NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1.
|
description of business
|
Description of Business
RLJ Entertainment, Inc. (
RLJE
or the
Company
) is a premium digital channel company serving distinct audiences through its proprietary subscription-based digital channels (or
Digital Channels
), Acorn TV and UMC or Urban Movie Channel, and 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
), which is referred to herein as the “
Business Combination
.” Acorn Media includes its U.K. subsidiaries RLJ Entertainment Ltd (or
RLJE Ltd.
), Acorn Media Enterprises Limited (or
AME
), and RLJE International Ltd (collectively,
RLJE UK
), as well as RLJ Entertainment Australia Pty Ltd (or
RLJE Australia
). 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 an additional location in Woodland Hills, California. We also have international offices in London, England and Sydney, Australia.
We acquire content rights in various categories including, British mysteries and dramas, urban programming and full-length independent motion pictures. We acquire this content in two ways:
|
•
|
through long-term exclusive licensing agreements where we secure multiple rights to third-party programs and;
|
|
•
|
through development, production and ownership of original drama television programming through our wholly-owned subsidiary, AME, and our 64%-owned equity method investee, ACL.
|
We market our products through a multi-channel strategy encompassing (1) direct relations with consumers via proprietary subscription-based video on demand (or
SVOD
) digital channels (our
Digital Channels segment
); (2) the licensing of original drama and mystery content managed and developed through our wholly-owned subsidiary, AME, and our majority-owned subsidiary, ACL, (our
Intellectual Property, or
IP, Licensing segment
); and (3) exploitation through partners covering broadcast/cable, digital, mobile, ecommerce and brick and mortar outlets (our
Wholesale Distribution segment
).
Our Digital Channels segment includes the sale of video content directly to consumers through our digital channels, such as Acorn TV and UMC or Urban Movie Channel.
On June 24, 2016, we entered into a licensing agreement with Universal Screen Arts (or
USA
) whereby USA took over our Acorn U.S. catalog/ecommerce business becoming the official, exclusive, direct-to-consumer seller of Acorn product in the U.S. During the year, we also ceased electronic email distribution of our Acacia catalogs. As a result of these actions, we have classified the U.S. catalog/ecommerce business as discontinued operations.
The IP Licensing segment includes intellectual property rights that we own or create and then sublicense for exploitation worldwide. Our Wholesale Distribution segment consists of the acquisition, content enhancement and worldwide exploitation of exclusive content in various formats, including broadcast (which includes cable and satellite), DVD, Blu-ray, digital, video-on-demand (or
VOD
), SVOD, downloading and sublicensing. The Wholesale Distribution segment exploits content through third-party vendors, which we also refer to as wholesale partners.
Our wholesale partners are broadcasters, digital outlets and major retailers in the United States of America (or
U.S.
), Canada, U.K. and Australia, including, among others, Amazon, Barnes & Noble, Costco, DirecTV, Hulu, iTunes, Netflix, PBS, Showtime, Starz, Target and Walmart.
RLJE’s management evaluates business performance based on these three distinctive reporting segments: (1) Digital Channels, (2) IP Licensing and (3) Wholesale Distribution. Operations and net assets that are not associated with any of these stated segments are reported as “Corporate” when disclosing and discussing segment information.
Basis of Presentation
The accompanying audited consolidated financial statements and related footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America (or
U.S. GAAP
) and with the Securities and Exchange
51
Commission’s (or
SEC
) instructions for the Form 10-K. The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts within our consolidated financial statements. Although we believe that these estimate
s to be reasonably accurate, actual amounts may differ.
Principles of Consolidation
The operations of ACL are subject to oversight by ACL’s Board of Directors. The investment in ACL is accounted for using the equity method of accounting given the voting control of the Board of Directors by the minority shareholder. We have included our share of ACL’s operating results as a separate line item in our consolidated financial statements.
Our consolidated financial statements include the accounts of all majority-owned subsidiary companies, except for ACL. We carry our investment in ACL as a separate asset on our consolidated balance sheet at cost adjusted for our share of the equity in undistributed earnings. Except for dividends and changes in ownership interest, we report changes in equity in undistributed earnings of ACL as “Equity earnings of affiliate” in our consolidated statements of operations. All intercompany transactions and balances have been eliminated.
Reclassifications and Adoption of Accounting Pronouncement
During 2016, we reclassified our U.S. catalog/ecommerce business assets, liabilities and operating results and presented them separately as discontinued operations in our consolidated balance sheets and statements of operations. We made this reclassification retroactively for all periods presented. As necessary, our footnote disclosures have been updated to reflect this reclassification. Prior to being classified as a discontinued operation, our U.S. catalog/ecommerce business was included in our Direct-to-Consumer segment, which we are now referring to as Digital Channels.
For segment reporting purposes, we also reclassified our remaining U.K. catalog/e-commerce business from Digital Channels to Wholesale Distribution. This reclassification reflects adjustments that we made internally in terms of how we are viewing and managing our operations after the disposal of our U.S. ecommerce/catalog business. This change has been reflected through retroactive reclassification of prior period information.
Certain amounts reported previously in our consolidated financial statements have been reclassified or adjusted to be comparable with the classifications used for our 2016 consolidated financial statements. We are now reporting technology infrastructure costs associated with delivering our digital channels within cost of sales as manufacturing and fulfillment. For the year ended December 31, 2015, we reclassified $1.7 million of these costs from selling expenses to cost of sales in our consolidated statement of operations.
On January 1, 2016, we retroactively adopted the guidance of Accounting Standards Update (or
ASU
) No. 2015-03,
Interest – Imputation of Interest
(the
Update
) issued by the Financial Accounting Standards Board (or
FASB
). We are now presenting issuance costs related to a recognized debt liability in our balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. As of December 31, 2015, we reclassified $0.8 million of unamortized debt issuance costs from prepaid expenses and other to debt, net of discounts and debt issuance costs on our consolidated balance sheet. The adoption of ASU No. 2015-3 did not affect our results of operations.
In October 2016 and concurrent with our private placement with AMC Networks Inc. (see Note 10,
Debt
), we amended our redeemable convertible preferred stock, including its embedded conversion feature, and the common stock warrants that were held by our preferred stockholders such that the amended securities are now being accounted for as part of shareholders’ equity (deficit). Prior to this amendment, the securities were being accounted for as either liabilities or as temporary equity, which is after liabilities but before shareholders’ equity (deficit). This reclassification resulted in us increasing our shareholders’ equity by $42.8 million in 2016.
Reverse Stock Split
W
e filed an amendment to our Amended and Restated Articles of Incorporation to effect a one-for-three reverse common stock split, which was effective June 24, 2016. We implemented the reverse stock split to maintain compliance with the listing requirements of the NASDAQ Capital Market. All share numbers and per-share amounts, including net loss per common share, presented in our consolidated financial statements and notes reflect the one-for-three reverse stock split applied on a retroactive basis. In addition, we retroactively reclassified total par value of $9,000 from common stock to additional paid-in capital.
52
Discontinued Operations
During December 2015, we committed to a plan to stop circulating our Acacia catalogs and to liquidate the catalog’s inventory. The last Acacia print catalogs were circulated in January 2016 and electronic email distribution continued through May 2016. On June 24, 2016, we entered into a licensing agreement to outsource our U.S. Acorn catalog and ecommerce business to USA. USA began selling Acorn video content during the third quarter of 2016.
Under the licensing agreement, USA became the official, exclusive, direct-to-consumer seller of U.S. Acorn product through catalogs and ecommerce. As such, USA received the rights to the Acorn catalog and related website for an 18-month period, subject to certain automatic renewals. To facilitate the transfer of the catalog to USA, we granted USA access to the catalog’s customer list and the Acorn brand. Going forward, we will also endeavor to provide USA with an exclusivity period for new Acorn releases. USA is responsible for all costs associated with their efforts. On an annual basis, USA will purchase from us a minimum of $1.2 million of inventory (Acorn video content) at pricing that is consistent with wholesale pricing. We also agreed to a one-time transfer of certain existing inventory to USA at cost. Further, we have been given meaningful consultation rights regarding sales prices of Acorn content listed in the catalog. Sales to USA began during the third quarter of 2016.
In addition to purchasing inventory from us, USA makes royalty payments to us for the various rights we have licensed. The royalty payments are not expected to be material. Further, all customer and marketing data obtained during the license period shall be jointly owned by both companies. During 2016, our Wholesale Distribution segment recognized revenues of $0.8 million from its sale of inventory to USA.
We consider the outsourcing of the U.S. Acorn catalog to be a major strategic shift in our business. Future revenues and gross margins from our outsourced operations will decrease. However, operating profits will increase as we have historically incurred significant selling expenses that will be eliminated. Upon circulating the last Acacia catalog and entering into the licensing agreement with USA during the quarter ended June 30, 2016, we classified the U.S. catalog/ecommerce business (Acacia and U.S. Acorn catalogs) as discontinued operations.
Major classes of line items constituting loss from discontinued operations, net of income taxes are:
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
7,778
|
|
|
$
|
25,947
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
Royalty expense
|
|
|
(205
|
)
|
|
|
(594
|
)
|
Manufacturing and fulfillment
|
|
|
(6,249
|
)
|
|
|
(15,781
|
)
|
Selling expenses
|
|
|
(2,280
|
)
|
|
|
(12,513
|
)
|
General and administrative expenses
|
|
|
(1,066
|
)
|
|
|
(1,501
|
)
|
Depreciation and amortization
|
|
|
(1,068
|
)
|
|
|
(1,819
|
)
|
Loss on disposal of fixed assets
|
|
|
(187
|
)
|
|
|
—
|
|
Loss before provision for income taxes
|
|
|
(3,277
|
)
|
|
|
(6,261
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
Loss from discontinued operations, net of income taxes
|
|
$
|
(3,277
|
)
|
|
$
|
(6,261
|
)
|
There are no income taxes allocable to the discontinued operations as the discontinued operations reside in the U.S. for which there is no tax provision as a result of the overall U.S. operating loss for tax purposes.
53
Carrying amounts of major classes of assets and li
abilities included as part of discontinued operations are:
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Accounts receivable, net
|
|
$
|
—
|
|
|
$
|
1,111
|
|
Inventories, net
|
|
|
—
|
|
|
|
2,417
|
|
Prepaid expenses and other assets
|
|
|
—
|
|
|
|
1,136
|
|
Property, equipment and improvements, net
|
|
|
—
|
|
|
|
670
|
|
Other intangible assets, net
|
|
|
—
|
|
|
|
1,536
|
|
Total assets of discontinued operations
|
|
$
|
—
|
|
|
$
|
6,870
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
—
|
|
|
$
|
6,863
|
|
Deferred revenue
|
|
|
—
|
|
|
|
697
|
|
Total liabilities of discontinued operations
|
|
$
|
—
|
|
|
$
|
7,560
|
|
During 2016, we assessed the remaining useful lives of property, equipment and improvements and other intangible assets held by the discontinued operations. As a result, we recorded accelerated depreciation and amortization of $0.3 million during 2016. Because USA is licensing our customer list, for which we retained a shared ownership, we made no changes as to how we are amortizing our other intangible assets.
During 2016, we provided lay-off notices to our U.S. catalog/ecommerce business employees and recorded severance charges of $0.3 million.
In September 2016, we vacated our office space in Minnesota. Our lease in Minnesota requires us to make average monthly payments of $12,500 through June 2022. We subleased our office space effective October 1, 2016. As a result we incurred a loss on this sublease of $0.2 million primarily pertaining to leasehold improvements and other fixed assets that we provided to the subtenant for no additional consideration.
Operating and investing cash flows of the discontinued operations are as follows:
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(3,277
|
)
|
|
$
|
(6,261
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities of discontinued operations:
|
|
|
|
|
|
|
|
|
Royalty expense
|
|
|
205
|
|
|
|
594
|
|
Depreciation and amortization
|
|
|
1,068
|
|
|
|
1,819
|
|
Loss on disposal of assets
|
|
|
187
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
35
|
|
|
|
8
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
937
|
|
|
|
(369
|
)
|
Inventories, net
|
|
|
2,417
|
|
|
|
175
|
|
Investments in content, net
|
|
|
(205
|
)
|
|
|
(594
|
)
|
Prepaid expenses and other assets
|
|
|
1,011
|
|
|
|
(409
|
)
|
Accounts payable and accrued liabilities
|
|
|
(5,528
|
)
|
|
|
714
|
|
Deferred revenue
|
|
|
(697
|
)
|
|
|
342
|
|
Net cash used in operating activities of
discontinued operations
|
|
$
|
(3,847
|
)
|
|
$
|
(3,981
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(5
|
)
|
|
$
|
(352
|
)
|
Net cash used in investing activities of
discontinued operations
|
|
$
|
(5
|
)
|
|
$
|
(352
|
)
|
54
Liquidity
For the years ended December 31, 2016 and 2015, we recognized a net loss of $21.9 million and $55.0 million, respectively. We used cash in operating activities of $1.5 million and $9.2 million during 2016 and 2015, respectively. At December 31, 2016, our cash balance was $7.8 million. At December 31, 2016, we had $42.1 million of term debt outstanding (see Note 10,
Debt
). We continue to experience liquidity constraints as we have several competing demands on our available cash and cash that may be generated from operations, including past-due vendor payables which are currently about $12.1 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. Additionally, we must maintain a certain level of expenditures to acquire new content that allows us to generate revenues and margins sufficient to meet our obligations.
During 2016, we realized significant growth in our digital channels. Our channel revenues increased 116% to $16.3 million during 2016 (see Note 3,
Segment Information
). By way of comparison, our channel revenues increased 83% during 2015. After cost of sales and operating expenses, our Digital Channels segment contributed $6.3 million of income from continuing operations for 2016 compared to a loss of $1.5 million last year. Our expectation is that our digital channels will continue to grow, however there is no assurance that this will occur.
