Information

Under the menu “Investors—SEC Filings” on our website at www.rljentertainment.com, we provide free access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.  The information contained on our website is not incorporated herein by reference and should not be considered part of this Annual Report.

ITEM 1A.

RISK FACTORS

Risks Relating to Our Liquidity and Credit Agreement

We may not be able to generate sufficient cash to service all of our indebtedness, and we may be forced to take other actions, which may or may not be successful, to satisfy our obligations under our indebtedness. Our ability to make scheduled payments depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service and other obligations, we could face substantial liquidity problems and could be forced to reduce or delay capital expenditures and development efforts, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including our senior secured Credit Agreement with certain lenders and McLarty, as Administrative Agent. Our Credit Agreement and the indenture governing our senior secured notes restrict our ability to dispose of

16


 

assets and use the proceeds from such dispositions. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due.

If we cannot make scheduled payments on our debt, we will be in default and, as a result:

 

·

Our debt holders could declare all outstanding principal and interest to be due and payable; and

 

·

We could be forced into bankruptcy or liquidation.

Our Credit Agreement contains covenants that may limit the way we conduct business. Our Credit Agreement contains various covenants limiting our ability to:

 

·

incur or guarantee additional indebtedness;

 

·

pay dividends and make other distributions;

 

·

pre-pay any subordinated indebtedness;

 

·

make investments and other restricted payments;

 

·

make capital expenditures;

 

·

enter into merger or acquisition transactions; and

 

·

sell assets.

These covenants may have an impact on our ability to raise additional debt or equity financing, competing effectively or taking advantage of new business opportunities.

Our Credit Agreement includes covenants that require us to maintain specified financial ratios. Our ability to satisfy those financial ratios can be affected by events beyond our control, and we cannot be certain we will satisfy those ratios. As of March 31, 2015, we were not in compliance with our minimum cash balance requirement, which was waived by our lenders on April 15, 2015. As further discussed below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – New Credit Agreement,” effective with the quarter ending December 31, 2016, the financial ratios adjust to become more restrictive than the current ratios.  For us to meet these more restrictive bank covenants, we will need to improve our Adjusted EBITDA and/or make an accelerated principal payment, which may be significant, on our senior debt.  Although we are currently in compliance with the financial ratios, there is no assurance that our financial results during the current fiscal year will enable us to meet the adjusted ratios or that the lenders will agree to further adjust the ratios.

Our Credit Agreement provides that the failure to comply with the financial ratios or other covenants or a material adverse change in our business, assets or prospects constitutes an “event of default.” If we are unable to comply with the financial ratios, comply with other covenants as specified in the Credit Agreement, our lenders may choose to assert an event of default under our Credit Agreement. In this event, unless we are able to negotiate an amendment, forbearance or waiver, we could be required to repay all amounts then outstanding, which would have a material adverse effect on our liquidity, business, results of operations and financial condition.

We may not be able to generate the amount of cash needed to fund our future operations. Our ability either to fund planned capital expenditures and development efforts will depend on our ability to generate cash in the future. Our ability to generate cash is in part subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. We cannot assure you, however, that our business will generate sufficient cash flow from operations to fund our liquidity needs.

Our liquidity depends on our cash-on-hand, operating cash flows and ability to collect cash receipts. At December 31, 2015, our cash and cash equivalents were approximately $4.5 million and, in accordance with the April 15, 2015 amendment to the Credit Agreement, we are required to maintain $1.0 million of cash at all times. We rely on our cash-on-hand, operating cash flows and ability to collect cash receipts to fund our operations and meet our financial obligations. Delays or any failure to collect our trade accounts receivable would have a negative effect on our liquidity.

We have pledged our intellectual property assets to secure our Credit Agreement, and this represents a risk to our business, results of operations and financial condition. In order to secure the financing necessary to operate our business, we pledged all of our intellectual property rights as collateral to our Credit Agreement. If we were to default on our obligations under the Credit Agreement, we could forfeit our intellectual property and, thereby, a primary source of revenue. This could have a material adverse effect on our business, results of operations and financial condition.

17


 

We may seek additional funding and such capital may not be available to us. We are continuing to explore various financing alternatives. If we are unable to obtain additional capital, we may be required to delay or reduce our expansion, reduce our offering of products and services, forego acquisition opportunities, delay or reduce development or enhancement of services or products or delay or reduce our response to competitive pressures in the industry. We cannot assure you that any necessary additional financing will be available on terms favorable to us, or at all. If we raise additional funds through the issuance of securities convertible into or exercisable for common stock, the percentage ownership of our stockholders could be significantly diluted, and newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. Market and industry factors may harm the market price of our common stock and may adversely impact our ability to raise additional funds. Similarly, if our common stock is delisted from the NASDAQ Capital Market, it may limit our ability to raise additional funds.

Risks Relating to Our Business

We have limited working capital and limited access to financing. Our cash requirements, at times, may exceed the level of cash generated by operations. Accordingly, we may have limited working capital.

Our ability to obtain adequate additional financing on satisfactory terms may be limited; and our Credit Agreement prevents us from incurring additional indebtedness. Our ability to raise financing through sales of equity securities depends on general market conditions, including the demand for our common stock. We may be unable to raise adequate capital through the sale of equity securities, and if we were able to sell equity, our existing stockholders could experience substantial dilution. If adequate financing is not available at all or it is unavailable on acceptable terms, we may find we are unable to fund expansion, continue offering products and services, take advantage of acquisition opportunities, develop or enhance services or products, or respond to competitive pressures in the industry.

Our business requires a substantial investment of capital. The production, acquisition and distribution of programming require a significant amount of capital. Capital available for these purposes will be reduced to the extent that we are required to use funds otherwise budgeted for capital investment to fund our operations and/or make payments on our debt obligations. Curtailed content investment over a sustained period could have a material adverse effect on future operating results and cash flows. Further, a significant amount of time may elapse between our expenditure of funds and the receipt of revenues from our television programs or motion pictures. This time lapse requires us to fund a significant portion of our capital requirements from our operating cash flow and from other financing sources. Although we intend to continue to mitigate the risks of our production exposure through pre-sales to broadcasters and distributors, tax credit programs, government and industry programs, co-financiers and other sources, we cannot assure you that we will continue to successfully implement these arrangements or that we will not be subject to substantial financial risks relating to the production, acquisition, completion and release of new television programs and motion pictures. In addition, if we increase (through internal growth or acquisition) our production slate or our production budgets, we may be required to increase overhead and/or make larger up-front payments to talent and, consequently, bear greater financial risks. Any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.

Our inability to gauge and predict the commercial success of our programming could adversely affect our business, results of operations and financial condition. Operating in the entertainment industry involves a substantial degree of risk. Each video program or feature film is an individual artistic work, and its commercial success is primarily determined by unpredictable audience reactions. The commercial success of a title also depends upon the quality and acceptance of other competing programs or titles released into the marketplace, critical reviews, the availability of alternative forms of entertainment and leisure activities, general economic conditions and other tangible and intangible external factors, all of which are subject to change and cannot be predicted. Timing is also sometimes relevant to a program’s success, especially when the program concerns a recent event or historically relevant material (e.g., an anniversary of a historical event which focuses media attention on the event and accordingly spurs interest in related content). Our success depends in part on the popularity of our content and our ability to gauge and predict it. Even if a film achieves success during its initial release, the popularity of a particular program and its ratings may diminish over time. Our inability to gauge and predict the commercial success of our programming could materially adversely affect our business, results of operations and financial condition.

We may be unable to recoup advances paid to secure exclusive distribution rights. Our most significant costs and cash expenditures relate to acquiring content for exclusive distribution. Most agreements to acquire content require upfront advances against royalties or net profits participations expected to be earned from future distribution. The amount we are willing to advance is derived from our estimate of net revenues that will be realized from our distribution of the title. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results will differ from those estimates. If sales do not meet our original estimates, we may (i) not recognize the expected gross margin or net profit, (ii) not recoup our advances or (iii) record accelerated amortization and/or fair value write-downs of advances paid. We recorded impairments related to our investments in content of $3.2 million during 2015 and $4.8 million during 2014.

18


 

Our inability to maintain relationships with our program suppliers and vendors may adversely affect our business. We receive a significant amount of our revenue from the distribution of content for which we already have exclusive agreements with program suppliers. However, titles which have been financed by us may not be timely delivered as agreed or may not be of the expected quality. Delays or inadequacies in delivery of titles, including rights clearances, could negatively affect the performance of any given quarter or year. In addition, results of operations and financial condition may be materially adversely affected if:

 

·

We are unable to renew our existing agreements as they expire;

 

·

Our current program suppliers do not continue to support digital, DVD or other applicable format in accordance with our exclusive agreements;

 

·

Our current content suppliers do not continue to license titles to us on terms acceptable to us; or

 

·

We are unable to establish new beneficial supplier relationships to ensure acquisition of exclusive or high-profile titles in a timely and efficient manner.

Disputes over intellectual property rights could adversely affect our business, results of operations and financial condition. Our sales and net revenues depend heavily on the exploitation of intellectual property owned by us or third parties from whom we have licensed intellectual property. Should a dispute arise over, or a defect be found in, the chain of title in any of our key franchises, this could result in either a temporary suspension of distribution or an early termination of our distribution license. This could have a material adverse impact on our business, results of operations and financial condition.

We, and third parties that manage portions of our secure data, are subject to cybersecurity risks and incidents. Our direct-to-consumer business involves the storage and transmission of customers' personal information, shopping preferences and credit card information, in addition to employee information and our financial and strategic data. The protection of our customer, employee and company data is vitally important to us. While we have implemented measures to prevent security breaches and cyber incidents, any failure of these measures and any failure of third parties that assist us in managing our secure data could materially adversely affect our business, financial condition and results of operations.

A high rate of product returns may adversely affect our business, results of operations and financial condition. As with the major studios and other independent companies in this industry, we experience a relatively high level of product returns as a percentage of our revenues. Our allowances for sales returns may not be adequate to cover potential returns in the future, particularly in the case of consolidation within the home-video retail marketplace, which when it occurs tends to result in inventory consolidation and increased returns. We have experienced a high rate of product returns over the past three years. We expect a relatively high rate of product returns to continue, which may materially adversely affect our business, results of operations and financial condition.

We depend on third-party shipping and fulfillment companies for the delivery of our products. If these companies experience operational difficulties or disruptions, our business could be adversely affected. We rely on SPHE, our distribution facilitation and manufacturing partner in North America, Sony DADC UK Limited in the U.K, and Trade Global, our fulfillment partner in the U.S., for a majority of our Direct-to-Consumer sales, to determine the best delivery method for our products. These partners rely entirely on arrangements with third-party shipping companies, principally Federal Express and UPS, for small package deliveries and less-than-truckload service carriers for larger deliveries, for the delivery of our products. The termination of arrangements between our partners and one or more of these third-party shipping companies, or the failure or inability of one or more of these third-party shipping companies to deliver products on a timely or cost-efficient basis from our partners to our customers, could disrupt our business, reduce net sales and harm our reputation. Furthermore, an increase in the amount charged by these shipping companies could negatively affect our gross margins and earnings.

Economic weakness may adversely affect our business, results of operations and financial condition. The global economic downturn had a significant negative effect on our revenues and may continue to do so. As consumers reduced spending and scaled back purchases of our products, we experienced higher product returns and lower sales, which adversely affected our revenues and results of operations in previous years. Although domestic consumer spending has improved over the last few years, weak consumer demand for our products may occur and may adversely affect our business, results of operations and financial condition.

Our high concentration of sales to and receivables from relatively few customers (and use of a third-party to manage collection of substantially all packaged goods receivables) may result in significant uncollectible accounts receivable exposure, which may adversely affect our liquidity, business, results of operations and financial condition. During 2015, sales to Amazon accounted for 21.7% of our net revenues and sales to Walmart accounted 12.6% of our net revenues.  Our top five customers accounted for approximately 54.8% of our net revenues for 2015, which includes Amazon and Walmart.  At December 31, 2015, SPHE and Netflix accounted for approximately 38.4% and 22.1%, respectively, of our gross accounts receivables.

19


 

We may be unable to maintain favorable relationships with our retailers and distribution facilitators including SPHE and Sony DADC UK Limited. Further, our retailers and distribution facilitators may be adversely affected by economic conditions. If we lose any of our top customers or distribution facilitators, or if any of these customers reduces or cancels a significant order, it could have a material adverse effect on our liquidity, business, results of operations and financial condition.

We face credit exposure from our retail customers and may experience uncollectible receivables from these customers should they face financial difficulties. If these customers fail to pay their accounts receivable, file for bankruptcy or significantly reduce their purchases of our programming, it would have a material adverse effect on our business, financial condition, results of operations and liquidity.

A high concentration of our gross accounts receivables is attributable to SPHE and Sony DADC UK Limited, as they are our vendor of record for shipments of physical product to North American and U.K. retailers and wholesalers. As part of our arrangement with our distribution facilitation partners, SPHE and Sony DADC UK Limited collect the receivables from our end customers, provide us with monthly advance payments on such receivables (less a reserve), and then true up the accounts receivables accounting quarterly. While we remain responsible for the credit risk from the end customer, if SPHE or Sony DADC UK Limited should fail to adequately collect and pay us the accounts receivable they collect on our behalf, whether due to inadequate processes and procedures, inability to pay, bankruptcy or otherwise, our financial condition, results of operations and liquidity would be materially adversely affected.

We do not control the timing of dividends paid by ACL, which could negatively impact our cash flow. Although we hold a 64% interest in ACL, we do not control the board of directors of ACL. The members of the Agatha Christie family, who hold the remaining 36% interest in ACL, have the right to appoint the same number of directors as us and, in the event of deadlock on any decision of the board, also have a second or casting vote exercised by their appointee as chairman of ACL, which allows them to exercise control of ACL’s board of directors.

Under English law, the amount, timing and form of payment of any dividends or other distributions is a matter for ACL’s board of directors to determine, and, as a result, we cannot control when these distributions are made. If ACL’s board of directors decides not to authorize distributions, our revenue and cash flow may decrease, materially adversely affecting our business, results of operations, liquidity and financial condition.

Our business plan and future growth depend in part on our ability to commercialize the IP owned by ACL based on commissions for new programming from broadcasters, over whom we have no control. If we are unable to successfully implement this strategy, the results of operations and financial condition could be materially adversely affected. Our financial condition and results of operation will depend, in part, on our ability to commercialize the IP owned by ACL. Whether we are able to successfully commercialize the IP owned by ACL, including the creation of new content, will depend, in part, on ACL obtaining commissions for new programming from broadcasters (such as ITV, BBC and Sky in the UK, and Fox, Disney and other studios in the U.S.). The ability to obtain commissions for new programming from broadcasters will depend on many factors outside of our control, including audience preferences and demand, financial condition of the broadcasters, the broadcasters’ budgets and access to financing, competitive pressures and the impact of actual and projected general economic conditions. We cannot guarantee that we will be able to obtain such commissions for new programming within our anticipated timeframe or at all. Without such commissions for new programming, we may not be able to successfully commercialize the IP of ACL in a timely or cost-effective manner, if at all. Failure to obtain commissions for new programming could adversely affect our market share, revenue, financial condition, results of operations, relationships with our distributors and retailers and our ability to expand our market, all of which would materially adversely affect our business, revenues and financial results.

We depend on key and highly skilled personnel to operate our business, and if we are unable to retain our current personnel or hire additional personnel, our ability to develop and successfully market our business could be harmed. Our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Moreover, we believe that our success greatly depends on the contributions of our Chairman, Robert L. Johnson, executive officers including Chief Executive Officer, Miguel Penella, and other key executives. Although we have an employment agreement with Mr. Penella, any of our employees may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. The loss of any key employees or the inability to attract or retain qualified personnel could delay the acquisition of content and harm the market's perception of us. Competition for the caliber of talent required to acquire and exploit content continues to increase. If we are unable to attract and retain the qualified personnel we need to succeed, our business, results of operations and financial condition could suffer.

20


 

We face risks from doing business internationally. We exploit and derive revenues from television programs and feature films outside the U.S., directly in the U.K. and in Australia, and through various third-party licensees elsewhere. As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control. These risks include:

 

·

Laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws;

 

·

Changes in local regulatory requirements, including restrictions on content, differing cultural tastes and attitudes;

 

·

Differing degrees of protection for intellectual property;

 

·

Financial instability and increased market concentration of buyers in foreign television markets, including in European pay television markets;

 

·

The instability of foreign economies and governments;

 

·

Fluctuating foreign exchange rates; and

 

·

War and acts of terrorism.

Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources, which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.

Changes to existing accounting pronouncements or taxation rules or practices may affect how we conduct our business and affect our reported results of operations. New accounting pronouncements or tax rules and varying interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future. A change in accounting pronouncements or interpretations or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. Changes to existing rules and pronouncements, future changes, if any, or the questioning of current practices or interpretations may materially adversely affect our reported financial results or the way we conduct our business.