On October 14, 2016, we refinanced our senior debt (see Note 10,
Debt
). In January 2017, we amended our senior debt and borrowed an additional $8.0 million. We received net proceeds of $7.4 million, which we used to repay our subordinated notes payable. In addition to providing us liquidity, the new senior loan facility helps us address our liquidity constraints going forward in three ways: (1) it bears a substantially lower cash-interest rate that is approximately 800 basis points lower than before, (2) there are no required principal payments until 2019, and (3) the financial covenants have been reset to less restrictive levels that provide us the necessary flexibility to invest in our operations.
In 2016, we also took actions to improve our operating results and Adjusted EBITDA 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. The last Acacia print catalogs were circulated in January 2016 and electronic email distribution continued through May 2016. Further, on June 24, 2016, we entered into a licensing agreement to outsource the U.S. Acorn catalog/ecommerce business to USA (see our
Discontinued Operations
disclosure above). During 2016, our U.S. catalog/ecommerce business was fully transitioned to USA and we do not anticipate future losses from this line of business.
We believe that our current cash at December 31, 2016, combined with our additional borrowing in January 2017 will be sufficient to meet our operating liquidity, capital expenditure and debt repayment requirements for at least the next one year from the date of issuance of these financial statements. However, there can be no assurances that we will be successful in realizing improved results from operations including improved Adjusted EBITDA, generating sufficient cash flows from operations or agreeing with vendors on revised payment terms.
NOTE 2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. The significant areas requiring the use of management estimates are related to provisions for lower-of-cost or market inventory write-downs, accounts receivable allowances and provision for doubtful accounts and sales returns reserves, valuation of deferred taxes, valuation of warrants, goodwill impairments, and ultimate projected revenues of our film library, which impact amortization of investments in content and related impairment assessments. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results may ultimately differ materially from those estimates.
Revenues and Receivables
Revenue Recognition
Revenues from our digital channels are recognized on a straight-line basis over the subscription period once the subscription has been activated.
Revenues from home video exploitation, which includes IP Licensing and Wholesale Distribution revenues, are recognized upon meeting the recognition requirements of the Financial Accounting Standards Board Accounting Standards Codification (or
ASC
)
926
,
Entertainment—Films
and ASC 605,
Revenue Recognition
. We generate our IP Licensing and Wholesale Distribution revenues
55
primarily from the exploitation of acquired or produced content rights through various distribution channels. The content
is monetized in DVD format to wholesalers, licensed to broadcasters including cable companies and digital platforms like Amazon and Netflix, and exploited through other windows such as VOD. Revenue is presented net of sales returns, rebates, unit price a
djustments, sales return reserves, sales discounts and market development fund reserves. Revenues from our U.K. catalog sales are recognized, net of an allowance for estimated returns, once payment has been received from the customer and the items ordered
have been shipped.
Revenues from home video exploitation are recognized net of an allowance for estimated returns, as well as related costs, in the period in which the product is available for sale by our wholesale partners (at the point that title and risk of loss transfer to the customer, which is generally upon receipt by the customer and in the case of new releases, after “street date” restrictions lapse). Rental revenues under revenue sharing arrangements are recognized when we are entitled to receipts and such receipts are determinable. Revenues from domestic and international broadcast licensing and home video sublicensing, as well as associated costs, are recognized when the programming is available to the licensee and all other recognition requirements are met such as the broadcaster is free to air the programming. Fees received in advance of availability, usually in the case of advances received from international home video sub-licensees and for broadcast programming, are deferred until earned and all revenue recognition requirements have been satisfied. Provisions for sales returns and uncollectible accounts receivable are provided at the time of sale.
Allowances for Sales Returns
For each reporting period, we evaluate product sales and accounts receivable to estimate their effect on revenues due to product returns, sales allowances and other credits given, and delinquent accounts. Our estimates of product sales that will be returned and the amount of receivables that will ultimately be collected require the exercise of judgment and affect reported revenues and net earnings. In determining the estimate of product sales that will be returned, we analyze historical returns (quantity of returns and time to receive returned product), historical pricing and other credit data, current economic trends, and changes in customer demand and acceptance of our products, including reorder activity. Based on this information, we reserve a percentage of each dollar of product sales where the customer has the right to return such product and receive a credit. Actual returns could differ from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings. Estimates of future sales returns and other credits are subject to substantial uncertainty. Factors that could negatively impact actual returns include retailer financial difficulties, the perception of comparatively poor retail performance in one or several retailer locations, limited retail shelf space at various times of the year, inadequate advertising or promotions, retail prices being too high for the perceived quality of the content or other comparable content, the near-term release of similar titles, and poor responses to package designs. Underestimation of product sales returns and other credits would result in an overstatement of current revenues and lower revenues in future periods. Conversely, overestimation of product sales returns would result in an understatement of current revenues and higher revenues in future periods.
Allowances Received From Vendors
In accordance with ASC 605-50,
Revenue Recognition—Customer Payments and Incentives,
we classify consideration received as a reduction in cost of sales in the accompanying statements of operations unless the consideration represents reimbursement of a specific, identifiable cost incurred by us in selling the vendor’s product.
Shipping Revenues and Expenses
In accordance with ASC 605-45,
Revenue Recognition—Principal Agent Considerations
, we classify amounts billed to customers for shipping fees as revenues, and classify costs related to shipping as cost of sales in the accompanying consolidated statements of operations.
Market Development Funds
In accordance with ASC 605-50,
Revenue Recognition—Customer Payment and Incentives
, market development funds, including funds for specific product positioning, taken as a deduction from payment for purchases by customers are classified as a reduction to revenues.
Investments in Content
Investments in content include the unamortized costs of completed and uncompleted films and television programs that were acquired or produced. Within the carrying balance of investments in content are development and production costs for films and television programs which are acquired or produced.
56
Acquired Distribution Rights and Produced Content
Royalty and Distribution Fee Advances – When acquiring titles, we often make royalty and distribution fee advances that represent fixed minimum payments made to program suppliers for exclusive content distribution rights. A program supplier’s share of exclusive program distribution revenues is retained by us until the share equals the advance(s) paid to the program supplier plus recoupable costs. Thereafter, any excess is paid to the program supplier. In the event of an excess, we also record, as content amortization and royalties – a component of cost of sales, an amount equal to the program supplier’s share of the net distribution revenues.
Original Production Costs – For films and television programs produced by RLJE, original production costs include all direct production and financing costs, as well as production overhead.
Unamortized content investments for our digital channels are charged to content amortization and royalties using the straight-line method over the license term for which the content is available to the digital channels.
For IP Licensing and Wholesale Distribution, unamortized content investments are charged to content amortization and royalties as revenues are earned in the same ratio that current period revenue for a title or group of titles bears to the estimated remaining unrecognized ultimate revenue for that title.
Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release, or for episodic television series a period not to exceed 10 years from the date of delivery of the first episode or, if still in production, five years from the date of delivery of the most recent episode, if later.
Investments in content are stated at the lower of amortized cost or estimated fair value. The valuation of investments in content is reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value of a film or television program is less than its unamortized cost. Additional amortization is recorded in the amount by which the unamortized costs exceed the estimated fair value of the film or television program. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may be required as a consequence of changes in management’s future revenue estimates.
Content programs in progress include the accumulated costs of productions, which have not yet been completed, and advances on content not yet received from program suppliers. We begin to amortize these investments once the content has been released.
Production Development Costs
The costs to produce licensed content for domestic and international exploitation include the cost of converting film prints or tapes into the optical disc format. Depending on the platform for which the content is being exploited, costs may include menu design, authoring, compression, subtitling, closed captioning, service charges related to disc manufacturing, ancillary material production, product packaging design and related services. These costs are capitalized as incurred. A percentage of the capitalized production costs are amortized to expense based upon: (i) a projected revenue stream resulting from distribution of new and previously released content related to such production costs; and (ii) management’s estimate of the ultimate net realizable value of the production costs. Estimates of future revenues are reviewed periodically and amortization of production costs is adjusted accordingly. If estimated future revenues are not sufficient to recover the unamortized balance of production costs, such costs are reduced to their estimated fair value.
Inventories
For each reporting period, we review the value of inventories on hand to estimate the recoverability through future sales. Values in excess of anticipated future sales are recorded as obsolescence reserve. Inventories consist primarily of packaged goods for sale, which are stated at average cost, as well as componentry.
Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of acquisition costs over the tangible and identifiable intangible assets acquired and liabilities assumed in a business acquisition. Goodwill is recorded at our reporting units, which are consolidated into our reporting segments. Goodwill is not amortized but is reviewed for impairment annually on October 1
st
of each year or between the annual tests if an event occurs or circumstances change that indicates it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. The impairment test follows a two-step approach. The first step determines if the goodwill is potentially impaired, and the
57
second step measures the amount of the impairment loss, if necessary. Under the first step, goodwill is considered potentially impaired if there are
subjective characteristics that suggest that goodwill is impaired or quantitatively when the fair value of the reporting unit is less than the reporting unit’s carry amount, including goodwill. Under the second step, the impairment loss is then measured a
s the excess of recorded goodwill over the fair value of the goodwill, as calculated. Determining the fair value requires various assumptions and estimates, which include consideration of the future, projected operating results and cash flows. Such projec
tions could be different than actual results. Should actual results be significantly less than estimates, the value of our goodwill could be impaired in future periods.
During 2015, we recognized goodwill impairments of $30.3 million (see Note 9,
Goodwill and Other Intangible Assets
). We did not recognize goodwill impairments during 2016.
Other Intangible Assets
Other intangible assets are reported at their estimated fair value, when acquired, less accumulated amortization. The majority of our intangible assets were recognized as a result of the Business Combination. As such, the fair values of our intangibles were recorded in 2012 when applying purchase accounting. Additions since the 2012 Business Combination are limited to software expenditures related to our websites and various digital platforms such as Roku and AppleTV. Similar to how we account for internal-use software development, costs incurred to develop and implement our websites and digital platforms are capitalized in accordance with ASC 350-50,
Website Development Costs
. Website operating costs are expensed as incurred. Costs incurred for upgrades and enhancements that provide additional functionality are capitalized.
Amortization expense of our other intangible assets is generally computed by applying the straight-line method, or based on estimated forecasted future revenues as stated below, over the estimated useful lives of trade names (11 to 15 years), websites and digital platforms (three years), supplier contracts (seven years), customer relationships (five years), options on future content (seven years) and leases (two years). The recorded value of our customer relationships is amortized on an accelerated basis over five years, with approximately 60% being amortized over the first two years (through 2014), 20% during the third year and the balance ratably over the remaining useful life. The recorded value of our options on future content is amortized based on forecasted future revenues, whereby approximately 50% is being amortized over the first two years (through 2014), 25% during the third year and the balance in decreasing amounts over the remaining four years.
Additional amortization expense is provided on an accelerated basis when the useful life of an intangible asset is determined to be less than originally expected. Other intangible assets are reviewed for impairment when an event or circumstance indicates the fair value is lower than the current carrying value.
As described in Note 9,
Goodwill and Other Intangible Assets
, during 2015, we recorded accelerated amortization expense totaling $1.3 million related to our brand name assets. During 2016 and 2015, we did not recognize any impairment on our other intangible assets.
Warrant and Other Derivative Liabilities
We have warrants outstanding to purchase 30.1 million shares of our common stock (see Note 12,
Stock Warrants
). Warrants issued in 2012 to acquire 7.0 million shares of common stock contain a provision whereby the exercise price will be reduced if RLJE is reorganized as a private company. Because of this provision, we account for these warrants as a derivative liability in accordance with ASC 815-40,
Contracts in Entity’s Own Equity
. Derivative liability warrants are carried on our consolidated balance sheet at their fair value with changes in fair value being included in the consolidated statement of operations as a separate component of other income (expense).
In May 2015, we issued additional warrants to acquire 3.1 million shares of our common stock. We were accounting for these warrants as a derivative liability because, among other provisions, the warrants contained a provision that allows the warrant holders to sell their warrants back to us, at their discretion, at a cash purchase price equal to the warrants’ then fair value, upon the consummation of certain fundamental transactions, such as a business combination or other change-in-control transaction. In October 2016, the 2015 warrants were amended and they are now being accounted for within shareholders’ equity (deficit).
In October 2016, we issued three separate warrants to our senior lender to acquire a total of 20.0 million shares of our common stock. For one of these warrants issued to acquire 5.0 million shares of common stock, we are accounting for the warrant as a derivative liability because the warrant contains a provision that may increase the number of shares acquirable for no additional consideration. This increase is contingent upon the number of shares of common stock outstanding at the time of exercise.
58
Our preferred stock is convertible into shares of common stock at an exchange rate equal to 333.3 shares of common stock for each share of preferred stock, subject to adjustment for any unpaid dividends. The conversion rate is subject to certain anti
-dilution protections. Those protections did include an adjustment for offerings consummated at a per-share price of less than $3.00 per common share. Because of this potential adjustment to the conversion rate, we had bifurcated the conversion feature fr
om its host instrument (a preferred share) and we were accounting for the conversion feature as a derivative liability. In October 2016, we amended the conversion feature to avoid liability accounting and as such we now account for the conversion feature a
s part of the host instrument.
Income Taxes
We account for income taxes pursuant to the provisions of ASC 740,
Income Taxes
, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and the future tax benefits derived from operating loss and tax credit carryforwards. We provide a valuation allowance on our deferred tax assets when it is more likely than not that such deferred tax assets will not be realized. We have a valuation allowance against 100% of our net deferred tax assets.