Changes in, or interpretations of, tax rules and regulations, and changes in geographic operating results, may adversely affect our effective tax rates. We are subject to income taxes in the U.S. and foreign tax jurisdictions. Our future effective tax rates could be affected by changes in tax laws or the interpretation of tax laws, by changes in the amount of revenue or earnings that we derive from international sources in countries with high or low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. Unanticipated changes in our tax rates could affect our future results of operations.

In addition, we may be subject to examination of our income tax returns by federal, state and foreign tax jurisdictions. We regularly assess the likelihood of outcomes resulting from possible examinations to determine the adequacy of our provision for income taxes. In making such assessments, we exercise judgment in estimating our provision for income taxes. While we believe our estimates are reasonable, we cannot assure you that final determinations from any examinations will not be materially different from those reflected in our historical income tax provisions and accruals. Any adverse outcome from any examinations may have a material adverse effect on our business and operating results.

We have disclosed a material weakness in our internal control over financial reporting relating to the review of content ultimates and the preparation and review of reconciliations that could adversely affect our ability to report our financial condition and results of operations accurately and on a timely basis. In connection with our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 for fiscal 2014 and 2015, we identified material weaknesses in our internal control over financial reporting relating to the review of content ultimates and the preparation and review of reconciliations. For a discussion of our internal control over financial reporting and a description of the identified material weakness, see “Management’s Annual Report on Internal Control over Financial Reporting” under Item 9A, “Controls and Procedures.”

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of the annual report, management identified errors that, although not material to the consolidated financial statements, led management to conclude that control deficiencies exist related to the review of content ultimates and the preparation and review of reconciliations. During fiscal 2015, we commenced a remediation plan to address these control deficiencies, which is currently being implemented.  We will evaluate the effectiveness of our remediation during 2016.

A material weakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. If we are unsuccessful in implementing or following our remediation plan, we may not be able to timely or accurately report our financial condition or results of operations or maintain effective disclosure controls and procedures. If

21


 

we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC and NASDAQ, including a delisting from the NASDAQ, which could adversely affect the valuation of our common stock and could adversely affect our business prospects.

We will apply the updated 2013 COSO framework when assessing our internal controls for 2016.  These standards, among other things, expand the requirement to assess third-party information that is recorded within our financial statements.  Because we use third parties to facilitate a significant portion of our sales, we are required to expand our control assessment. There can be no assurances that our expanded assessment will not identify additional weaknesses that could be material or that we will be given adequate and timely access to the control environment of our third-parties sufficient to allow us to perform our assessment.

Risks Relating to Our Industry

Revenues from the sale of DVDs are declining. During calendar 2015, the standard DVD marketplace experienced the ninth straight year-over-year decline for the category since the format debuted in 1997. We estimate that approximately 49% of our current net revenue base is generated from the sale of physical goods, which include the revenues from the sale of DVDs. The continued maturation of the standard DVD format may continue to adversely affect our business, results of operations and financial condition.

Decreasing retail prices for DVDs may negatively affect our revenues and gross profit margins. The home entertainment programming market in which we compete is rapidly evolving and intensely competitive. Many of our competitors, including major studios, are increasingly offering programming, particularly DVD programming, at lower prices. They may be able to produce or secure content on more favorable terms and may be able to adopt more aggressive pricing policies than we can. While we strive to improve our operating efficiencies and leverage our fixed costs so that we can afford to pass along these savings to our customers in the form of lower prices, the industry trend of lowering prices may, over time, lead to lower sales, decreased profit margins or decreased overall revenues.

Decreasing retail shelf space for our industry may limit sales of our programming, which may adversely affect our business, results of operations and financial condition. We face increasing competition from major motion picture studios and other independent content suppliers for limited retail shelf space, which space has been shrinking in absolute terms as brick and mortar retailers have fewer stores and lower budgets for the home-video space within their stores. Our exclusive content competes for a finite amount of shelf space against a large and diverse supply of entertainment content from other suppliers. New releases generally exceed several hundred titles a week. We believe this competition can be especially challenging for independent labels like us, because the new releases of major studios often have extremely high visibility, greater marketing support and sales projections in the millions of units, which typically require much more shelf space to support.

Shelf space limitations at our brick and mortar retail customers are exacerbated by the increasing popularity of the high-definition format, Blu-ray. The combination of standard discs, premium discs and special-edition boxed sets across two formats means that a release can come in as many six different configurations. With the possible exception of our most popular new release titles and top-selling catalog titles, it can be a challenge to obtain the product placement necessary to maximize sales, particularly among the limited number of major retailers who comprise our core brick and mortar customers. The continued retailer trend toward greater visibility for titles at the expense of quantity (i.e., “face out” rather than “spine out” placement) has the effect of reducing the total number of titles actually carried by a retailer.

We cannot accurately predict the overall effect shifting audience tastes, technological change or the availability of alternative forms of entertainment may have on distributors. In addition to uncertainty regarding the DVD market, there is uncertainty as to whether other developing distribution channels and formats, such as VOD and internet distribution of television and films, will attain expected levels of public acceptance, or if such channels or formats are accepted by the public, whether we will be successful in exploiting the business opportunities they provide. Moreover, to the extent that these emerging distribution channels and formats gain popular acceptance, the demand for delivery through DVDs may decrease.

Our revenues and results of operations may fluctuate significantly. Our results of operations are difficult to predict and depend on a variety of factors. Our results of operations depend significantly upon the commercial success of the television programming and feature films that we exploit, which cannot be predicted with certainty. In particular, the underperformance of the VOD or SVOD window of one or more motion pictures in any period may cause our revenue and earnings results for that period (and potentially, subsequent periods) to be less than anticipated, in some instances to a significant extent. Accordingly, our results of operations may fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future periods.

Our results of operations also fluctuate due to the timing, mix, number and availability of our broadcast, home entertainment and theatrical motion picture releases, as well as license periods for our content.  Our operating results may increase or decrease during a

22


 

particular period or year due to differences in the number and/or mix of films released compared to the corresponding period in the prior year.

Risks Relating to Our Stock

Our stock price may be subject to substantial volatility, and stockholders may lose all or a substantial part of their investment. Our common stock currently trades on the Nasdaq Capital Market (NASDAQ). There is limited public float, and trading volume historically has been low and sporadic. As a result, the market price for our common stock may not necessarily be a reliable indicator of our fair market value. The price at which our common stock trades may fluctuate as a result of a number of factors, including the number of shares available for sale in the market, quarterly variations in our operating results, actual or anticipated announcements of new releases by us or competitors, the gain or loss of significant customers, changes in the estimates of our operating performance, fluctuations in the fair value of our common stock warrant liability and market conditions in our industry and the economy as a whole.

If we fail to meet all applicable continued listing requirements of the Nasdaq Capital Market and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, impair the value of your investment, adversely affect our ability to raise needed funds and subject us to additional trading restrictions and regulations.  Companies listed on The NASDAQ Stock Market, or NASDAQ, are subject to delisting for, among other things, failure to maintain a minimum closing bid price per share of $1.00 for 30 consecutive business days or failure to timely file all required periodic financial reports with the SEC.  On January 12, 2016, we received a deficiency letter from NASDAQ, indicating that for the last 30 consecutive business days our common stock had a closing bid price below the $1.00 minimum closing bid as required for continued listing set forth in Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided a grace period of 180 calendar days, or until July 11, 2016, to regain compliance with this requirement. Although we are actively monitoring the bid price for our common stock and will consider all available options to resolve the deficiency, including effecting a reverse stock split in accordance with the authority conferred by the shareholders at the special meeting held on December 4, 2015, we cannot be sure that our share price will regain compliance timely.  As of March 31, 2016, the closing price of our common stock was $0.85 per share.

NASDAQ's notice has no immediate effect on the listing of our common stock on the NASDAQ Capital Market. However, we cannot assure you that we will be able to meet this or other continued listing requirements of NASDAQ.  If our common stock loses its status on The NASDAQ Capital Market, our common stock would likely trade in the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and any security analysts’ coverage of us may be reduced. In addition, in the event our common stock is delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock, further limiting the liquidity of our common stock. These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock. Such delisting from The NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.

Any future issuances of equity may significantly affect the market price of our common stock. Future issuances of substantial amounts of our common stock, including shares that we may issue upon exercise of outstanding warrants, or other convertible securities, if any, could adversely affect the market price of our common stock. Further, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock, our stockholders may experience substantial dilution and the price of our common stock may fall. New equity securities issued may also have greater rights, preferences or privileges than our existing common stock.