ASC 740 requires that we recognize in the consolidated financial statements the effect of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. The first step is to determine whether or not a tax benefit should be recognized. A tax benefit will be recognized if the weight of available evidence indicates that the tax position is more likely than not to be sustained upon examination by the relevant tax authorities. The recognition and measurement of benefits related to our tax positions requires significant judgment as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known. For tax liabilities, we recognize accrued interest related to uncertain tax positions as a component of income tax expense, and penalties, if incurred, are recognized as a component of operating expense.
Our foreign subsidiaries are subject to income taxes in their respective countries, as well as U.S. Federal and state income taxes. The income tax payments they make outside the U.S. may give rise to foreign tax credits that we may use to offset taxable income in the United States.
Foreign Currency Translation
The consolidated financial statements are presented in our reporting currency, which is the U.S. dollar. For the foreign subsidiaries whose functional currency is other than the U.S. dollar (the British Pound Sterling or
GBP
for RLJE UK and AME; and Australian dollar for RLJE Australia), balance sheet accounts, other than equity accounts, are translated into U.S. dollars at exchange rates in effect at the end of the period and income statement accounts are translated at average monthly exchange rates. Equity accounts are translated at historical rates. Translation gains and losses are included as a separate component of equity. Gains and losses from foreign currency denominated transactions are included in our consolidated statement of operations as a component of other income (expense).
Fair Value of Financial Instruments
The carrying amount of our financial instruments, which principally include cash, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relative short maturity of such instruments. The carrying amount of our debt under our senior credit agreement approximates its fair value as it bears interest at market rates of interest after taking into consideration the debt discounts. The carrying amount of our subordinated debt approximates its fair value given its short-term maturity date, which takes into consideration that the debt was repaid in January 2017.
59
ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used
to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair-value hierarchy based on three levels of inputs, of which the first two are considered observable and
the last unobservable, that may be used to measure fair value as follows:
Level 1
—Quoted prices in active markets for identical assets or liabilities.
Level 2
—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Our recurring fair value measurements of stock warrants and other derivative liabilities and our non-recurring fair value measurements of investments in content are disclosed in Note 15,
Fair Value Measurements
. Our non-recurring fair value measurement of goodwill is disclosed in Note 9,
Goodwill and Other Intangible Assets
.
Concentrations of Credit Risk
Financial instruments which potentially subject RLJE to concentrations of credit risk consist primarily of deposit accounts and trade accounts receivable. RLJE maintains bank accounts at financial institutions, which at times may exceed amounts insured by the Federal Deposit Insurance Corporation (or
FDIC
) and Securities Investor Protection Corporation (or
SIPC
). We place our cash with several financial institutions which are reputable and therefore bear minimal credit risk. RLJE has never experienced any losses related to these balances.
With respect to trade receivables, we perform ongoing credit evaluations of our customers’ financial conditions and limit the amount of credit extended when deemed necessary but generally require no collateral.
Major Customers and Distribution Facilitators
We have a high concentration of net revenues from relatively few customers, the loss of which may adversely affect our liquidity, business, results of operations, and financial condition. During 2016, sales reported within our Wholesale Distribution segment to Amazon accounted for 15.3% of our net revenues. Our top five customers accounted for 47.8% of net revenues during the same period. During 2015, sales to Amazon and Walmart accounted for 21.7% and 12.6%, respectively, of our net revenues. Our top five customers accounted for approximately 54.8% of our net revenues for the same period.
We may be unable to maintain favorable relationships with our retailers and distribution facilitators such as, Sony Pictures Home Entertainment (or
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 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.
Our high concentration of sales to 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. As of December 31, 2016, Netflix, SPHE and Amazon accounted for approximately 29.3%, 25.4% and 16.7%, respectively, of our gross accounts receivable. At December 31, 2015, SPHE and Netflix accounted for approximately 38.4% and 22.1%, respectively, or our gross accounts receivable.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost less accumulated depreciation and amortization. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are expensed as incurred. Internal-use software development costs are capitalized if the costs were incurred while in the application development stage, or if the costs were for upgrades and enhancements that provide additional functionality. Training and data-conversion costs are expensed as incurred. We cease capitalizing software costs and start depreciating the software once the project is substantially complete and ready for its intended use.
60
Depreciation and amortization are computed by applying the straight-line method over the estimated useful lives o
f the furniture, fixtures and equipment (3 to 5 years), and software (3 to 5 years). Leasehold improvements are amortized over the shorter of the useful life of the improvement or the life of the related leases (7 years).
Impairment of Long-Lived Assets
We review long-lived and specific, definite-lived, identifiable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An impairment loss of the excess of the carrying value over fair value would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. We have no intangible assets with indefinite useful lives.
Leases
We lease all of the office space utilized for our operations. All of our leases are operating leases in nature. A majority of our leases have fixed incremental increases over the lease terms, which are recognized on a straight-line basis over the term of the lease.
Equity Method Investments
We use the equity method of accounting for investments in companies in which we do not have voting control but where we do have the ability to exert significant influence over operating decisions of the companies. Our equity method investments are periodically reviewed to determine whether there has been a loss in value that is other than a temporary decline.
Debt Discounts
The difference between the principal amount of our debt and the amount recorded as the liability represents a debt discount. The carrying amount of the liability is accreted up to the principal amount through the amortization of the discount, using the effective interest method, to interest expense over the expected term of the debt.
Advertising Costs
Our advertising expense consists of expenditures related to advertising in trade and consumer publications, product brochures and catalogs, booklets for sales promotion, radio advertising and other promotional costs. In accordance with ASC 720-35,
Other Expenses—Advertising Costs
, and ASC 340-20,
Other Assets and Deferred Costs—Capitalized Advertising Costs
, we expense advertising costs in the period in which the advertisement first takes place. Product brochures and catalogs and various other promotional costs are capitalized and amortized over the expected period of future benefit, but generally not exceeding six months. Advertising and promotion expense are included as a component of selling expenses. For the years ended December 31, 2016 and 2015, advertising expense was $2.8 million and $4.1 million, respectively.
Stock Options and Restricted Stock Awards
We expense our stock-based awards in accordance with ASC 718,
Compensation—Stock Compensation
. ASC 718 establishes standards with respect to the accounting for transactions in which an entity exchanges its equity instruments for goods or services, or incurs liabilities in exchange for goods or services, that are based on the fair value of the entity’s equity instruments, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. ASC 718 requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions) and recognize the cost over the period during which an employee is required to provide service in exchange for the award. Expense recognized is not reduced by estimated forfeitures as forfeitures have been immaterial.
Earnings/Loss per Common Share
Basic earnings/loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed using the combination of dilutive common share equivalents and the weighted-average shares outstanding during the period. For the periods reporting a net loss, diluted loss per share is equivalent to basic loss per share, as inclusion of common share equivalents would be anti-dilutive.
61
Recently Issued Accounting Standards
In May 2014, the FASB Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as a new Topic, (ASC) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. This ASU must be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are considering the alternatives of adoption of this ASU and we are conducting our review of the likely impact to the existing portfolio of customer contracts entered into prior to adoption. After completing our review, we will continue to evaluate the effect of adopting this guidance upon our results of operations, cash flows and financial position. Currently, we do not expect the adoption of this ASU to have a material impact on our financial statements except that there are significant additional reporting requirements under the new standard
.
In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of the pending adoption of this new standard on our financial statements and we have yet to determine the overall impact this ASU is expected to have. The likely impact will be one of presentation only on our consolidated balance sheet. Our leases currently consist of operating leases with varying expiration dates through 2021 and annual rent expense is approximately $1.7 million.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). This ASU is related to the embedded derivative analysis for debt instruments with contingent call or put options. This ASU clarifies that an exercise contingency does not need to be evaluated to determine whether it relates only to interest rates or credit risk. Instead, the contingent put or call option should be evaluated for possible bifurcation as a derivative in accordance with the four-step decision sequence detailed in FASB ASC 815-15, without regard to the nature of the exercise contingency. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this ASU on our financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). This ASU is related to reporting revenue gross versus net, or principal versus agent considerations. This ASU is meant to clarify the guidance in ASU 2014-09, Revenue from Contracts with Customers, as it pertains to principal versus agent considerations. Specifically, the guidance addresses how entities should identify goods and services being provided to a customer, the unit of account for a principal versus agent assessment, how to evaluate whether a good or service is controlled before being transferred to a customer, and how to assess whether an entity controls services performed by another party. This ASU has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We are evaluating the effect and methodology of adopting this new accounting guidance upon our results of operations, cash flows and financial position. We have begun to consider the alternatives of adoption of this ASU, and have started our review of the likely impact to the existing portfolio of customer contracts entered into prior to adoption. We will also continue to evaluate the effect of adopting this guidance upon our results of operations, cash flows and financial position. Currently, we do not expect the adoption of this ASU to have a material impact on our financial statements except that there are significant additional reporting requirements under the new standard.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718). This ASU is related to simplifications of employee share-based payment accounting. This pronouncement eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. The pronouncement also addresses simplifications related to statement of cash flows classification, accounting for forfeitures and minimum statutory tax withholding requirements. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. This ASU will not have a material impact on our financial statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU is meant to clarify the guidance in FASB ASU 2014-09, Revenue from Contracts with Customers. Specifically, the guidance addresses an entity’s identification of its performance obligations in a contract, as well as an
62
entity’s evaluation o
f the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. This ASU has the same effective date as the new revenue standard, which is effective for fiscal years, an
d for interim periods within those fiscal years, beginning after December 15, 2017. We are considering the alternatives of adoption of this ASU and we continue to review the likely impact to the existing portfolio of customer contracts entered into prior t
o adoption. We will continue to evaluate the effect of adopting this guidance upon our results of operations, cash flows and financial position. We do not expect the adoption of this ASU to have a material impact on our financial statements except that th
ere are significant additional reporting requirements under the new standard.
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This ASU rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically, registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: (1) Revenue and Expense Recognition for Freight Services in Process, which is codified in paragraph 605-20-S99-2; (2) Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph 605-45-S99-1; (3) Accounting for Consideration Given by a Vendor to a Customer (including Reseller of the Vendor’s Products), which is codified in paragraph 605-50-S99-1; and (4) Accounting for Gas-Balancing Arrangements (i.e., use of the “entitlements method”), which is codified in paragraph 932-10-S99-5. This ASU becomes effective upon adoption of ASU 2014-09, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We have not yet begun to consider the alternatives of adoption of this ASU or its impact on our financial statements.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This ASU does not change the core principle of the guidance in Topic 606. Instead, the amendments provide clarifying guidance in a few narrow areas and add some practical expedients to the guidance. This ASU has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We are currently evaluating the impact of the pending adoption of this new standard on our financial statements. We are considering the alternatives of adoption of this ASU. Currently, we do not expect the adoption of this ASU to have a material impact on our financial statements except that there are significant additional reporting requirements under the new standard.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We have not adopted this ASU and currently we have determined there to be no impact of this ASU on our financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this ASU on our financial statements and currently we have determined there to be no impact of this ASU on our financial statements and related disclosures.
In January 2017, the FASB issued 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. The amendments in this ASU add language to the SEC Staff Guidance in relation to ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2016-02, Leases (Topic 842), and ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This ASU provides the SEC Staff view that a registrant should consider additional quantitative and qualitative disclosures related to the previously mentioned ASUs in connection with the status and impact of their adoption. We adopted this ASU during the current quarter 2016. Since this update intended to add disclosures related to certain ASUs, the adoption of this standard did not have a material impact on our financial statements.
In January 2017, the FASB issued 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminating the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Instead, under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment change for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. This ASU is effective for fiscal years,
63
and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted
. We are currently evaluating the impact of this ASU on our financial statements and related disclosures.
Note 3.
|
Segment Information
|
In accordance with the requirements of the ASC 280 “
Segment Reporting,
” selected financial information regarding our reportable business segments, Digital Channels, IP Licensing and Wholesale Distribution, is presented below. Our reportable segments are determined based on the distinct nature of their operation. Each segment is a strategic business unit that is managed separately and either exploits our content over a different business model (subscription based vs. transactional) or acquires content differently. Our Digital Channels segment consists of our proprietary digital streaming channels. Our IP Licensing segment includes intellectual property (or
content
) owned or created by us, other than certain fitness related content, that is licensed for exploitation worldwide. The IP Licensing segment also includes our investment in ACL. Our Wholesale Distribution segment consists of the acquisition, enhancement and worldwide exploitation through our wholesale partners of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), VOD, streaming video, downloading and sublicensing. Our Wholesale Distribution segment also includes our U.K. mail-order catalog and ecommerce businesses.
Management currently evaluates segment performance based primarily on revenues and operating income (loss), including earnings from ACL. Operating costs and expenses attributable to our Corporate segment include only those expenses incurred by us at the parent corporate level, which are not allocated to our reporting segments and include costs associated with RLJE’s corporate functions such as finance and accounting, human resources, legal and information technology departments. Interest expense, change in the fair value of stock warrants and other derivatives, other income (expense) and provision for income taxes are evaluated by management on a consolidated basis and are not allocated to our reportable segments.
The following tables summarize the segment contribution for the years ended December 31, 2016 and 2015:
|
|
Year Ended December 31, 2016
|
|
(In thousands)
|
|
Digital Channels
|
|
|
IP Licensing
|
|
|
Wholesale Distribution
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
16,262
|
|
|
$
|
168
|
|
|
$
|
63,808
|
|
|
$
|
—
|
|
|
$
|
80,238
|
|
Operating costs and expenses
|
|
|
(9,297
|
)
|
|
|
(554
|
)
|
|
|
(60,169
|
)
|
|
|
(10,966
|
)
|
|
|
(80,986
|
)
|
Depreciation and amortization
|
|
|
(618
|
)
|
|
|
(134
|
)
|
|
|
(1,714
|
)
|
|
|
(491
|
)
|
|
|
(2,957
|
)
|
Share in ACL earnings
|
|
|
—
|
|
|
|
3,078
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,078
|
|
Segment contribution
|
|
$
|
6,347
|
|
|
$
|
2,558
|
|
|
$
|
1,925
|
|
|
$
|
(11,457
|
)
|
|
$
|
(627
|
)
|
|
|
Year Ended December 31, 2015
|
|
(In thousands)
|
|
Digital Channels
|
|
|
IP Licensing
|
|
|
Wholesale Distribution
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
7,542
|
|
|
$
|
3,107
|
|
|
$
|
88,321
|
|
|
$
|
—
|
|
|
$
|
98,970
|
|
Operating costs and expenses
|
|
|
(8,230
|
)
|
|
|
(2,276
|
)
|
|
|
(83,656
|
)
|
|
|
(11,185
|
)
|
|
|
(105,347
|
)
|
Depreciation and amortization
|
|
|
(763
|
)
|
|
|
(143
|
)
|
|
|
(2,715
|
)
|
|
|
(516
|
)
|
|
|
(4,137
|
)
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,260
|
)
|
|
|
—
|
|
|
|
(30,260
|
)
|
Share in ACL earnings
|
|
|
—
|
|
|
|
2,217
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,217
|
|
Segment contribution
|
|
$
|
(1,451
|
)
|
|
$
|
2,905
|
|
|
$
|
(28,310
|
)
|
|
$
|
(11,701
|
)
|
|
$
|
(38,557
|
)
|
Operating costs and expenses exclude costs related to depreciation and amortization, as well as goodwill impairments, which are separately presented in the tables above. The above results also exclude our discontinued operations.
During 2016, we reclassified our U.K. mail-order catalog and ecommerce businesses into our Wholesale Distribution segment. As a result, for 2016 and 2015 we reclassified revenues of $1.7 million and $2.1 million, respectively, operating costs and expenses of $2.1 million and $2.7 million, respectively, and depreciation and amortization of $0.1 million and $0.1 million, respectively.
64
A reconciliation of total segment loss to loss before provision for income taxes is as follows:
|
|
Years Ended
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Total segment loss
|
|
$
|
(627
|
)
|
|
$
|
(38,557
|
)
|
Interest expense, net
|
|
|
(8,400
|
)
|
|
|
(9,968
|
)
|
Change in fair value of stock warrants and other
derivatives
|
|
|
(4,573
|
)
|
|
|
1,373
|
|
Loss on extinguishment of debt
|
|
|
(3,549
|
)
|
|
|
—
|
|
Other expense
|
|
|
(1,293
|
)
|
|
|
(1,402
|
)
|
Loss before provision for income taxes
|
|
$
|
(18,442
|
)
|
|
$
|
(48,554
|
)
|
Total revenue by geographical location is as follows:
|
|
Years Ended
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
68,096
|
|
|
$
|
80,409
|
|
United Kingdom
|
|
|
11,117
|
|
|
|
16,616
|
|
Other
|
|
|
1,025
|
|
|
|
1,945
|
|
Net revenues
|
|
$
|
80,238
|
|
|
$
|
98,970
|
|
Revenues are attributed to geographical locations based on where our customers reside.
Total assets for each segment primarily include accounts receivable, inventory and investments in content. The Corporate segment primarily includes assets not fully allocated to a segment including consolidated cash accounts, certain prepaid assets and fixed assets used across all segments.
Total assets by segment, excluding assets of discontinued operations, are as follows:
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Digital Channels
|
|
$
|
5,941
|
|
|
$
|
1,489
|
|
IP Licensing
|
|
|
18,648
|
|
|
|
22,707
|
|
Wholesale Distribution
|
|
|
102,748
|
|
|
|
114,221
|
|
Corporate
|
|
|
8,643
|
|
|
|
5,341
|
|
|
|
$
|
135,980
|
|
|
$
|
143,758
|
|
During the year ended December 31, 2016, we had capital expenditures of $1.7 million, which includes $0.3 million that was accrued for in accounts payable. The capital expenditures by segment during 2016 were $1.4 million and $0.3 million for the Digital Channels and Corporate segments, respectively. During the year ended December 31, 2015, we had capital expenditures of $1.2 million, which includes $0.1 million that was accrued for in accounts payable. The capital expenditures by segment during 2015 were $0.8 million, $0.1 million, $0.1 million and $0.2 million for the Digital Channels, IP Licensing, Wholesale Distribution and Corporate segments, respectively.
Long-lived assets by geographical location are as follows:
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
75,742
|
|
|
$
|
73,637
|
|
United Kingdom
|
|
|
25,177
|
|
|
|
31,901
|
|
Other
|
|
|
645
|
|
|
|
646
|
|
Total long-lived assets
|
|
$
|
101,564
|
|
|
$
|
106,184
|
|
65
Long-lived assets include goodwill, other intangibles assets, equity investment in ACL, investments in content and property, equipment and improvements.
Note 4.
|
EQUITY EARNINGS OF AFFILIATE
|
In February 2012, Acorn Media acquired a 64% interest in ACL for total purchase consideration of £13.7 million or approximately $21.9 million excluding direct transaction costs. The acquisition gave Acorn Media a majority ownership of ACL’s extensive works including a variety of short story collections, more than 80 novels, 19 plays and a film library of over 100 made-for-television films.
We account for our investment in ACL using the equity method of accounting because (1) Acorn Media is only entitled to appoint one-half of ACL’s board members and (2) in the event the board is deadlocked, the chairman of the board, who is appointed by the directors elected by the minority shareholders, casts a deciding vote.
As of the Business Combination, our 64% share of the difference between ACL’s fair value and the amount of underlying equity in ACL’s net assets was approximately $18.7 million. This step-up basis difference is primarily attributable to the fair value of ACL’s copyrights, which expire in 2046. We are amortizing the basis difference through 2046 using the straight-line method. Basis-difference amortization is recorded against our share of ACL’s net income in our consolidated statements of operations; however this amortization is not included within ACL’s financial statements.
A summary of the ACL investment account is as follows:
(In thousands)
|
|
|
|
|
Investment balance at December 31, 2014
|
|
$
|
22,281
|
|
Share of income before basis-difference amortization
|
|
|
2,763
|
|
Dividends received
|
|
|
(3,300
|
)
|
Basis-difference amortization
|
|
|
(546
|
)
|
Translation adjustment
|
|
|
(1,100
|
)
|
Investment balance at December 31, 2015
|
|
|
20,098
|
|
Share of income before basis-difference amortization
|
|
|
3,562
|
|
Dividends received
|
|
|
(3,282
|
)
|
Basis-difference amortization
|
|
|
(484
|
)
|
Translation adjustment
|
|
|
(3,403
|
)
|
Investment balance at December 31, 2016
|
|
$
|
16,491
|
|
The following summarized financial information is derived from financial statements of ACL as of December 31, 2016 and 2015 (balance sheets), and for the years ended December 31, 2016 and 2015 (income statements):
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Cash
|
|
$
|
3,592
|
|
|
$
|
4,296
|
|
Film costs
|
|
|
2,040
|
|
|
|
8,073
|
|
Other assets
|
|
|
6,883
|
|
|
|
6,962
|
|
Production obligation payable
|
|
|
—
|
|
|
|
(1,674
|
)
|
Deferred revenues
|
|
|
(3,687
|
)
|
|
|
(8,511
|
)
|
Other liabilities
|
|
|
(2,778
|
)
|
|
|
(2,022
|
)
|
Equity
|
|
$
|
6,050
|
|
|
$
|
7,124
|
|
|
|
Years Ended
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
19,463
|
|
|
$
|
23,534
|
|
Film cost amortization
|
|
|
(7,916
|
)
|
|
|
(14,114
|
)
|
General, administrative and other expenses
|
|
|
(4,641
|
)
|
|
|
(4,198
|
)
|
Income from operations
|
|
$
|
6,906
|
|
|
$
|
5,222
|
|
Net income
|
|
$
|
5,491
|
|
|
$
|
4,128
|
|
66
Balance sheet amounts have been translated from the GBP to U.S. dollar using the December 31, 2016 and 2015 exchange rates. Income statement amounts have been translated from the GBP to U.S. dollar using the average exchange rate for each of the years presented.
Note 5.
|
Accounts Receivable
|
Accounts receivable are primarily derived from: (1) subscription revenues, which are processed by merchant banks or our channel partners such as Amazon, that have not cleared our bank as of period end, (2) video content we license to broadcast, cable/satellite providers and digital subscription platforms like Netflix, and (3) the sale of physical content to retailers and wholesale distributors, who ship to mass retail, and U.K. ecommerce and catalog sales. Our accounts receivable typically trends with retail seasonality.
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Digital Channels
|
|
$
|
2,200
|
|
|
$
|
160
|
|
Wholesale Distribution
|
|
|
22,231
|
|
|
|
30,663
|
|
Accounts receivable before allowances and reserves
|
|
|
24,431
|
|
|
|
30,823
|
|
Less: reserve for returns
|
|
|
(4,817
|
)
|
|
|
(6,677
|
)
|
Less: allowance for doubtful accounts
|
|
|
(45
|
)
|
|
|
(260
|
)
|
Accounts receivable, net
|
|
$
|
19,569
|
|
|
$
|
23,886
|
|
Wholesale Distribution receivables are partially billed and collected by our U.S. distribution facilitation partner, Sony Pictures Home Entertainment, or SPHE. Each quarter, SPHE preliminarily settles their portion of our wholesale receivables assuming a timing lag on collections and an average-return rate. When actual returns differ from the amounts previously assumed, adjustments are made that give rise to payables and receivables between us and SPHE. Amounts vary and tend to be seasonal following our sales activity. As of December 31, 2016, we owed our distribution partner $5.6 million for receivables settled as of year-end; and as of December 31, 2015, our distribution partner owed us $0.8 million for receivables settled as of year-end. The Wholesale Distribution receivables are reported net of amounts owed to the distribution partner as amounts are offset against each other when settling.
As of December 31, 2016 and 2015, the net Wholesale Distribution receivables with SPHE were $4.3 million and $11.1 million, respectively, which is included in accounts receivable.
Inventories are summarized as follows:
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Packaged discs
|
|
$
|
5,601
|
|
|
$
|
7,557
|
|
Packaging materials
|
|
|
452
|
|
|
|
753
|
|
Other merchandise
(1)
|
|
|
162
|
|
|
|
15
|
|
Inventories, net
|
|
$
|
6,215
|
|
|
$
|
8,325
|
|
|
(1)
|
Other merchandise consists of third-party products, primarily gifts, jewelry and home accents.
|
For each reporting period, we review the value of inventories on hand to estimate the recoverability through future sales. Values in excess of anticipated future sales are booked as obsolescence reserve. Our obsolescence reserve was $10.0 million and $11.4 million as of December 31, 2016 and 2015, respectively. We reduce our inventories with adjustments for lower of cost or market valuation, shrinkage, excess quantities and obsolescence. During the years ended December 31, 2016 and 2015, we recorded impairment charges of $1.8 million and $1.5 million, respectively. These charges are included in cost of sales as manufacturing and fulfillment cost.
67
NOTE 7.
|
PROPERTY, EQUIPMENT AND IMPROVEMENTS
|
Property, equipment and improvements are summarized as follows:
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Furniture, fixtures and equipment
|
|
$
|
1,174
|
|
|
$
|
1,431
|
|
Software
|
|
|
2,042
|
|
|
|
1,865
|
|
Leasehold improvements
|
|
|
486
|
|
|
|
530
|
|
Property, equipment and improvements
|
|
|
3,702
|
|
|
|
3,826
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,366
|
)
|
|
|
(2,011
|
)
|
Property, equipment and improvements, net
|
|
$
|
1,336
|
|
|
$
|
1,815
|
|
During the years ended December 31, 2016 and 2015, we recorded no impairment to property, equipment and improvements. Depreciation expense was 0.7 million for the year ended December 31, 2016 and 0.8 million for the year ended December 31, 2015.
Note 8.
|
InvestmentS in CONTENT
|
Investments in content are as follows:
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Released
|
|
$
|
48,593
|
|
|
$
|
53,378
|
|
Completed, not released
|
|
|
8,453
|
|
|
|
5,936
|
|
In-production
|
|
|
3,691
|
|
|
|
1,093
|
|
Investments in content, net
|
|
$
|
60,737
|
|
|
$
|
60,407
|
|
Investments in content are stated at the lower of unamortized cost or estimated fair value. The valuation of investments in content is reviewed on a title-by-title basis when an event or change in circumstances indicates that the fair value of content is less than its unamortized cost. Impairment charges for the years ended December 31, 2016 and 2015 were $2.8 million and $3.2 million, respectively. Impairments are included in cost of sales as part of content amortization and royalties.
In determining the fair value of content (Note 15,
Fair Value Measurements
), we employ a discounted cash flows (or
DCF
) methodology. Key inputs employed in the DCF methodology include estimates of ultimate revenue and costs, as well as a discount rate. The discount rate utilized in the DCF analysis is based on a market participant’s weighted average cost of capital plus a risk premium representing the risk associated with producing a particular type of content.