Additional authorized shares of common stock available for issuance may adversely affect the market. We are authorized to issue 250,000,000 shares of our common stock. As of March 31, 2016, we had 14,132,820 shares of our common stock outstanding, excluding shares issuable upon conversion of our outstanding preferred stock and exercise of our outstanding warrants. As of March 31, 2016, we had outstanding preferred stock convertible into 31,046,243 shares of our common stock at a conversion price of $1.00 per share and warrants to purchase 21,041,667 and 9,313,873 shares of our common stock at a price of $12.00 and $1.50 per share, respectively.  To the extent the shares of common stock are issued, preferred stock is converted or warrants are exercised, holders of our common stock will experience dilution.

Provisions in our amended and restated articles of incorporation and Nevada law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management. Our amended and restated articles of incorporation contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the ability of the board of directors to designate the terms of and issue new series of preferred shares, which may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

23


 

We are also subject to anti-takeover provisions under Nevada law, which could delay or prevent a change of control. Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

RLJE’s principal executive office is located in Silver Spring, Maryland. We also maintain offices in Woodland Hills, California; Stillwater, Minnesota; London, England and Sydney, Australia with varying terms and expiration dates. All locations are leased. A summary of our locations is as follows:

 

 

Location

 

Primary

Purpose

 

Lease

Expiration

 

 

Reporting Segment (1)

Silver Spring, MD

 

Executive

Office/Administrative/Sales/

Content Acquisition

 

November 15,

2020

 

Corporate

Woodland Hills, CA

 

Administrative/Sales/Content Acquisition

 

June 30, 2021

 

Wholesale

 

Stillwater, MN

 

Sales and Administration for Direct-to-Consumer

 

June 30, 2022

 

Direct-to-Consumer

London, England

 

Content Development and Production/Sales/

Administration for the U.K.

 

July 1, 2018

 

IP Licensing/Wholesale/

Direct-to-Consumer

Sydney, Australia

 

Sales/Administration

 

March 1, 2017

 

Wholesale

 

(1)

The segment descriptions above reflect the location’s primary activity.

We believe that our current offices are adequate to meet our business needs, and our properties and equipment have been well maintained.

ITEM 3.

LEGAL PROCEEDINGS

In the normal course of business, we are subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations relating to content ownership and copyright matters. While it is not possible to predict the outcome of these matters, it is the opinion of management, based on consultations with legal counsel, that the ultimate disposition of known proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

 

24


 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on The NASDAQ Capital Market® under the symbol “RLJE” and our warrants are quoted on the Over-The-Counter Bulletin Board (or OTCBB) under the symbol “RLJEW.”  The table below presents the quarterly high and low closing sales prices of our common stock and warrants as reported by NASDAQ and the OTCBB, respectively.  

 

 

 

Common Stock

 

 

Warrants

 

 

 

High

 

 

Low

 

 

High

 

 

Low

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

2.22

 

 

$

1.44

 

 

$

0.10

 

 

$

0.08

 

Second quarter

 

$

1.59

 

 

$

0.28

 

 

$

0.08

 

 

$

0.08

 

Third quarter

 

$

1.65

 

 

$

0.34

 

 

$

0.10

 

 

$

0.10

 

Fourth quarter

 

$

1.32

 

 

$

0.47

 

 

$

0.01

 

 

$

0.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

5.01

 

 

$

4.31

 

 

$

0.40

 

 

$

0.22

 

Second quarter

 

$

4.38

 

 

$

3.36

 

 

$

0.30

 

 

$

0.22

 

Third quarter

 

$

3.90

 

 

$

2.28

 

 

$

0.22

 

 

$

0.05

 

Fourth quarter

 

$

4.04

 

 

$

1.98

 

 

$

0.25

 

 

$

0.08

 

 

Stockholders  

As of March 31, 2016, there were 14,132,820 shares of our common stock outstanding, which were held by approximately 309 holders of record, warrants to purchase 21,041,667 shares of our common stock at a price of $12.00 per share held by approximately 30 holders of record and warrants to purchase 9,313,873 shares of our common stock at a price of $1.50 per share held by approximately 14 holders of record.  The number of holders of record does not include the number of persons whose securities are in nominee or “street name” accounts through brokers.

Dividend Policy

We have not paid any cash dividends on our common stock to date. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our board of directors at such time. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board of directors does not anticipate declaring any dividends in the foreseeable future. In addition, our Credit Agreement restricts our ability to pay dividends on our common stock.  For more information on these restrictions, please refer to Note 10, Debt of our Consolidated Financial Statements and in the Capital and Liquidity sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations (or MD&A).  

Securities Authorized for Issuance Under Equity Compensation Plans  

The following table sets forth certain information as of December 31, 2015 with respect to our equity compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance, aggregated by (i) all compensation plans previously approved by our security holders, and (ii) all compensation plans not previously approved by our security holders:

 

Plan Category

 

Number of securities

to be issued upon

exercise of

outstanding options,

warrants and rights

 

 

Weighted-average

exercise price of

outstanding options,

warrants and rights

 

 

Number of securities remaining

available for future issuance under

equity compensation plans

(excluding securities referenced in

the first column) (1)

 

Equity compensation plans approved

   by security holders

 

 

 

 

$

 

 

 

4,534,166

 

Equity compensation plans not

   approved by security holders:

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

 

 

 

4,534,166

 

 

(1)

Represents shares available for grant in the future under our 2012 Incentive Compensation Plan.

25


 

Additional information with respect to the shares of our common stock that may be issued under our existing stock-based compensation plans is disclosed in our consolidated financial statements in Note 14, Stock-Based Compensation.

ITEM 6.

SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions.  As described under the heading "Forward-Looking Statements" of this Annual Report, our actual results could differ materially from those anticipated in our forward-looking statements.  Factors that could contribute to such differences include those discussed elsewhere in this Annual Report, including in Item 1A of this Annual Report under the heading “Risk Factors.”  You should not place undue reliance on our forward-looking statements, which apply only as of the date of this Annual Report.  Except as may be required under federal law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related footnotes included in Item 8 of this Annual Report.

OVERVIEW

General

RLJ Entertainment, Inc. (or RLJE) is a global entertainment company with a direct presence in North America, the United Kingdom (or U.K.) and Australia and strategic sublicense and distribution relationships covering Europe, Asia and Latin America.  RLJE was incorporated in Nevada in April 2012.  On October 3, 2012, we completed the business combination of RLJE, Image Entertainment, Inc. (or Image) and Acorn Media Group, Inc. (or Acorn Media or Acorn), which is referred to herein as the “Business Combination.”  Acorn Media includes its subsidiaries RLJE International Ltd (or RLJE U.K.), RLJ Entertainment Australia Pty Ltd. (or RLJE Australia) and RLJ Entertainment Ltd (or RLJE Ltd).  In February 2012, Acorn Media acquired a 64% ownership of Agatha Christie Limited (or ACL).  References to Image include its wholly-owned subsidiary Image/Madacy Home Entertainment, LLC.  “We,” “our” or “us” refers to RLJE and its subsidiaries, unless otherwise noted.  Our principal executive offices are located in Silver Spring, Maryland, with additional U.S. locations in Woodland Hills, California, and Stillwater, Minnesota, and international locations in London, England and Sydney, Australia.  

RLJE is a global entertainment content distribution company for distinct, passionate audiences.  We strive to be a preferred source and destination for entertainment for a variety of distinct audiences with particular and special programming interests.  We acquire, develop and exploit television, film and other media content agnostically across all platforms of distribution.  We actively manage all windows of exploitation to optimize the reach of our promotional efforts and maximize the value of our releases.

We acquire content rights in various categories, with particular focus on British mysteries and dramas, urban programming and full-length independent motion pictures.  We also develop, produce and own original programming through our wholly-owned subsidiary, RLJE Ltd, and our 64%-owned subsidiary, ACL.  We control an extensive program library in genres such as British mysteries and dramas, urban/African-American, action/thriller and horror, fitness/lifestyle and long-form documentaries.  Our owned content includes 28 Foyle’s War made-for-TV films, multiple instructional Acacia titles, and through our 64% ownership of ACL, the vast majority of the works of Agatha Christie.  

We exploit our products through a multi-channel strategy encompassing (1) the licensing of original drama and mystery content managed and developed through our wholly-owned subsidiary, RLJE Ltd, and our 64%-owned subsidiary, ACL, (IP Licensing segment); (2) wholesale exploitation through partners covering broadcast and cable, digital, online and retail outlets (Wholesale segment); and (3) direct relations with consumers via proprietary SVOD channels, e-commerce websites and mail-order catalog (Direct-to-Consumer segment).  

RLJE Ltd manages and develops our intellectual property rights on British drama and mysteries. Our owned content includes 28 Foyle’s War made-for-TV films; multiple instructional Acacia titles; and through our 64% ownership interest of ACL, the Agatha Christie library.  ACL is home to some of the world’s greatest works of mystery fiction, including Murder on the Orient Express and Death on the Nile and includes all development rights to iconic sleuths such as Hercule Poirot and Miss Marple.  The Agatha Christie

26


 

library includes a variety of short story collections, more than 80 novels, 19 plays and a film library of over 100 made-for-television films.  In the third quarter of 2014, ACL published its first book, The Monogram Murders, since the death of Agatha Christie.

Our wholesale partners are broadcasters, digital outlets and major retailers in the U.S., Canada, United Kingdom and Australia, including, among others:  Amazon, Barnes & Noble, BET, Costco, DirecTV, Hulu, iTunes, Netflix, PBS, Showtime, Target and Walmart.  We work closely with our wholesale partners to outline and implement release and promotional campaigns customized to the different audiences we serve and the program genres we exploit.  We have a catalog of owned and long-term licensed content that is segmented into brands such as Acorn (British drama/mystery, including content produced by ACL), RLJE Films (independent feature films, action/thriller horror), Urban Movie Channel (or UMC) (urban), Acacia (fitness), and Athena (documentaries).

Our Direct-to-Consumer segment includes our proprietary SVOD channels, such as Acorn TV and UMC, and the sale of video content and complementary merchandise directly to consumers through proprietary e-commerce websites and mail-order catalogs.  As of December 31, 2015, Acorn TV had over 195,000 paying subscribers.  As of February 29, 2016, Acorn TV had approximately 235,000 paying subscribers.  UMC, which launched in late-2014, has been adding over 2,000 subscribers per month since December 2015 and has close to 10,000 subscribers as of February 29, 2016.  We expect the subscriber base to continue to grow in 2016 for all of our subscription-based digital channels as we add more exclusive content to the channels.

RLJE’s management views our operations based on these three distinctive reporting segments: (1) IP Licensing; (2) Wholesale; and (3) Direct-to-Consumer.  Operations and net assets that are not associated with any of these stated segments are reported as “Corporate” when disclosing and discussing segment information.  The IP Licensing segment includes intellectual property rights that we own or create and then sublicense for exploitation worldwide.  Our Wholesale and Direct-to-Consumer segments consist of the acquisition, content enhancement and worldwide exploitation of exclusive content in various formats, including broadcast, DVD and Blu-ray, and digital (which include VOD, SVOD, streaming and downloading).  We also sublicense certain distribution rights to others to cover territories outside the U.S., the U.K. and Australia.  The Wholesale segment exploits content through third-party vendors such as Amazon, Best Buy, BET, Costco, DirecTV, Netflix, Showtime, Target and Walmart, while the Direct-to-Consumer segment exploits the same content and complementary merchandise directly to consumers through our proprietary SVOD channels, e‑commerce websites and mail-order catalogs.  

Revenue Sources

Net revenues by reporting segment as a percentage of total net revenues for the periods presented are as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

IP Licensing (1)

 

 

2.5

%

 

 

6.4

%

Wholesale

 

 

69.0

%

 

 

66.4

%

Direct-to-Consumer

 

 

28.5

%

 

 

27.2

%

Total revenues

 

 

100.0

%

 

 

100.0

%

 

(1)

Reported net revenues exclude revenues generated by our 64% owned subsidiary, ACL, which is accounted for under the equity method of accounting.

Revenues by geographical area as a percent of the total revenues are as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

United States

 

 

85.1

%

 

 

81.6

%

United Kingdom

 

 

13.3

%

 

 

17.1

%

Other

 

 

1.6

%

 

 

1.3

%

Total revenues

 

 

100.0

%

 

 

100.0

%

 

Wholesale Segment

DVD and Blu-ray

Our primary source of revenues within the Wholesale segment continues to be from the exploitation of exclusive content on DVD and Blu-ray through third-party vendors such as Amazon, Best Buy, Costco, Target and Walmart.

27


 

Digital, VOD and Broadcast

Revenues derived from digital and broadcast exploitation of our content continue to grow as a percentage of revenues.  Net revenues derived from digital, VOD, third-party SVOD and broadcast exploitation account for approximately 37.7% of the segment’s revenues in 2015 versus 30.3% in 2014.  This is consistent with consumer adoption trends. As retailers continue to offer consumer-friendly devices that make access to these on-demand services easier, including allowing consumption on portable devices such as smartphones and tablets, we believe we are well-positioned to capture business in this growing distribution channel.  Some of our digital retailers include Amazon, Cinedigm, Google Play, Hoopla, Hulu, iTunes, Microsoft Xbox, Netflix, Overdrive, Shudder (AMC) Sony PlayStation, Vimeo, Vudu and YouTube.  Our partners in the VOD space include AT&T, Cablevision, Comcast, DirecTV, Dish, iNDemand, Verizon and Vubiquity.

Other Licensing

We continue our efforts to acquire more programming with international rights.  Our key sublicensing partners, that cover territories outside the U.S., the U.K. and Australia, are with BET International, Universal Music Group International, Universal Pictures Australia and Warner Music Australia.  To date, most of the feature films we have acquired do not include rights outside of North America.  However, given our presence in the United Kingdom and Australia, we are focusing our efforts to acquire more programming in all English-language markets.  When appropriate, we now seek the greatest variety of distribution rights regarding acquired content in the greatest variety of formats.  We believe that this will allow us to further diversify revenue streams.

Direct-to-Consumer Segment

Our Direct-to-Consumer businesses are primarily in the U.S. and U.K. and comprise approximately one-fourth of our overall revenue base.  Non-video revenues include the sale of retail merchandise such as attire for women and men, home furnishings and decorator items and collectables.  Video revenues in our catalogs and website orders consist of the sale of owned and licensed video content in DVD, Blu-ray and digital formats and is generally the same content that is also sold to third parties through the Wholesale segment.  

A majority of the Direct-to-Consumer segment revenues are derived from our mail-order catalogs (Acorn and Acacia), which also includes website orders.  The remaining revenues were derived from our online, proprietary, subscriber-based SVOD channels.  During 2015, revenues from our proprietary SVOD channels totaled $7.5 million, which represents an increase of $3.4 million when compared to 2014.

Despite generating revenues in excess of $10.0 million for each of the past two years, the Acacia catalog has not secured a large enough market share to become profitable. The health and fitness sector has become increasingly competitive and digital in nature, thereby reducing opportunities for merchandise cross and up-selling. Management has therefore decided to exit the Acacia catalog and online business and focus on distributing Acacia content through RLJE’s third-party wholesale channels and its direct-to-consumer SVOD service Acacia TV.

IP Licensing Segment

Our television drama productions are generally financed by the pre-sale of the initial broadcast license rights.  Revenues reported in this segment include the initial broadcast license revenue, generally from the U.K. territory, and sublicense revenue for other territories outside the U.S., U.K. and Australia.  

Cost Structure

Our most significant costs and cash expenditures relate to acquiring or producing content for exclusive exploitation.  We generally acquire programming through exclusive license or distribution agreements, under which we either (1) pay royalties or (2) receive distribution fees and pay net profits after recoupment of our upfront costs.  Upon entering into a typical license (royalty) agreement, we pay an advance based on the estimated expected future net profits.  Once the advance payment has been recouped, we pay royalties to the content suppliers quarterly based on the net revenues collected from the previous quarter.  Under a typical exclusive distribution agreement, we may pay upfront fees, which are expressed as advances against future net profits.  Once the advance is recouped, we pay the content supplier their share of net cash-profits, which is after our distribution fee, from the prior quarter’s exploitation.

In addition to advances, upfront fees and production costs, the other significant expenditures we incur are:

 

·

DVD/Blu-ray authoring and replication and digitalization of program masters;

 

·

Packaging;

28


 

 

·

Advertising, promotion and marketing funds provided to wholesale partners; 

 

·

Domestic shipping costs from self-distribution of exclusive content;

 

·

Personnel; and

 

·

Interest.

We strive to achieve long-term, sustainable growth and profitability with a target return on investment (ROI) of 20% or more on new content acquisitions.  This financial target is based on all up-front expenses associated with the acquisition and release of a title, including advances and development costs, and is calculated after allocating overhead costs.  

We also seek to maximize our operational cash flow and profitability by closely managing our marketing and discretionary expenses, and by actively negotiating and managing collection and payment terms.

Highlights

Highlights for the year ended December 31, 2015 and other significant events are as follows:

 

·

Grew subscriber base for Acorn TV from 118,000 to 195,000 in 2015, and 260,000 as of the end of March 2016.

 

·

Revenues are down while gross margin percentages have increased.  The gross margin increased to 26.9% for the year ended December 31, 2015 compared to 26.3% for the year ended December 31, 2014.  

 

·

During December 2015, all three of our proprietary SVOD channels were featured in Amazon Prime’s add-on streaming video service launch, which provides us with a significant increase in addressable audience and brand awareness.