Our estimated future amortization for investments in content is as follows:
(In thousands)
|
|
|
|
Period
|
|
Estimated
Amortization
|
|
|
Percentage
|
|
1 Year
|
|
$
|
15,591
|
|
|
|
32.1
|
%
|
2 - 3 Years
|
|
|
16,410
|
|
|
|
33.8
|
%
|
4 - 5 Years
|
|
|
8,671
|
|
|
|
17.8
|
%
|
6 - 7 Years
|
|
|
4,560
|
|
|
|
9.4
|
%
|
Thereafter
|
|
|
3,361
|
|
|
|
6.9
|
%
|
|
|
$
|
48,593
|
|
|
|
100.0
|
%
|
68
Note 9.
|
Goodwill and other Intangible Assets
|
Goodwill
Goodwill by segment is as follows:
(In thousands)
|
|
Digital Channels
|
|
|
Wholesale Distribution
|
|
|
Total
|
|
Goodwill balance as of January 1, 2015
|
|
$
|
1,855
|
|
|
$
|
43,036
|
|
|
$
|
44,891
|
|
Impairment loss during the year
|
|
|
—
|
|
|
|
(30,260
|
)
|
|
|
(30,260
|
)
|
Goodwill balance as of December 31, 2015
|
|
|
1,855
|
|
|
|
12,776
|
|
|
|
14,631
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
(940
|
)
|
|
|
(940
|
)
|
Goodwill balance as of December 31, 2016
|
|
$
|
1,855
|
|
|
$
|
11,836
|
|
|
$
|
13,691
|
|
Accumulated impairment losses as of December 31, 2016
|
|
$
|
(981
|
)
|
|
$
|
(30,260
|
)
|
|
$
|
(31,241
|
)
|
Of the goodwill initially recognized, approximately $22.3 million is being amortized over 15 years for tax purposes giving rise to a future tax deduction.
Goodwill was tested for impairment for the periods presented and we recognized impairment losses of $30.3 million in our Wholesale Distribution segment during 2015. We did not impair our goodwill in 2016.
During the fourth quarter of 2015, our Wholesale Distribution segment performance, primarily in the U.S., was below its forecast for the quarter. Also, during that quarter, we adjusted our 2016 forecast downward to reflect our continued liquidity constraints and the impact these constraints have had on our ability to invest in future content. We considered these decreases to be a triggering event and hired a valuation firm to fair value our U.S. Wholesale Distribution reporting unit, which held the majority of our goodwill. The valuation firm valued our U.S. Wholesale Distribution reporting unit using both the market approach (by using comparable businesses) and the income approach. Significant inputs were the selection of comparable companies, our five-year forecast and a risk-appropriate discount rate of 18%. The results of the valuation were that our U.S. Wholesale Distribution reporting unit had a fair value that was less than its carrying value, primarily because the unit held $38.9 million of recorded goodwill. Management assessed the amount of implied goodwill within this reporting unit and concluded that $30.3 million of its goodwill was impaired.
Other Intangibles
A summary of our intangibles and accumulated amortization are as follows:
|
|
December 31, 2016
|
|
(In thousands)
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Trade name
|
|
$
|
9,875
|
|
|
$
|
(3,671
|
)
|
|
$
|
6,204
|
|
Customer relationships
|
|
|
9,290
|
|
|
|
(8,512
|
)
|
|
|
778
|
|
Websites and digital platforms
|
|
|
2,480
|
|
|
|
(933
|
)
|
|
|
1,547
|
|
Supplier contracts
|
|
|
1,590
|
|
|
|
(965
|
)
|
|
|
625
|
|
Option for future content
|
|
|
900
|
|
|
|
(745
|
)
|
|
|
155
|
|
|
|
$
|
24,135
|
|
|
$
|
(14,826
|
)
|
|
$
|
9,309
|
|
|
|
December 31, 2015
|
|
(In thousands)
|
|
Gross Carrying
Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Trade name
|
|
$
|
9,875
|
|
|
$
|
(2,602
|
)
|
|
$
|
7,273
|
|
Customer relationships
|
|
|
520
|
|
|
|
(429
|
)
|
|
|
91
|
|
Websites and digital platforms
|
|
|
3,863
|
|
|
|
(3,115
|
)
|
|
|
748
|
|
Supplier contracts
|
|
|
1,720
|
|
|
|
(868
|
)
|
|
|
852
|
|
Option for future content
|
|
|
900
|
|
|
|
(631
|
)
|
|
|
269
|
|
Leases
|
|
|
400
|
|
|
|
(400
|
)
|
|
|
—
|
|
|
|
$
|
17,278
|
|
|
$
|
(8,045
|
)
|
|
$
|
9,233
|
|
In connection with the USA licensing agreement covering our U.S. catalog business, USA licensed the right to use our U.S. direct-to-consumer customer list. Going forward, future sales of product inventory to USA will be part of our Wholesale Distribution
69
segment. In 2016, we transferred our U.S. customer-list asset (which is included in customer relationships in the above table) to our Wholesale Distribution segmen
t as this asset will be realized through sales to USA. As of December 31, 2015, this asset was included in discontinued operations and its unamortized balance was $1.5 million
Amortization expense for the years ended December 31, 2016 and 2015 was $2.3 million and $3.4 million, respectively. Costs incurred to develop, upgrade or enhance functionality of websites and digital platform software are capitalized while maintenance and operating costs are expensed as incurred. During the years ended December 31, 2016 and 2015, we capitalized $1.4 million and $0.5 million of costs related to our websites and digital platform software, respectively.
During the third quarter of 2015, we committed to using the RLJE brand for all new feature-film content. We continue to brand all previously released feature-film content with the Image brand. As a result of this change, we reassessed the useful life of our Image brand and concluded that the brand's life had been reduced to a trailing eight-year period, with a disproportionate amount of brand benefit being realized during the first three years. As a result, we changed our amortization assumptions. We were amortizing the carrying value of our Image trade name on a straight-line basis over 15 years, with 12 years remaining. Since 2015, we are amortizing the carrying value of our Image trade name over the remaining eight years with increased amortization in the earlier years. We recognized $0.5 million of accelerated amortization within our Wholesale Distribution segment during 2015. We assessed whether the Image brand was impaired during 2015 and concluded that the estimated future cash flows from the Image brand exceed the brand’s carrying value; therefore we did not recognize an impairment charge.
During the fourth quarter of 2015, we committed to and began implementing a plan to exit our Acacia catalog business, which diminished the value of our Acacia brand. As a result, we re-assessed the recoverability and the remaining useful life of our Acacia brand and recognized $0.8 million of accelerated amortization within our Wholesale Distribution segment during 2015. When reaching this conclusion, we considered the future revenues forecasted from this brand and an appropriate royalty rate that would be owed had we not owned the brand. This charge effectively reduced the carrying value of this brand name asset to zero.
During 2015, as a result of the above changes in estimates related to the accelerated amortization of trade names, our loss from continuing operations and net loss after discontinued operations each increased by a total of $1.3 million and our basic and diluted loss per share increased by $0.31.
As of December 31, 2016, the remaining amortization by year for intangible assets is as follows:
(In thousands)
|
|
|
|
|
Year Ended December 31,
|
|
Amount
|
|
2017
|
|
$
|
2,585
|
|
2018
|
|
|
1,698
|
|
2019
|
|
|
1,073
|
|
2020
|
|
|
631
|
|
2021
|
|
|
546
|
|
Thereafter
|
|
|
2,776
|
|
|
|
$
|
9,309
|
|
70
Debt consists of the following:
|
|
Maturity
|
|
Interest
|
|
|
December 31,
|
|
(In thousands)
|
|
Date
|
|
Rate
|
|
|
2016
|
|
|
2015
|
|
Senior secured term notes
with AMC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche A Loan
|
|
June 30, 2019
|
|
|
7.0%
|
|
|
$
|
5,000
|
|
|
$
|
—
|
|
Tranche B Loan
|
|
Beginning October 14, 2021
|
|
|
6.0%
|
|
|
|
60,000
|
|
|
|
—
|
|
Prior senior secured term notes
|
|
Repaid October 14, 2016
|
|
LIBOR + 10.64%
|
|
|
|
—
|
|
|
|
56,938
|
|
Less: debt discount
|
|
|
|
|
|
|
|
|
(31,565
|
)
|
|
|
(4,234
|
)
|
Total senior-term notes, net of
discount
|
|
|
|
|
|
|
|
|
33,435
|
|
|
|
52,704
|
|
Subordinated notes payable to prior
Image Shareholders
|
|
Repaid January 31, 2017
|
|
1.5% through 2016 then 12%
|
|
|
|
8,618
|
|
|
|
8,546
|
|
Debt, net of discount
|
|
|
|
|
|
|
|
$
|
42,053
|
|
|
$
|
61,250
|
|
Future minimum principal payments as of December 31, 2016 are as follows:
|
|
|
|
|
|
Subordinated
|
|
|
|
|
|
(In thousands)
|
|
Senior Notes
|
|
|
Notes
|
|
|
Total
|
|
2017
|
|
$
|
—
|
|
|
$
|
8,618
|
|
|
$
|
8,618
|
|
2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2019
|
|
|
5,000
|
|
|
|
—
|
|
|
|
5,000
|
|
2020
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2021
|
|
|
15,000
|
|
|
|
—
|
|
|
|
15,000
|
|
Thereafter
|
|
|
45,000
|
|
|
|
—
|
|
|
|
45,000
|
|
|
|
$
|
65,000
|
|
|
$
|
8,618
|
|
|
$
|
73,618
|
|
Senior Term Notes
On October 14, 2016, we entered into a $65.0 million Credit and Guaranty Agreement (the
AMC
Credit Agreement
) with Digital Entertainment Holdings LLC, a wholly owned subsidiary of AMC Networks Inc. (or
AMC
). Concurrent with entering into the AMC Credit Agreement, we also issued AMC three warrants (the
AMC Warrants
) to acquire a total of 20.0 million shares of our common stock at $3.00 per share. The entering of the AMC Credit Agreement, the issuance of the AMC Warrants and the associated transactions are referred to as the AMC Transaction.
The proceeds received from the AMC Credit Agreement were used to repay our prior senior secured term notes of $55.1 million, including accrued interest, and transaction expenses of approximately $1.7 million, which includes a prepayment penalty of $0.8 million. The AMC Credit Agreement consists of (i) a term loan tranche in the principal amount of $5.0 million (or
Tranche A Loan)
, which was due October 14, 2017, but was amended in 2017 to June 30, 2019, and (ii) a term loan tranche in the principal amount of $60.0 million (or
Tranche B Loan)
of which 25% is due after five years, 50% is due after six years and the remaining 25% is due after seven years. The Tranche A Loan bears interest at a rate of 7.0% per annum and the Tranche B Loan bears interest at a rate of 6.0% per annum. Interest is payable quarterly whereby 4.0% is payable in cash and the balance is payable in shares of common stock determined using a per-share value of $3.00 per share. The loan is secured by a lien on substantially all of our consolidated assets.
Subject to certain customary exceptions, the AMC Credit Agreement requires mandatory prepayments if we were to receive proceeds from asset sales, insurance, debt issuance or the exercise of the AMC Warrants (see Note12,
Stock Warrants
). We may also make voluntary prepayments. Prepayments of the Tranche B Loan (either voluntary or mandatory) are subject to a prepayment premium of 3.0% if principal is repaid on or before October 14, 2018, and 1.5% if principal is repaid after October 14, 2018 but on or before October 14, 2019. No prepayment premium is due for amounts prepaid after October 14, 2019.
71
The AMC Credit Agreement contains certain financial and non-financial covenants. Financial covenants are assessed annually and are based on Consolidated Adjusted E
BITDA, as defined in the AMC Credit Agreement. Financial covenants vary by fiscal year and generally become more restrictive over time.
Financial covenants include the following:
|
|
December 31,
2016
|
|
December 31,
2017
|
|
December 31,
2018
|
|
Thereafter
|
Leverage Ratios:
|
|
|
|
|
|
|
|
|
Senior debt-to-Adjusted EBITDA
|
|
6.00 : 1.00
|
|
5.50 : 1.00
|
|
3.50 : 1.00
|
|
2.50 : 1.00
|
Total debt-to-Adjusted EBITDA
|
|
6.75 : 1.00
|
|
6.00 : 1.00
|
|
5.00 : 1.00
|
|
4.00 : 1.00
|
Fixed charge coverage ratio
|
|
1.00 : 1.00
|
|
1.00 : 1.00
|
|
2.00 : 1.00
|
|
2.00 : 1.00
|
The AMC Credit Agreement contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to certain other contracts (including, for example, business arrangements with our U.S. distribution facilitation partner and other material contracts) and indebtedness and events constituting a change of control or a material adverse effect in any of our results of operations or conditions (financial or otherwise). The occurrence of an event of default would increase the applicable rate of interest and could result in the acceleration of our obligations under the AMC Credit Agreement.
The AMC Credit Agreement imposes restrictions on such items as encumbrances and liens, payments of dividends, other indebtedness, stock repurchases, capital expenditures and entering into new lease obligations. Additional covenants restrict our ability to make certain investments, such as loans and equity investments, or investments in content that are not in the ordinary course of business. Pursuant to the AMC Credit Agreement, we must maintain at all times a cash balance of $1.0 million for 2016, $2.0 million in cash for 2017 and $3.5 million in cash for all years thereafter. As of December 31, 2016, we were in compliance with all covenants as stipulated in the AMC Credit Agreement.
When repaying the previous credit facility on October 14, 2016, we recognized a $3.5 million loss from the early extinguishment of debt, which is reported separately within our statement of operations. This loss primarily represents the unamortized debt discount and deferred financing costs at the time of repayment of our prior credit facility and prepayment penalty of $0.8 million.
Concurrent with entering into the AMC Credit Agreement, we issued AMC the AMC Warrants to acquire shares of our common stock at $3.00 per share. The first warrant is for 5.0 million shares of common stock and expires on October 14, 2021. The second warrant is for 10.0 million shares of common stock and expires on October 14, 2022. The third warrant is for 5.0 million shares of common stock, subject to adjustment, and expires on October 14, 2023. The AMC Warrants are subject to certain standard anti-dilution provisions, and may be exercised on a non-cash basis at AMC’s discretion.