 

·

In December 2015, management approved and began implementing a plan to shut down unprofitable lines of business.  This includes closing the Acacia catalog that lost $4.0 million and $1.8 million during 2015 and 2014, respectively, and transitioning the Acorn catalog from a physical printed catalog that is mailed to an online catalog.  

 

·

On May 20, 2015, we completed a $31.0 million capital restructuring by selling shares of preferred stock and warrants to acquire common stock.  After fees and expenses incurred, this reduced our debt balances from $85.8 million to $67.3 million and provided working capital of $10.6 million.

The highlights above and the discussion below are intended to identify some of our more significant results and transactions during 2015 and should be read in conjunction with our consolidated financial statements and related discussions within this Annual Report.

Results of Operations

A summary of the U.S. GAAP results of operations for the years ended December 31, 2015 and 2014, as disclosed in our consolidated financial statements in Item 8, Financial Statements and Supplementary Data, herein referred to as our “consolidated financial statements” is as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

Revenues

 

$

124,917

 

 

$

137,689

 

Costs of sales

 

 

91,328

 

 

 

101,454

 

Gross profit

 

 

33,589

 

 

 

36,235

 

Operating expenses

 

 

80,624

 

 

 

50,710

 

Loss from operations

 

 

(47,035

)

 

 

(14,475

)

Equity earnings of affiliate

 

 

2,217

 

 

 

2,580

 

Interest expense, net

 

 

(9,968

)

 

 

(9,615

)

Change in fair value of stock warrants and other derivatives

 

 

1,373

 

 

 

3,522

 

Loss on extinguishment of debt

 

 

 

 

 

(1,457

)

Other expense

 

 

(1,402

)

 

 

(1,356

)

Provision for income taxes

 

 

(165

)

 

 

(399

)

Net loss

 

$

(54,980

)

 

$

(21,200

)

 

29


 

Revenues

The comparability of our revenues between years is affected by the early termination of a feature-film output deal, which was effective December 31, 2013 and for which we completed an inventory sell-off period during the first quarter of 2014.  A summary of net revenue by segment with and without the terminated output deal revenue for the years ended December 31, 2015 and 2014 is as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

Wholesale Revenue:

 

 

 

 

 

 

 

 

U.S.

 

$

72,868

 

 

$

77,057

 

Terminated Image output deal

 

 

 

 

 

1,059

 

U.S. excluding output deal

 

 

72,868

 

 

 

78,116

 

International

 

 

13,373

 

 

 

14,322

 

Total Wholesale

 

 

86,241

 

 

 

92,438

 

Direct-to-Consumer

 

 

 

 

 

 

 

 

Ecommerce Catalog U.S.

 

 

25,947

 

 

 

31,168

 

Proprietary Digital Channels

 

 

7,543

 

 

 

4,126

 

International Ecommerce

 

 

2,079

 

 

 

2,264

 

Total Direct-to-Consumer

 

 

35,569

 

 

 

37,558

 

Intellectual Property

 

 

3,107

 

 

 

8,752

 

Total revenues excluding terminated output deal

   revenues

 

 

124,917

 

 

 

138,748

 

Terminated output deal revenues

 

 

 

 

 

(1,059

)

Total Revenues

 

$

124,917

 

 

$

137,689

 

 

Revenue for the year ended December 31, 2015 decreased $12.8 million when compared to the year ended December 31, 2014.  The decrease in revenues is primarily driven by our IP Licensing segment and our Wholesale segment, which declined by $5.7 million and $6.2 million, respectively.  The decrease in our IP Licensing segment is attributable to the U.K. broadcast release of the latest season of Foyle’s War during the third quarter last year with no similar releases this year.  The initial broadcast revenues for Foyle’s War last year were $8.7 million.  During 2015, our IP Licensing segment did release a new series, Partners in Crime, which was produced by ACL and is being distributed in part by RLJE Ltd.  However, for this new title, the initial broadcast revenues are being recognized by ACL and therefore those revenues are excluded from our consolidated revenue amounts.  The decrease in our Wholesale segment is attributable to us releasing fewer titles in 2015 compared to 2014, as we reduced the amount of cash we spent on content in 2015.  In 2015, we released 110 titles compared to 123 titles released in 2014.  

The Direct-to-Consumer segment consists of digital streaming SVOD channels, and proprietary Acorn and Acacia branded e‑commerce websites and mail-order catalogs in both the U.S. and U.K.  We experienced a decline in revenues during 2015 when compared to 2014 from our Direct-to-Consumer segment as a result of lower e-commerce website and mail-order catalog revenues partially offset by an increase in our proprietary digital channel revenues.  During 2015, our Acorn and Acacia catalogs generated U.S. revenues of $14.8 million and $11.1 million, respectively, compared to $17.9 million and $13.3 million, respectively, during 2014.  The decrease in U.S. catalog revenues is attributable to reduced catalog circulation during 2015 when compared to 2014.  Our proprietary digital channel revenues increased $3.4 million from$4.1 million to $7.5 million during 2015 compared to 2014 due to an increase in subscribers for Acorn TV, which increased 65.3% from 118,000 paying subscribers as of December 31, 2014 to 195,000 paying subscribers as of December 31, 2015.  We are continually rolling-out new content on our digital channels, which we believe is a key factor in attracting new subscribers for all of channels.

30


 

Cost of Sales (“COS”) and Gross Margins

A summary of COS by segment and overall gross margins for the years ended December 31, 2015 and 2014 is as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

IP Licensing

 

$

1,954

 

 

$

6,213

 

Wholesale

 

 

68,866

 

 

 

73,615

 

Direct-to-Consumer

 

 

20,508

 

 

 

21,626

 

Total COS

 

$

91,328

 

 

$

101,454

 

Gross Margin

 

$

33,589

 

 

$

36,235

 

Gross Margin %

 

 

26.9

%

 

 

26.3

%

 

COS decreased by $10.1 million to $91.3 million for 2015 compared to the same period in 2014.  The decrease in COS is attributed to lower sales during the period, lower impairment charges and lower step-up amortization resulting from the Business Combination.  Impairment charges and step-up amortization are recorded in our Wholesale segment.  Our impairment charges recorded for content investments and inventories total $4.7 million and $7.1 million for the years ended December 31, 2015 and 2014, respectively.  Our step-up amortization decreased during 2015 compared to 2014 due to decreased revenues.  Our step-up amortization was $5.0 million and $7.7 million for 2015 and 2014, respectively.  

As a percentage of revenues, our gross margin improved to 26.9% for 2015 compared to 26.3% for 2014.  The improvement is attributable primarily to our IP Licensing and our Wholesale segments.  Our IP Licensing margin improved because we are forecasting, on an ultimate basis, a higher margin for our new release, Partners in Crime, as compared to the latest season of Foyle’s War.  Our Wholesale segment margin improved primarily as a result of lower impairments.  Our Direct-to-Consumer gross margin percentage was effectively unchanged when comparing 2015 to 2014.

Operating Expenses (“SG&A”)

The following table includes a summary of the components of SG&A:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

Selling expenses

 

$

25,161

 

 

$

24,510

 

General and administrative expenses

 

 

19,247

 

 

 

19,525

 

Depreciation and amortization

 

 

5,956

 

 

 

5,694

 

Goodwill impairment

 

 

30,260

 

 

 

981

 

Total operating expenses

 

$

80,624

 

 

$

50,710

 

 

SG&A increased by $29.9 million for the year ended December 31, 2015, compared to the same period in 2014.  The increase is due to a $30.3 million goodwill impairment charge recorded in 2015 compared to a similar charge in 2014 of $981,000.  The 2015 goodwill impairment charge is attributable to our Wholesale segment and was recorded because management concluded in 2015 that the segment’s book value for its U.S. operations exceeded its corresponding fair value.  Selling expenses increased during 2015 compared to 2014 due to increased internet support costs necessary to support the growth of Acorn TV.  Our general and administrative expenses continued to decrease as a result of our efforts to reduce overhead and related costs despite a slight increase in severance charges, which were $574,000 and $548,000 for 2015 and 2014, respectively.  

Equity Earnings of Affiliate

Equity earnings of affiliate (which is ACL) decreased $363,000 for the year ended December 31, 2015 to $2.2 million compared to 2014.  During 2015, ACL generated lower gross margins (revenues less film cost amortization) when compared to 2014.  ACL recognized increased revenues in 2015 resulting from two new releases (Partners in Crime and And Then There were None), but these increased revenues generated low margins as the initial broadcasters did not exercise their options for a second season.  Previous to these 2015 releases, ACL latest releases were in 2013, which realized better gross margins and disproportionally benefited 2014 when compared to 2015.  ACL is in process of completing the production of another made-for-television movie, which has not yet been released.  