The third warrant (the
AMC Tranche C Warrant
)
contains a provision that may increase the number of shares acquirable upon exercising, for no additional consideration payable by AMC, such that the number of shares acquirable upon exercise is equal to the sum of (i) at least 50.1% of our then outstanding shares of common stock, determined on a fully diluted basis, less (ii) the sum of 15.0 million shares and the equity interest shares issued in connection with the AMC Credit Agreement. This provision provides AMC the ability to acquire at least 50.1% of our common stock for $60.0 million, provided that all warrants are exercised and AMC elects not to exercise on a non-cash basis. The third warrant with this guarantee provision is being accounted for as a derivative liability.
Pursuant to the terms of the AMC Transaction, AMC is entitled to designate two director nominees. In connection with the closing, AMC designated John Hsu and Arlene Manos, and the Board appointed them to be members of the Board.
On January 30, 2017, we amended the AMC Credit Agreement and borrowed an additional $8.0 million, thereby increasing our Tranche A loan from $5.0 million to $13.0 million. We also changed the maturity date for our Tranche A loan from October 14, 2017 to June 30, 2019. The additional $8.0 million borrowed was used to repay our obligations under the subordinated notes payable. When doing so, we did not incur a prepayment penalty. This amendment also changed certain debt covenant ratios to reflect the extended maturity date and the increase of the Tranche A loan balance. These amended terms are reflected in the above tables and disclosures.
Subordinated Notes Payable
In October 2012, we issued unsecured subordinated promissory notes in the aggregate principal amount of $14.8 million to the selling preferred stockholders of Image (or
Subordinated Note Holders
). On May 20, 2015, and in connection with the sale of preferred stock and warrants, the Subordinated Note Holders exchanged approximately $8.5 million of subordinated notes for 8,546
72
shares of preferred stock
and warrants to acquire 855,000 shares of common stock (see Note 12,
Stock Warrants
). The notes bore interest at 12.0% per annum, except for a two-year period ending December 31, 2016, whereby the interest rate was adjusted to 1.5% per annum. Each year, we
paid 45% of the interest due in cash and added the remaining of 55% to the subordinated note balance. On January 31, 2017, we repaid these subordinated notes and accrued interest in full.
Note 11.
|
REDEEMABLE CONVERTIBLE PREFERRED STOCK
|
On May 20, 2015, we closed a transaction in which we sold 31,046 shares of preferred stock and warrants to acquire 3.1 million shares of common stock for $22.5 million in cash and the exchange of $8.5 million in subordinated notes. Of the preferred shares and warrants sold, 16,500 shares of preferred stock and warrants to acquire 1.7 million shares of common stock were sold to certain board members or their affiliated companies. We used $10.0 million of the cash proceeds from this sale to make partial payment on our senior notes payable and approximately $1.9 million for prepayment penalties, legal and accounting fees, which include fees associated with our registration statement filed in July 2015 and other expenses associated with the transaction. The balance of the net cash proceeds was used for content investment and working capital purposes. Of the fees incurred, $0.9 million was recorded against the proceeds received, $0.5 million was recorded as additional debt discounts, $0.2 million was included as interest expense and the balance was included in other expense.
In connection with the sale of our preferred stock on May 20, 2015, the holders of the preferred stock appointed two board members temporarily increasing the board to 11 members. On June 4, 2015, four board members resigned thus reducing the board size to seven members, which we committed to when issuing the preferred stock.
On October 14, 2016 and concurrent with the close of our AMC Credit Agreement, we amended our preferred stock such that we were able to classify our preferred stock and its embedded conversion feature within our shareholders’ equity (deficit). Prior to the amendment, our preferred stock and its embedded conversion feature were recorded on our consolidated balance sheet outside of shareholders equity (deficit). The amended terms are disclosed below.
The preferred stock has the following rights and preferences:
|
•
|
Rank
– the preferred stock ranks higher than other company issued equity securities in terms of distributions, dividends and other payments upon liquidation.
|
|
•
|
Dividends
– the preferred stockholders are entitled to cumulative dividends at a rate of 8% per annum of a preferred share’s stated value ($1,000 per share plus any unpaid dividends). The first dividend payment is due July 1, 2017 and then payments are to be made quarterly thereafter. At our discretion, dividend payments are payable in either cash, or if we satisfy certain equity issuance conditions, in shares of common stock. Pursuant to the October 14, 2016 amended terms, if we don’t satisfy equity issuance conditions, then we may elect to accrue the value of the dividend and add it to the preferred share’s stated value.
|
|
•
|
Conversion
– at the preferred stockholder’s discretion, each share of preferred stock is convertible into 333.3 shares of our common stock, subject to adjustment for any unpaid dividends. Prior to the October 14, 2016 amendment, the conversion rate was subject to anti-dilution protection for offerings consummated at a per-share price of less than $3.00 per common share. This down-round provision was removed as part of the October 14, 2016 amendment.
|
|
•
|
Mandatory Redemption
– unless previously converted, on May 20, 2020, at our option we will either redeem the preferred stock with (a) cash equal to $1,000 per share plus any unpaid dividends (Redemption Value), or (b) shares of common stock determined by dividing the Redemption Value by a conversion rate equal to the lower of (i) the conversion rate then in effect (which is currently $3.00) or (ii) 85% of the then trading price, as defined, of our common stock. As part of the October 14, 2016 amendment, a floor was established for all but 16,500 shares of preferred stock such that the redemption ratio cannot be below $0.50 per common share. For the 16,500 shares of preferred stock, a floor of $2.49 was already in place and remained unchanged. I
f we were to redeem with shares of common stock, the actual number of shares that would be issued upon redemption is not determinable as the number is contingent upon the then trading price of our common stock. Generally, if we were to redeem with shares, the number of common shares needed for redemption increases as our common stock price decreases. Because of the October 14, 2016 amendment, the maximum number of common shares issuable upon redemption is determinable given the redemption conversion floors. If we elect to redeem with shares of common stock, and we fail to meet certain conditions with respect to the issuance of equity, then we would be subject to a 20% penalty of the maturity redemption price, payable in either cash or shares of common stock. This penalty is subject to, and therefore possibly limited by, a $0.50 per share floor.
|
73
|
•
|
Voting
– except for certain matters that require the approval of the preferred stockholders, such as changes to the rights and preferences of the preferred stock, the preferred stock does not have voting rights.
However, the holders of the preferred stock are entitled to appoint two board members and, under certain circumstances, appoint a third member.
|
We are increasing (or accreting) the carrying balance of our preferred stock up to its redemption value using the effective interest-rate method over a period of time beginning from the issuance date of May 20, 2015 to the required redemption date of May 20, 2020.
During the years ended December 31, 2016 and 2015, we recognized accretion of $4.3 million and $2.6 million, respectively. Accretion includes cumulative preferred dividends. As of December 31, 2016, the accumulated unpaid dividends on preferred stock were $4.2 million. During the years ended December 31, 2016 and 2015, accumulated unpaid dividends increased by
$2.7 million (or $88.60 per share of preferred stock) and $1.6 million (or $50.60 per share of preferred stock), respectively
.
During 2016, two preferred shareholders converted a total of 849 shares of preferred stock and $0.1 million of accumulated dividends into 312,000 shares of common stock.
On July 9, 2015, we filed a registration statement with the Securities and Exchange Commission to register the shares issuable upon conversion of the preferred stock and exercise of the 2015 Warrants (see Note 12,
Stock
Warrants). The registration statement was declared effective in July 2015. We will use our best efforts to keep the registration statement effective. If we are in default of the registration rights agreement, and as long as the event of default is not cured, then we are required to pay, in cash, partial liquidation damages, which in total are not to exceed 6% of the aggregated subscription amount of $31.0 million.
RLJE had the following warrants outstanding:
|
|
December 31, 2016
|
(In thousands, except per share data)
|
|
Shares
|
|
|
Weighted-Average Exercise
Price
|
|
|
Weighted-Average Remaining Life
|
AMC Unregistered Warrants
|
|
|
20,000
|
|
|
$
|
3.00
|
|
|
5.8 years
|
2015 Warrants:
|
|
|
|
|
|
|
|
|
|
|
Unregistered warrants
|
|
|
3,105
|
|
|
$
|
2.27
|
|
|
3.4 years
|
2012 Warrants:
|
|
|
|
|
|
|
|
|
|
|
Registered warrants
|
|
|
5,125
|
|
|
$
|
36.00
|
|
|
0.8 year
|
Sponsor warrants
|
|
|
1,272
|
|
|
$
|
36.00
|
|
|
0.8 year
|
Unregistered warrants
|
|
|
617
|
|
|
$
|
36.00
|
|
|
0.8 year
|
|
|
|
30,119
|
|
|
|
|
|
|
|
Concurrent with entering into the AMC Credit Agreement, we also issued AMC three warrants (the
AMC Warrants
) to acquire shares of our common stock at $3.00 per share. The first warrant is for 5.0 million shares of common stock and expires on October 14, 2021. The second warrant is for 10.0 million shares of common stock and expires on October 14, 2022. The third warrant is for 5.0 million shares of common stock, subject to adjustment, and expires on October 14, 2023. The AMC Warrants are subject to certain standard anti-dilution provisions, and may be exercised on a non-cash basis at AMC’s discretion.
The third warrant (the
AMC Tranche C Warrant
)
contains a provision that may increase the number of shares acquirable upon exercising, for no additional consideration payable by AMC, such that the number of shares acquirable upon exercise is equal to the sum of (i) at least 50.1% of our then outstanding shares of common stock, determined on a fully diluted basis, less (ii) the sum of 15.0 million shares and the equity interest shares issued in connection with the AMC Credit Agreement. This provision provides AMC the ability to acquire at least 50.1% of our common stock for $60.0 million, provided that all warrants are exercised and AMC elects not to exercise on a non-cash basis. The third warrant with this guarantee provision is being accounted for as a derivative liability.
On May 20, 2015 and concurrent with our preferred stock placement, we issued warrants to our preferred stock holders to acquire 3.1 million shares of our common stock (the
2015 Warrants
). The warrants have term of five years. On October 14, 2016 and in connection with the AMC Credit Agreement, we amended the anti-dilution and redemption provisions of the warrants to conform to the terms of the amended preferred stock. Because of the AMC transaction and the then-existing terms of the 2015 Warrants, the warrant exercise price was reduced from $4.50 to $3.00; however, the exercise price was further reduced down to $1.50 for warrants to acquire 1.5 million shares of common stock, and down to $2.37 for warrants to acquire 150,000 shares of
74
common stock.
Because of the October 14, 2016 amendment, we began accounting for the 2015 Warrants as
equity awards and reclassified the carrying balance of the warrants to shareholders’ equity (deficit).
On October 3, 2012, we issued warrants with a term of five years that provide the warrant holder the right to acquire one share of our common stock for $36.00 per share (the
2012 Warrants
). The warrants are redeemable by us for $0.03 per warrant share if our common stock trades at $52.50 or more per share for 20 out of 30 trading days. The warrants contain standard anti-dilution provisions.
The 2012 Warrants contain a provision whereby the exercise price will be reduced if RLJE reorganized as a private company. The reduction in exercise price depends upon the amount of other consideration, if any, received by the warrant holders in the reorganization and how many years after the Business Combination reorganization is consummated. Generally, the reduction in exercise price would be between $18.00 and $27.00 assuming no additional consideration was received. Because of this adjustment provision, the 2012 Warrants are being accounted for as a derivative liability.
Our articles of incorporation authorize us to issue up to 250 million shares of common stock and one million shares of preferred stock, par value $0.001 per share. As of December 31, 2016, there were 5,240,085 shares of common stock issued and outstanding. As of December 31, 2015, there were 4,717,324 shares issued and outstanding.
On October 3, 2012, in connection with the consummation of the Business Combination, RLJE and certain Image and Acorn Media selling shareholders entered into an amended and restated registration rights agreement (the “Registration Rights Agreement”), in which RLJE agreed to use its best efforts to register certain of its securities held by the stockholders who are a party to the Registration Rights Agreement under the Securities Act of 1933, as amended (the “Securities Act”). Such stockholders are entitled to make up to three demands, excluding short form registration demands, that RLJE register certain of its securities held by them for sale under the Securities Act. In addition, such stockholders have the right to include their securities in other registration statements filed by RLJE. At December 31, 2016, no demand had been received.
As shares of common stock are forfeited, they become treasury shares. Forfeiture of shares occurs when directors or employees, who hold compensatory restricted stock, resign or stop working for us prior to achieving required vesting conditions, or when performance conditions are not met regardless of continued employment or service. Treasury shares are available to RLJE for future grants or issuances of shares at our discretion. At December 31, 2016 and 2015, we did not hold any treasury shares.
Note 14.
|
Stock-Based Compensation
|
Equity Compensation Plan
As of December 31, 2016 and 2015, we had one equity compensation plan. The 2012 Incentive Compensation Plan of RLJ Entertainment, Inc. (the
Incentive Plan
) was approved by the shareholders of RLJ Acquisition, Image and Acorn Media on September 20, 2012. The Incentive Plan is administered by the compensation committee of our Board of Directors. On December 4, 2015, our stockholders approved an amendment to the Incentive Plan whereby the compensation committee may grant awards totaling a maximum of 2,081,385 shares. The compensation committee may award options, stock appreciation rights, restricted stock awards, restricted stock unit awards, bonus stock and awards in lieu of obligations, dividend equivalents, performance awards and other stock-based awards (as those terms are defined in the Incentive Plan). No person may be granted (i) options or stock appreciation rights with respect to more than 250,000 shares or (ii) restricted stock, restricted stock units, performance shares and/or other stock-based awards with respect to more than 250,000 shares. In addition, no person may be granted awards worth more than $1.0 million of grant date fair value with respect to any 12-month Performance Period (as that term is defined in the Incentive Plan) or $2.0 million with respect to any Performance Period that is more than 12 months. The maximum term allowed for an option is 10 years and a stock award shall either vest or be forfeited not more than 10 years from the date of grant.