31


 

Interest Expense

Interest expense for the year ended December 31, 2015 was $10.0 million compared to $9.6 million for the same period in 2014.  Interest expense increased $353,000 during the current year due to an increased average debt balance owed under our Credit Agreement in 2015 as compared to 2014, and an increased interest rate payable (currently LIBOR plus 10.64%) when compared to the prior credit facility (which was approximately LIBOR plus 7.0%).  At the time the prior credit facility was refinanced in September 2014, the balance due was $55.7 million.  Once refinanced, the balance due increased to $70.0 million.  On April 15, 2015, we made an accelerated debt payment of $10.0 million.  During 2015, we also made quarterly principal payments on our Credit Agreement of $613,000 each.

Change in Fair Value of Stock Warrants and Other Derivatives

The change in the fair value of our stock warrants and other derivative liabilities impacts the statement of operations.  A decrease in the fair value of the liabilities results in the recognition of income, while an increase in the fair value of the liabilities results in the recognition of expense.  Changes in fair value are primarily driven by changes in our common stock price and its volatility.  For the years ended December 31, 2015 and 2014, the fair value of our stock warrants and other derivative liabilities decreased by $1.4 million and $3.5 million, respectively.

Loss on Extinguishment of Debt

When entering into the new Credit Agreement, we recognized a loss on extinguishment of debt of $1.5 million in the third quarter of 2014.  The loss primarily represents the expensing of unamortized debt discounts and deferred financing costs associated with the prior credit facility.

Other Expense

Other expense mostly consists of foreign currency gains and losses resulting primarily from advances and loans by our U.S. subsidiaries to our foreign subsidiaries that have not yet been repaid.  Our foreign currency gains and losses are primarily impacted by changes in the exchange rate of the British Pound Sterling (or the Pound) relative to the U.S. dollar (or the Dollar).  As the Pound strengthens relative to the Dollar, we recognized other income; and as the Pound weakens relative to the Dollar, we recognize other expense.  During 2015 and 2014, the Pound weakened relative to the dollar and we recognized foreign currency losses of $1.1 million each year.

Income Taxes

We have fully reserved our net U.S. deferred tax assets, and such tax assets may be available to reduce future income taxes payable should we have U.S. taxable income in the future. To the extent such deferred tax assets relate to net operating losses (or NOL) carryforwards, the ability to use our NOL carryforwards against future earnings will be subject to applicable carryforward periods and limitations subsequent to a change in ownership.  As of December 31, 2015, we had NOL carryforwards for federal and state income tax purposes of approximately $87.3 million and approximately $59.6 million, respectively.  

We recorded income tax expense of $165,000 and $399,000 for the years ended December 31, 2015 and 2014, respectively.  Our tax provision consists primarily of a deferred tax provision for certain deferred tax liabilities and a current tax provision for our U.K. operations.  We are recording a deferred tax provision and liability for our equity earnings of affiliate (ACL).  These earnings will be taxable in the U.K., when and if we dispose of our investment.  In 2015, we also reversed a previously recognized deferred liability related to goodwill amortization that was being provided for tax purposes.  Because of the goodwill impairment recognized, the deferred liability was reversed and is no longer being recognized for financial statement purposes.  This reversal resulted in us reducing our tax expense in 2015 by $411,000.  We are providing current income tax expense on pre-tax income from our consolidated U.K. subsidiaries at an effective tax rate of approximately 20%.  We are not providing a current tax provision (benefit) on our U.S. operations, other than for certain state minimum taxes, which are immaterial.

Adjusted EBITDA

Management believes Adjusted EBITDA to be a meaningful indicator of our performance that provides useful information to investors regarding our financial condition and results of operations because it removes material non-cash items that allows investors to analyze the operating performance of the business using the same metric management uses.  The exclusion of non-cash items better reflects our ability to make investments in the business and meet obligations.  Presentation of Adjusted EBITDA is a non-GAAP financial measure commonly used in the entertainment industry and by financial analysts and others who follow the industry to measure operating performance.  Management uses this measure to assess operating results and performance of our business, perform analytical comparisons, identify strategies to improve performance and allocate resources to our business segments. While

32


 

management considers Adjusted EBITDA to be an important measure of comparative operating performance, it should be considered in addition to, but not as a substitute for, net income and other measures of financial performance reported in accordance with US GAAP. Not all companies calculate Adjusted EBITDA in the same manner and the measure, as presented, may not be comparable to similarly-titled measures presented by other companies.

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

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(54,980

)

 

$

(21,200

)

Amortization of content

 

 

54,624

 

 

 

58,807

 

Cash investment in content

 

 

(38,868

)

 

 

(44,611

)

Depreciation and amortization

 

 

5,956

 

 

 

5,694

 

Goodwill impairment

 

 

30,260

 

 

 

981

 

Interest expense

 

 

9,968

 

 

 

9,615

 

Loss on extinguishment of debt

 

 

 

 

 

1,457

 

Provision for income tax

 

 

165

 

 

 

399

 

Severance and costs to modify debt

 

 

886

 

 

 

548

 

Change in fair value of stock warrants and other derivatives

 

 

(1,373

)

 

 

(3,522

)

Stock-based compensation

 

 

310

 

 

 

769

 

Basis-difference amortization in equity earnings of
affiliate

 

 

546

 

 

 

589

 

Adjusted EBITDA

 

$

7,494

 

 

$

9,526

 

 

During 2015, we started adding back basis-difference amortization in equity earnings when computing Adjusted EBITDA.  For comparability purposes, we made this adjustment retroactively for 2014.  Adjusted EBITDA decreased by $2.0 million for the year ended December 31, 2015 compared to the same period in 2014.  The decrease is primarily driven by lower revenues from our IP Licensing segment and lower equity earnings of affiliate.

A reconciliation of Adjusted EBITDA to our net cash (used in) provided by operating activities as reported in our consolidated statements of cash flows is as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

Adjusted EBITDA

 

$

7,494

 

 

$

9,526

 

Cash interest expense

 

 

(6,967

)

 

 

(7,301

)

Current income tax provision

 

 

(235

)

 

 

(211

)

ACL dividends in excess of earnings before basis-difference amortization

 

 

537

 

 

 

871

 

Changes in working capital

 

 

(10,214

)

 

 

(1,061

)

Severance and costs to modify debt

 

 

(886

)

 

 

(548

)

Foreign currency exchange loss

 

 

1,111

 

 

 

1,149

 

Net cash (used in) provided by operating activities

 

$

(9,160

)

 

$

2,425

 

 

BALANCE SHEET ANALYSIS

Assets

Total assets at December 31, 2015 and 2014, were $151.5 million and $192.1 million, respectively.  The decline of $40.6 million in assets is mostly attributed to (i) the goodwill impairment of $30.3 million, (ii) amortization of other intangible assets of $5.0 million, (iii) a decline in investments in content of $7.1 million, which is due to the amortization from the Business Combination’s fair value adjustments of $5.0 million and impairments of $3.2 million, (iv) a decline in inventories of $2.3 million as customers continue to shift from physical consumption (DVD and Blue-ray) to digital (VOD and streaming), and (v) a decline in our equity investment in ACL of $2.2 million.  The decline in our equity investment is due to a combination of dividends paid of $3.3 million being greater than our share of net income from ACL of $2.2 million and a weakening Pound compared to the Dollar.  

33


 

Offsetting these declines is an increase in accounts receivable of $7.6 million, which is due to a shift in our title releases for 2015 whereby more content was released in the fourth quarter this year compared to the same period last year.

A summary of assets by segment is as follows:

 

 

 

December 31,

 

(In thousands)

 

2015

 

 

2014

 

IP Licensing

 

$

22,707

 

 

$

30,197

 

Wholesale

 

 

112,066

 

 

 

140,935

 

Direct-to-Consumer

 

 

10,514

 

 

 

12,049

 

Corporate

 

 

6,173

 

 

 

8,873

 

 

 

$

151,460

 

 

$

192,054

 

 

Liabilities and Equity

The decline of liabilities and equity of $40.6 million is mostly attributed to the net loss of $55.0 million for the year ended December 31, 2015 that is included in accumulated deficit, offset by $12.5 million that is related to the issuance of preferred stock and warrants.  On May 20, 2015, we issued preferred stock and warrants for $31.0 million and concurrently reduced our debt obligations by $18.5 million, which consists of an accelerated principal payment of $10.0 million and $8.5 million of converted subordinated debt.