At December 31, 2016 and 2015, there were 1,109,046 and 1,511,389 shares, respectively, available for future grants under the Incentive Plan.
Restricted Stock-Based Compensation Grants
Compensation expense relating to the restricted stock awards for the years ended December 31, 2016 and 2015 was $1.0 million and $0.3 million, respectively. Unrecognized stock-based compensation expense relating to these restricted stock awards of approximately $0.6 million at December 31, 2016 is expected to be expensed ratably over the remaining vesting period through March 2019. The weighted average remaining vesting period for non-vested shares is 1.1 years. Compensation expense related to restricted stock awards is included in general and administrative expenses. On June 30, 2015, we allowed 19,075 shares of common stock to
75
vest that were granted to those board members who resigned on June 4, 2015 (see Note 11,
Redeemable C
onvertible Preferred Stock).
We accounted for this as a modification of vesting provisions and revalued these shares as of June 30, 2015. This revaluation resulted in a reduction in share-based compensation expense of $0.1 million during the year ended D
ecember 31, 2015.
During the year ended December 31, 2016, 418,805 shares of restricted stock-based awards were granted. Of the awards granted, 216,982 restricted stock awards were granted to executive officers and directors and 201,823 restricted stock units were granted to employees. The shares were fair valued using our closing stock price of $1.92 per share on the grant date, for a total value of approximately $0.8 million, which will be expensed over the vesting period as a component of general and administrative expenses. The restricted stock awards will vest over a three-year period for executive officers and a one-year period for directors. The restricted stock units will vest over a three-year period for employees. The vesting of restricted stock-based awards is subject to the achievement of certain service criteria. The awards may be subject to further forfeitures if the employee or director terminates his or her service during the vesting period. All shares of restricted stock participate in dividends, if declared prior to their vesting date.
Restricted stock award activity under the Incentive Plan for the year ended December 31, 2016, and changes during the year then ended are presented below:
(In thousands, except per share data)
|
|
Service Shares
|
|
|
Performance Shares
|
|
Restricted Stock-Based Compensation
Award Activity
|
|
Shares
|
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
|
Shares
|
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
Non-vested shares at January 1, 2016
|
|
|
436
|
|
|
$
|
2.48
|
|
|
|
6
|
|
|
$
|
16.36
|
|
Granted
|
|
|
419
|
|
|
$
|
1.92
|
|
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
|
(436
|
)
|
|
$
|
2.48
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(10
|
)
|
|
$
|
1.92
|
|
|
|
(6
|
)
|
|
$
|
16.36
|
|
Non-vested shares at December 31, 2016
|
|
|
409
|
|
|
$
|
1.92
|
|
|
|
—
|
|
|
$
|
—
|
|
During the year ended December 31, 2015, 434,750 shares of restricted common stock were granted. Of the shares granted, 158,669 shares were granted to executive officers and directors and 276,081 shares were granted to other members of management. The shares were fair valued using our closing stock price on the date of grant with a range of $2.07 to $3.66 per share, for a total value of approximately $1.0 million. These restricted shares will vest and be expensed over a one-year period as a component of general and administrative expenses.
Restricted stock award activity under the Incentive Plan for the year ended December 31, 2015, and changes during the year then ended are presented below:
(In thousands, except per share data)
|
|
Service Shares
|
|
|
Performance Shares
|
|
Restricted Stock-Based Compensation
Award Activity
|
|
Shares
|
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
|
Shares
|
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
Non-vested shares at January 1, 2015
|
|
|
60
|
|
|
$
|
12.39
|
|
|
|
19
|
|
|
$
|
15.27
|
|
Granted
|
|
|
435
|
|
|
$
|
2.28
|
|
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
|
(55
|
)
|
|
$
|
10.95
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(4
|
)
|
|
$
|
13.38
|
|
|
|
(13
|
)
|
|
$
|
14.67
|
|
Non-vested shares at December 31, 2015
|
|
|
436
|
|
|
$
|
2.48
|
|
|
|
6
|
|
|
$
|
16.36
|
|
Note 15.
|
Fair Value Measurements
|
Warrant Liability
Stock Warrant and Other Derivative Liabilities
Of our outstanding warrants, certain warrants are accounted for as derivative liabilities, which require us to carry them on our consolidated balance sheet at their fair value. Our derivative liability warrants consist of the AMC Tranche C Warrant to acquire 5.0 million shares of common stock and our 2012 Warrants to acquire 7.0 million shares of common stock. Prior to the amendment on October 14, 2016, our 2015 Warrants for 3.1 million shares of common stock and the preferred stock’s embedded conversion feature were being accounted for as derivative liabilities as well.
76
We determined the fair value of the AMC Tranche C warrant using a lattice model, which is classified as Level 3 within in the fair-value hierarchy.
Inputs to the model include our publicly-traded stock price, our stock volatility, the risk-free interest rate and contractual terms of the warrant (which are remaining life of the warrant, exercise price and assumptions pertaining to increasing the numbe
r of acquirable shares of common stock to achieve 50.1% ownership). We use the closing stock price of our common stock to compute stock volatility. To quantify and value the possibility of increasing the number of acquirable shares, management took into
consideration its current capital structure, the impact of the 20% penalty if we were to fail to meet certain equity issuance conditions, and management’s best estimates of the likelihood of being subject to the 20% penalty. The AMC Tranche C warrant was
valued at $13.2 million on October 14, 2016, and then at $9.8 million as of December 31, 2016.
The fair value of our 2012 Warrants is immaterial as of December 31, 2016. As of December 31, 2016, 2015 and 2014, the fair value of the 2012 Warrants, which was determined using a Monte Carlo simulation model, was $0, $36,000 and $601,000, respectively. Because the warrants are so far out-of-the-money (exercise price is $36.00 per share) and as they approach their expiration date (which is October 2017) their fair value has been decreasing and is now effectively zero.
Prior to the October 14, 2016 amendment, we were using a lattice model to value the 2015 Warrants, which was classified as Level 3 within the fair-value hierarchy. Inputs to the model were stock volatility, contractual warrant terms (which were remaining life of the warrant and the exercise price), the risk-free interest rate and management’s assessment of the likelihood of doing a down-round transaction. As of October 13, 2016, December 31, 2015 and when issued on May 20 2015, the 2015 Warrants were fair valued at $4.4 million, $2.2 million and $2.1 million, respectively.
Prior to the October 14, 2016 amendment, we were using the lattice model to value the preferred stock’s embedded conversion feature, which was classified as Level 3 within the fair-value hierarchy. Inputs to the model were stock volatility, contractual terms (which were remaining life of the conversion option and the conversion rate), the risk-free interest rate and management’s assessment of the likelihood of doing a down-round transaction. As of October 13, 2016, December 31, 2015 and when issued on May 20, 2015, the embedded conversion feature was fair valued at $14.0 million, $8.4 million and $9.4 million, respectively.
The following tables represent the valuation of our warrant and other derivative liabilities within the fair-value hierarchy:
|
|
December 31, 2016
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Stock warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,763
|
|
|
$
|
9,763
|
|
Embedded conversion feature
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
December 31, 2015
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Stock warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,252
|
|
|
$
|
2,252
|
|
Embedded conversion feature
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,426
|
|
|
$
|
8,426
|
|
The following tables include a roll-forward of activity for our warrant and other derivative liabilities classified within Level 3 of the fair-value hierarchy:
|
|
Year Ended December 31, 2016
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Stock warrants at December 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,252
|
|
|
$
|
2,252
|
|
Issuance of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
13,220
|
|
|
|
13,220
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,294
|
)
|
|
|
(1,294
|
)
|
Amount reclassified to shareholders' equity (deficit)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,415
|
)
|
|
|
(4,415
|
)
|
Stock warrants at December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,763
|
|
|
$
|
9,763
|
|
|
|
Year Ended December 31, 2016
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Embedded conversion feature at December 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,426
|
|
|
$
|
8,426
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
5,867
|
|
|
|
5,867
|
|
Amount reclassified to shareholders' equity (deficit)
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,998
|
)
|
|
|
(13,998
|
)
|
Amount reclassified to shareholders' equity (deficit)
upon conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
(295
|
)
|
|
|
(295
|
)
|
Embedded conversion feature at December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
77
|
|
Year Ended December 31, 2015
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Stock warrants at December 31, 2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
601
|
|
|
$
|
601
|
|
Issuance of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
2,067
|
|
|
|
2,067
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
(416
|
)
|
|
|
(416
|
)
|
Stock warrants December 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,252
|
|
|
$
|
2,252
|
|
|
|
Year Ended December 31, 2015
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Embedded conversion feature at December 31, 2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Issuance of embedded conversion feature
|
|
|
—
|
|
|
|
—
|
|
|
|
9,383
|
|
|
|
9,383
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
(957
|
)
|
|
|
(957
|
)
|
Embedded conversion feature at December 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,426
|
|
|
$
|
8,426
|
|
Investments in Content
When events and circumstances indicate that investments in content are impaired, we determine the fair value of the investment; and if the fair value is less than the carrying amount, we recognize additional amortization expense equal to the excess. Our non‑recurring fair value measurement information of assets and liabilities is classified in the tables below:
|
|
Year Ended December 31, 2016
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Loss
|
|
Investments in content
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,398
|
|
|
$
|
1,398
|
|
|
$
|
2,822
|
|
|
|
Year Ended December 31, 2015
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Loss
|
|
Investments in content
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,677
|
|
|
$
|
4,677
|
|
|
$
|
3,174
|
|
During the years ended December 31, 2016 and 2015, the investments in content were impaired by $2.8 million and $3.2 million, respectively. In determining the fair value of our investments in content, we employ a DCF methodology. Key inputs employed in the DCF methodology include estimates of a film's ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on our weighted average cost of capital plus a risk premium representing the risk associated with producing a particular film or television program. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a Level 3 measurement.
Note 16.
|
Net Loss per Common Share Data
|
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per common share for the years ended December 31, 2016 and 2015:
|
|
Years Ended
December 31,
|
|
(In thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(26,175
|
)
|
|
$
|
(57,606
|
)
|
Denominator - basic and diluted:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding – basic
|
|
|
4,603
|
|
|
|
4,251
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
Weighted-average common shares outstanding – diluted
|
|
|
4,603
|
|
|
|
4,251
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(5.69
|
)
|
|
$
|
(13.55
|
)
|
We have outstanding warrants to acquire 30.1 million and 10.1 million shares of common stock as of December 31, 2016 and 2015, respectively, that are not included in the computation of diluted net loss per common share as the effect would be anti-dilutive. For the year ended December 31, 2015, we have weighted average outstanding shares of approximately 12,000 which were held by founding shareholders and forfeited in January 2015, that are not included in the computation of basic or diluted net loss per share as
78
the effect would be anti-dilutive.
For the years ended December 31, 2016 and 2015, we have weighted average unvested shares of approximately 404,000 and 78,000 shares, respectively, of compensatory restricted common stock and restricted common stock units, that are not included in the comp
utation of diluted net loss per share as the effect would be anti-dilutive.
When dilutive, we include in our computation of diluted loss per share the number of shares of common stock that is acquirable upon conversion of the preferred stock by applying the as-converted method per ASC 260,
Earnings per Share
. For the years ended December 31, 2016 and 2015, we excluded approximately 11.5 million and 10.9 million shares of common stock that are acquirable upon conversion of the preferred stock as they were anti-dilutive.
RLJE files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. Our subsidiaries in the United Kingdom and Australia continue to file income tax returns in their foreign jurisdictions.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that it is more likely than not that such deferred tax assets will not be realized, we must establish a valuation allowance.
As of December 31, 2016, we have a valuation allowance against 100% of our deferred tax assets, which are composed primarily of net operating loss (or
NOL
) carryforwards that were either acquired in the Business Combination or generated in the years following. Even though we have reserved all of these net deferred tax assets for book purposes, we would still be able to utilize them to reduce future income taxes payable should we have future taxable earnings. To the extent our deferred tax assets relate to NOL carryforwards, the ability to use such NOLs against future earnings will be subject to applicable carryforward periods. As of December 31, 2016, we had NOL carryforwards for Federal and state tax purposes of approximately $111.6 million and approximately $69.5 million, respectively, which are available to offset taxable income through 2036. Our NOL carryforwards begin to expire in 2017. NOL carryforwards that were acquired in the Business Combination reflect our assessment of an annual limitation on the utilization of these carryforwards due to ownership change limitations as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state limitations.