Liquidity and Capital Resources

Liquidity

A summary of our cash flow activities is as follows:

 

 

 

Years Ended

December 31,

 

(In thousands)

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(9,160

)

 

$

2,425

 

Net cash used in investing activities

 

 

(1,811

)

 

 

(1,655

)

Net cash provided by (used in) financing activities

 

 

8,818

 

 

 

(1,361

)

Effect of exchange rate changes on cash

 

 

21

 

 

 

(421

)

Net decrease in cash

 

 

(2,132

)

 

 

(1,012

)

Cash at beginning of year

 

 

6,662

 

 

 

7,674

 

Cash at end of year

 

$

4,530

 

 

$

6,662

 

 

At December 31, 2015 and 2014, our cash and cash equivalents were approximately $4.5 million and $6.7 million, respectively.  During the year ended December 31, 2015, our cash position was impacted by the following:

 

·

We incurred a net use of cash of $9.2 million resulting from our operating activities.  The net use of cash was largely attributable to a net increase (or investment) in working capital of $10.2 million.  During 2015, our accounts receivables increased by $7.9 million due to a shift in our title releases for 2015 whereby more content was released in the fourth quarter this year compared to the same period last year.  We continue to have significant short-term vendor debts, which are past due and which we are in the process of paying off by making increased cash payments or modifying payment terms in the short term.  Bringing our vendor trade payables current continues to constrain our liquidity. During 2015, our accounts payable and accrued liabilities decreased by $921,000.  In 2014, we were able to reduce accounts payable and accrued liabilities by $7.8 million.  

 

·

Our quarterly results are typically affected by:  (a) the timing and release dates of key productions, (b) the seasonality of our Wholesale and Direct-to-Consumer business which are 32% to 35% weighted to the fourth quarter and (c) we generally invest more cash on content during the first half of the year.

The aggregate cash used in operating activities during the year ended December 31, 2015 was provided by our financing activities and our cash reserves as of December 31, 2014, offset by cash used in investing activities.  For the year ended December 31, 2015, significant factors affecting cash provided by or used in our investing and financing activities were:

 

·

We received gross cash proceeds of $22.5 million by issuing preferred stock and warrants to purchase shares of common stock.  We used the proceeds to make accelerated principal payments of $10.0 million under our Credit Agreement as discussed below.

34


 

 

·

Made quarterly principal payments under our Credit Agreement totaling $2.4 million; 

 

·

Made capital expenditures of $1.8 million.

We continue to experience liquidity constraints as we have several competing demands on our available cash and cash that may be generated from operations.  (1) We continue to have significant past-due vendor payables, which currently exceed $12.0 million.  These past-due payables are largely a result of significant past-due vendor payables acquired in 2012 when purchasing Image.  As we work to catch up on the acquired past-due payables, we have fallen behind on other payables.  We continue to work with our vendors to make payment arrangements that are agreeable with them and that give us flexibility in terms of when payments will be made.  (2) We are forecasting that we may need to make an accelerated principal payment, which may be significant, on our senior debt during the fourth quarter of 2016 in order to meet our bank covenants.  This is because our bank covenants become more restrictive during the fourth quarter of 2016.  For example, our senior debt-to-Adjusted EBITDA ratio goes from 4:03 : 1:00 currently to 2:67 : 1:00.  For us to meet these more restrictive bank covenants, we will need to improve our Adjusted EBITDA and/or pay down our senior debt balance.  (3) We must maintain a certain level of content spend necessary to acquire new content that allows us to generate the revenues and margins necessary to meet our obligations.

To help address our liquidity risk, on May 20, 2015, we completed a $31.0 million capital restructuring transaction that addressed two fundamental areas: (a) deleveraging the balance sheet and (b) providing new working capital.  As part of the capital restructure, we amended our credit agreement and other notes payable by (i) reducing our minimum cash requirement by $2.5 million, thus making this cash available for operational needs, (ii) modifying certain short-term financial covenants to maintain compliance and (iii) amending our unsecured subordinated seller notes to convert 50% or $8.5 million of the outstanding principal and accrued interest into preferred stock and warrants and reduce the applicable interest rate from 12.0% to 1.5% on the remaining balance through 2016.  The capital restructure improved our liquidity by selling shares of preferred stock and warrants for a total of $31.0 million ($22.5 million in cash and $8.5 million in converted subordinated notes).  The proceeds received were used to make an accelerated principal payment of $10.0 million under our credit agreement and pay fees and expenses incurred of approximately $1.9 million.  The remaining $10.6 million was available for content investment and working capital needs.  By reducing our debt balances and the applicable interest rate on the unsecured subordinated seller notes for two years, our future, annual cash interest expense has been reduced by approximately $2.0 million.  

We have taken actions to improve our operating results and Adjusted EBITDA in 2016 by exiting certain non-core operations that have been generating losses.  During December 2015, we approved and started implementing a plan to close our Acacia catalog operations, which incurred an operating loss of $4.0 million in 2015.  We are also exploring various financing alternatives, which includes raising additional capital and/or refinancing our existing senior debt.  There can be no assurances that we will be able to secure additional capital or be able to refinance our senior debt.  While our ability to meet our commitments is not dependent upon these efforts, if we were to complete one of these transactions, it would help to address our liquidity risk.  We believe that our current financial position combined with our 2016 forecasted operational results and management efforts will be sufficient to meet our commitments.  However, there can be no assurances that we will be successful in achieving our 2016 forecasted operational results, generating sufficient cash flows from operations necessary to meet our future covenant requirements, or agreeing with vendors on revised payment terms.

If we are able to raise additional funds through the issuance of securities convertible into or exercisable for common stock, the percentage ownership of our stockholders may be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing common stockholders.  Market and industry factors may harm the market price of our common stock and may adversely impact our ability to raise additional funds. Similarly, if our common stock is delisted from the NASDAQ Capital Market, it may limit our ability to raise additional funds.

Capital Resources

Cash

As of December 31, 2015, we had cash of $4.5 million, as compared to $6.7 million as of December 31, 2014.  

Senior Term Notes

On September 11, 2014, we entered into a $70.0 million Credit and Guaranty Agreement (the Credit Agreement) with a syndicate of lenders led by McLarty Capital Partners, as administrative agent.  On April 15, 2015, we entered into an agreement with the lenders to amend the Credit Agreement whereby (i) the interest rate was increased to LIBOR plus 10.64%, (ii) certain financial statement and other reporting and lending communication requirements were modified, (iii) certain financial covenants were made less restrictive for the quarters ended March 31, 2015 and June 30, 3015, (iv) the Minimum Cash Balance (as defined in the Credit Agreement) that we are required to maintain was lowered to $1.0 million, and (v) the lenders consented to the issuance of preferred

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stock and warrants (see Preferred Stock below).  The Credit Agreement consists of a term loan totaling $70.0 million with a maturity of five years, at an interest rate equal to LIBOR plus 10.64%.  LIBOR has a floor of 0.25%.  Principal payment obligations as a percentage of the amount initially borrowed are 3.5% per annum paid quarterly for the first two years, 5.0% for the third year and 7.5% for the remaining term with any unpaid principal balance due at maturity.  The obligations under the Credit Agreement are secured by a lien on substantially all of our consolidated assets pursuant to the Pledge and Security Agreement, dated as of September 11, 2014.

Under the Credit Agreement, interest and principal is payable quarterly with principal payments beginning on December 31, 2014.  Beginning in 2016, we are obligated to make certain accelerated principal payments annually which are contingent upon: (1) the occurrence of consolidated excess cash flows, as defined in the Credit Agreement and (2) only to the extent at which such excess cash flows are above our minimum cash threshold of $12.0 million.  We are permitted to make additional voluntary principal payments under the Credit Agreement, but prepayments are subject to an applicable prepayment premium of:  (a) 5% if prepaid the first year, (b) 3% if prepaid during the second year and (c) 1.5% if prepaid during the third year.  The first $5.0 million of voluntary prepayment is not subject to any prepayment premium.

The Credit Agreement contains certain financial and non-financial covenants beginning on December 31, 2014.  Financial covenants are assessed quarterly and are based on Adjusted EBITDA, as defined in the Credit Agreement.  Financial covenants vary each quarter and generally become more restrictive over time.  

Financial covenants include the following:

 

 

 

December 31,

2014

 

December 31,

2015

 

2016

 

Thereafter

 

 

 

 

(as amended)

 

(as amended)

 

(as amended)

Leverage Ratios:

 

 

 

 

 

 

 

 

Senior debt-to-Adjusted EBITDA

 

4.64 : 1.00

 

4.03 : 1.00

 

Ranges from

3.83 : 1:00 to

2:67 : 1.00

 

2.67 : 1.00

Total debt-to-Adjusted EBITDA

 

5.71 : 1.00

 

5.06 : 1.00

 

Ranges from