Income tax expense is summarized below:
|
|
Years Ended
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
(17
|
)
|
|
|
87
|
|
Foreign
|
|
|
(144
|
)
|
|
|
148
|
|
|
|
|
(161
|
)
|
|
|
235
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
(389
|
)
|
State
|
|
|
—
|
|
|
|
(21
|
)
|
Foreign
|
|
|
316
|
|
|
|
340
|
|
|
|
|
316
|
|
|
|
(70
|
)
|
Total Tax Expense
|
|
$
|
155
|
|
|
$
|
165
|
|
Loss from continuing operations before provision for income taxes is as follows:
|
|
Years Ended
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
(20,234
|
)
|
|
$
|
(49,403
|
)
|
Foreign
|
|
|
1,792
|
|
|
|
849
|
|
|
|
$
|
(18,442
|
)
|
|
$
|
(48,554
|
)
|
79
The tax effects of temporary differences that give rise to a significant portion of the net deferred tax assets and
liabilities are presented below:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
(In thousands)
|
|
U.S. Federal and State
|
|
|
Foreign
|
|
|
U.S. Federal and State
|
|
|
Foreign
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
9,066
|
|
|
$
|
—
|
|
|
$
|
8,965
|
|
|
$
|
—
|
|
Provision for lower of cost or market inventory write-
downs
|
|
|
2,452
|
|
|
|
—
|
|
|
|
2,717
|
|
|
|
—
|
|
Net operating loss carryforwards
|
|
|
41,384
|
|
|
|
984
|
|
|
|
32,380
|
|
|
|
737
|
|
Allowance for sales returns
|
|
|
1,223
|
|
|
|
—
|
|
|
|
1,541
|
|
|
|
—
|
|
Allowance for doubtful accounts receivable
|
|
|
17
|
|
|
|
—
|
|
|
|
97
|
|
|
|
—
|
|
Marketing discounts and price protection reserves
|
|
|
905
|
|
|
|
—
|
|
|
|
1,925
|
|
|
|
—
|
|
Tax credits carryforwards
|
|
|
2,942
|
|
|
|
—
|
|
|
|
4,583
|
|
|
|
—
|
|
Other
|
|
|
247
|
|
|
|
—
|
|
|
|
614
|
|
|
|
12
|
|
Deferred tax assets
|
|
|
58,236
|
|
|
|
984
|
|
|
|
52,822
|
|
|
|
749
|
|
Less valuation allowance
|
|
|
(57,623
|
)
|
|
|
(984
|
)
|
|
|
(50,682
|
)
|
|
|
(737
|
)
|
Deferred tax assets
|
|
|
613
|
|
|
|
—
|
|
|
|
2,140
|
|
|
|
12
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant and other derivative liabilities
|
|
|
(432
|
)
|
|
|
—
|
|
|
|
(2,140
|
)
|
|
|
—
|
|
Equity income in ACL
|
|
|
—
|
|
|
|
(1,715
|
)
|
|
|
—
|
|
|
|
(1,851
|
)
|
Other
|
|
|
(181
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Deferred tax liabilities
|
|
|
(613
|
)
|
|
|
(1,715
|
)
|
|
|
(2,140
|
)
|
|
|
(1,851
|
)
|
Net deferred tax assets and liabilities
|
|
$
|
—
|
|
|
$
|
(1,715
|
)
|
|
$
|
—
|
|
|
$
|
(1,839
|
)
|
A reconciliation of income tax benefit based on the federal statutory rate to actual income tax expense (benefit) is as follows:
|
|
Years Ended
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Expected federal income tax benefit at 34% on continuing operations
|
|
$
|
(6,270
|
)
|
|
$
|
(16,508
|
)
|
Expected state income tax benefit on continuing operations, net of
federal benefit
|
|
|
(711
|
)
|
|
|
(1,664
|
)
|
Expected federal and state income tax benefit on discontinued
operations
|
|
|
(1,240
|
)
|
|
|
(2,343
|
)
|
Current state income taxes
|
|
|
(17
|
)
|
|
|
87
|
|
Change in effective tax rates for state taxes
|
|
|
(319
|
)
|
|
|
—
|
|
Nondeductible expenses
|
|
|
31
|
|
|
|
4,718
|
|
Change in valuation allowance for U.S. tax purposes only
|
|
|
6,941
|
|
|
|
14,845
|
|
Foreign income taxes, including change in valuation allowance
|
|
|
172
|
|
|
|
488
|
|
Change in prior year deferred taxes and other
|
|
|
1,568
|
|
|
|
542
|
|
Total tax expense
|
|
$
|
155
|
|
|
$
|
165
|
|
Our significant tax returns are filed in the following jurisdictions: United States, United Kingdom and in the following states: Maryland and California. The tax years for 2009 through 2016 remain open to examination. We are not currently under examination by any of the jurisdictions where we file significant tax returns. We believe that our tax filing positions and deductions will be sustained if audited and we do not anticipate any adjustments that would result in a material adverse effect on our financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain tax positions have been recorded.
80
Note 18.
|
statements of cash flows
|
Supplemental Disclosures
|
|
Years Ended
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,156
|
|
|
$
|
7,997
|
|
Income taxes
|
|
$
|
43
|
|
|
$
|
338
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Subordinated notes payable exchanged for preferred
stock and warrants
|
|
$
|
—
|
|
|
$
|
8,546
|
|
Reclassification of deferred financing costs from
prepaid expenses and other assets to debt,
net of discounts
|
|
$
|
832
|
|
|
$
|
—
|
|
Reclassification of derivative liabilities and redeemable
convertible preferred stock to shareholders' equity
(deficit)
|
|
$
|
42,769
|
|
|
$
|
—
|
|
Interest payable on subordinated notes converted to
principal
|
|
$
|
72
|
|
|
$
|
—
|
|
Accretion on preferred stock
|
|
$
|
4,301
|
|
|
$
|
2,626
|
|
Preferred stock and derivative liability converted
into common stock
|
|
$
|
1,232
|
|
|
$
|
—
|
|
Preferred stock issuance costs accrued for in accounts
payable and accrued liabilities
|
|
$
|
—
|
|
|
$
|
95
|
|
Capital expenditures accrued for in accounts payable
and accrued liabilities
|
|
$
|
322
|
|
|
$
|
76
|
|
During the year ended December 31, 2015, we incurred severance charges of $0.5 million. During the year ended December 31, 2016, we recognized additional severance charges of $0.5 million of which $0.3 million is included in discontinued operations. Severance charges that are not part of discontinued operations are recorded as a component of general and administrative expense.
Note 20.
|
Employee Benefits
|
Effective October 3, 2012, we established the RLJ Entertainment 401(k) Plan, a defined contribution 401(k) plan for the benefit of employees meeting certain eligibility requirements. Under the plan, participants may contribute a portion of their earnings on a pre-tax basis. Employee contributions are forwarded to the plan administrator and invested in various funds at the discretion of the employee. RLJE matches a portion of those contributions based upon the employee’s compensation status in accordance with the U.S. Internal Revenue Code. Our U.S. sponsor plan contributes up to four percent depending on the employee’s contribution beginning one month after the date of hire. Our U.K. subsidiary sponsor plan contributes between three to seven percent to employees beginning after a probationary period of three months. Our Australia subsidiary sponsor plan contributes 9.5 percent to employees beginning at the date of hire.
During the years ended December 31, 2016 and 2015,
we incurred compensation expenses related to these plans of $0.4 million and $0.5 million, respectively.
81
Note 21.
|
Commitments and Contingencies
|
Operating Leases
RLJE’s principal executive office is located in Silver Spring, Maryland. We also maintain offices in Woodland Hills, California; London, England and Sydney, Australia with varying terms and expiration dates. All locations are leased. In addition, we have subleased our Stillwater, Minnesota, location associated with our discontinued operations. 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/
Digital Channels
|
Woodland Hills, CA
|
Administrative/Sales/Content
Acquisition
|
June 30, 2021
|
Digital Channels/
Wholesale Distribution
|
London, England
|
Content Development and
Production/Sales/
Administration for the U.K.
|
July 1, 2018
|
Digital Channels/IP Licensing/
Wholesale Distribution
|
Sydney, Australia
|
Sales/Administration
|
Month-to-month
|
Wholesale Distribution
|
|
(1)
|
The segment descriptions above reflect the location’s primary activity.
|
Future minimum annual rental payments include amounts we are obligated to pay under the leases described above and on space associated with discontinued operations that we began subleasing in 2016. The sublease is in effect through the end of the lease term in July 2022. Beginning in March 2017, our obligations for the subleased space are entirely offset by sublease income. We received no sublease income in 2016. Future minimum annual rental payments by year under noncancelable operating leases at December 31, 2016, are as follows:
(In thousands)
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Lease
Commitment
|
|
|
Sublease
Income
|
|
2017
|
|
$
|
1,291
|
|
|
$
|
146
|
|
2018
|
|
|
1,172
|
|
|
|
178
|
|
2019
|
|
|
1,017
|
|
|
|
182
|
|
2020
|
|
|
1,032
|
|
|
|
186
|
|
2021
|
|
|
450
|
|
|
|
189
|
|
Thereafter
|
|
|
91
|
|
|
|
112
|
|
|
|
$
|
5,053
|
|
|
$
|
993
|
|
Rent expense was $1.7 million and $1.8 million, for the years ended December 31, 2016 and 2015, respectively.
82
Employment Agreements
At December 31, 2016, our future contractual obligations under three employment agreements are summarized below. Included in the amounts below are any minimum bonus or agreed-upon amounts to be paid within the employment contracts over the next five years as long as the employee continues to be an employee in good standing and meets the performance criteria within the individual employment agreements. One of the four employment agreements does not have an expiration date and is included in each of the five years presented below.
(In thousands)
|
|
|
|
|
Year Ended
December 31,
|
|
Employment Contracts
|
|
2017
|
|
$
|
1,095
|
|
2018
|
|
|
1,025
|
|
2019
|
|
|
889
|
|
2020
|
|
|
750
|
|
2021
|
|
|
750
|
|
|
|
$
|
4,509
|
|
Future Royalty Obligations
At December 31, 2016, our future obligations for royalty advances, minimum royalty guarantees and exclusive distribution fee guarantees under the terms of our existing licenses and exclusive distribution agreements that have an off balance sheet commitment total $7.9 million. To the extent payment is not due until delivery has occurred, these commitments will be recognized in 2017 upon the earlier of payment or upon delivery of content by the content supplier.
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 impact on our financial position, results of operations or liquidity.
NOTE 22.
|
RELATED PARTY TRANSACTIONS
|
Equity Investments in Affiliate
We charged ACL overhead and personnel costs for the years ended December 31, 2016 and 2015, of approximately $0.1 million and $1.0 million, respectively. Amounts were recorded as a reduction in general and administrative expenses in the accompanying consolidated statements of operations. During 2015, ACL began incurring most of their personnel and related support costs directly opposed to these costs being incurred by us and then charged to ACL.
ACL paid dividends to RLJE Ltd. of $3.3 million and $3.3 million during the years ended December 31, 2016 and 2015, respectively. Dividends received were recorded as a reduction to the ACL investment account.
During 2016 and 2015, we paid ACL $0.7 million and $2.7 million, respectively, for the distribution rights to three titles, two of which have been released as of December 31, 2016 and one title which will be released in 2017. As we recognize revenues from these titles, and all other titles, we amortize our content advances resulting in the recognition of content amortization and royalty expense. During 2016 and 2015, content amortization and royalty expense recognized for these titles was $0.5 million and $1.3 million, respectively. As of December 31, 2016 and 2015, our remaining unamortized content advances for these titles are $1.7 million and $1.5 million, respectively.
Foreign Currency
We recognize foreign currency gains and losses, as a component of other expense, on amounts lent by Acorn Media to AME and RLJE Australia. As of December 31, 2016, Acorn Media had lent its U.K. subsidiaries approximately $7.3 million and its Australian subsidiary approximately $3.2 million. Amounts lent will be repaid in U.S. dollars based on available cash. Movement in exchange rates between the U.S. dollar and the functional currencies (which are the British Pound Sterling and the Australian dollar) of those subsidiaries that were lent the monies will result in foreign currency gains and losses. During the years ended December 31, 2016 and 2015, we recognized foreign currency losses of $1.5 million and $1.1 million, respectively.
83
The RLJ Companies, LLC
On June 27, 2013, The RLJ Companies, LLC (whose sole manager and voting member is the chairman of our board of directors) purchased from one of our vendors $3.5 million of contract obligations that we owed to the vendor. These obligations were payable by us to the vendor through September 5, 2013. Pursuant to the purchase, The RLJ Companies, LLC has become the account creditor with respect to these accounts. These accounts have not been otherwise modified. These purchased liabilities are included in accrued royalties and distribution fees in the accompanying consolidated balance sheets as of December 31, 2016 and 2015.
Sale of Preferred Stock and Warrants
On May 20, 2015, certain former board members and their affiliate companies, including RLJ SPAC Acquisition, LLC which is owned by the chairman of our board of directors, purchased 16,500 shares of preferred stock and warrants to acquire 1.7 million shares of common stock from us for $16.5 million.
NOTE 23.
|
SUBSEQUENT EVENT
|
First Amendment to Credit and Guaranty Agreement
On January 30, 2017, we amended the AMC Credit Agreement and borrowed and additional $8.0 million (see Note 10,
Debt)
. We used the proceeds to repay our subordinated term notes.
Stock-Based Compensation
On March 13, 2017, the Compensation Committee, subject to the receipt of subsequent shareholder approval, approved the award to our chief executive officer of a stock-based compensation package consisting of the following:
|
•
|
an option to purchase 700,000 shares of common stock with an exercise price of $2.3999 per share vesting in two years,
|
|
•
|
an option to purchase 700,000 shares of common stock with an exercise price of $3.00 per share vesting in four years,
|
|
•
|
300,000 restricted stock units vesting in four equal annual installments, and
|
|
•
|
performance-based stock units with a target award of 500,000 shares of common stock, but no more than 1,000,000 shares, vesting according to specified financial performance criteria and upon confirmation by the Compensation Committee of the satisfaction of such performance criteria based upon our audited financial statements for 2017, 2018, 2019 and 2020.
|
Stock compensation expense for the options and performance-based stock units will be calculated using the Black-Scholes model, and stock compensation expense for the restricted stock units will be calculated based upon the last closing price of the common stock on the date of grant.
84