rlje-10k_20151231.htm

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	Common Stock				Warrants
	High		Low		High		Low
2015
First quarter	$	2.22	$	1.44	$	0.10	$	0.08
Second quarter	$	1.59	$	0.28	$	0.08	$	0.08
Third quarter	$	1.65	$	0.34	$	0.10	$	0.10
Fourth quarter	$	1.32	$	0.47	$	0.01	$	0.01

2014
First quarter	$	5.01	$	4.31	$	0.40	$	0.22
Second quarter	$	4.38	$	3.36	$	0.30	$	0.22
Third quarter	$	3.90	$	2.28	$	0.22	$	0.05
Fourth quarter	$	4.04	$	1.98	$	0.25	$	0.08

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	Years Ended December 31,
(In thousands)	2015			2014
Revenues	$	124,917		$	137,689
Costs of sales		91,328			101,454
Gross profit		33,589			36,235
Operating expenses		80,624			50,710
Loss from operations		(47,035	)		(14,475	)
Equity earnings of affiliate		2,217			2,580
Interest expense, net		(9,968	)		(9,615	)
Change in fair value of stock warrants and other derivatives		1,373			3,522
Loss on extinguishment of debt		—			(1,457	)
Other expense		(1,402	)		(1,356	)
Provision for income taxes		(165	)		(399	)
Net loss	$	(54,980	)	$	(21,200	)

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

	Years Ended December 31,
(In thousands)	2015		2014
Wholesale Revenue:
U.S.	$	72,868	$	77,057
Terminated Image output deal		—		1,059
U.S. excluding output deal		72,868		78,116
International		13,373		14,322
Total Wholesale		86,241		92,438
Direct-to-Consumer
Ecommerce Catalog U.S.		25,947		31,168
Proprietary Digital Channels		7,543		4,126
International Ecommerce		2,079		2,264
Total Direct-to-Consumer		35,569		37,558
Intellectual Property		3,107		8,752
Total revenues excluding terminated output deal revenues		124,917		138,748
Terminated output deal revenues		—		(1,059	)
Total Revenues	$	124,917	$	137,689

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	Years Ended December 31,
(In thousands)	2015			2014

Net loss	$	(54,980	)	$	(21,200	)
Amortization of content		54,624			58,807
Cash investment in content		(38,868	)		(44,611	)
Depreciation and amortization		5,956			5,694
Goodwill impairment		30,260			981
Interest expense		9,968			9,615
Loss on extinguishment of debt		—			1,457
Provision for income tax		165			399
Severance and costs to modify debt		886			548
Change in fair value of stock warrants and other derivatives		(1,373	)		(3,522	)
Stock-based compensation		310			769
Basis-difference amortization in equity earnings of affiliate		546			589
Adjusted EBITDA	$	7,494		$	9,526

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are also obligated to maintain a minimum valuation ratio computed on the outstanding principal balance of our senior debt compared to the sum of our valuations of our content library and our investment in ACL. To the extent the valuation ratio exceeds the allowed threshold; we are obligated to make an additional principal payment such that the threshold would not be exceeded after giving effect to this payment. The valuation threshold is 83% as long as the unpaid principal balance exceeds $65.0 million and 75% thereafter.

The 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 Credit Agreement.

The 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 amended Credit Agreement, we must maintain at all times a cash balance of $1.0 million. As of December 31, 2015, we were in compliance with all covenants as stipulated in the amended Credit Agreement.

In connection with the sale of preferred stock and warrants, we used $10.0 million of the cash proceeds to make partial payment on the Credit Agreement and approximately $1.9 million for prepayment penalties, legal and accounting fees and other expenses associated with the transaction.

Upon consummation of the Business Combination, 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). The subordinated promissory notes mature on the earlier of October 3, 2018 or six months after the latest stated maturity of the senior debt issued pursuant to the Credit Agreement. The unsecured subordinated promissory notes currently bear an interest rate of 1.5% per annum, of which 45% is payable in cash annually and the balance is accrued and added to the principal, which is payable upon maturity. During the second quarter of 2014, interest was due of $992,000 and added to the principal balance of these notes and the remainder was paid to the debt holders. At December 31, 2014, our principal balance due pursuant to these notes was $16.0 million.

On April 15, 2015, we entered into an agreement to amend the subordinated promissory notes (the Note Amendment) that were issued to the Subordinated Note Holders. The principal terms of the Note Amendment are as follows:

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 shares of preferred stock and 2,564,000 warrants. At December 31, 2015, our principal balance due pursuant to these notes was $8.5 million.

On May 20, 2015, we closed a transaction in which we sold 31,046 shares of preferred stock and warrants to acquire 9,313,873 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 4,950,000 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 Credit Agreement and approximately $1.9 million for prepayment penalties, legal and accounting fees, which included 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, $878,000 was recorded against the proceeds received, $450,000 was recorded as additional debt discounts, $250,000 was included as interest expense and the balance was included in other expense.

We are increasing (or accreting) the carrying balance of our preferred stock up to its redemption value using the effective interest-rate method. During the years ended December 31, 2015 and 2014, we recognized accretion of $2.6 million and zero, respectively, which includes cumulative preferred dividends of $1.6 million (or $50.60 per share of preferred stock).

The warrants issued with the preferred stock have a term of five years and an exercise price of $1.50 per share. The exercise price is subject to standard anti-dilution protection including adjustments for offerings consummated at a per-share price of less than $1.50 per common share. Additionally, if we were to consummate certain fundamental transactions, such as a business combination or other change-in-control transactions, the warrant holders may require, under certain conditions, that we repurchase the warrants with cash equal to the warrants’ then fair value as determined using the Black Scholes valuation model.

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 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. We are accreting the carrying value of our preferred stock up to its redemption value over a period of time beginning from the issuance on May 20, 2015 to the required redemption date of May 20, 2020.

In the ordinary course of business we enter into transactions with related parties, primarily our equity method investee and entities owned and controlled by the Chairman of our Board of Directors. Information regarding transactions and amounts with related parties is discussed in Note 22, Related Party Transactions of our consolidated financial statements.

Since the filing of our 2014 Form 10-K, there were no new accounting pronouncements adopted. A summary of the accounting pronouncement issued but, not required to be adopted for the preparation of our current financial statements is as follows:

On February 25, 2016 the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (or ASU) No. 2016‑2, Leases (the Update). The Update requires that most leases, including operating leases, be recorded on the balance sheet as an asset and a liability, initially measured at the present value of the lease payments. Subsequently, the lease asset will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. The amendments in this Update are effective for public companies’ financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We will adopt this Update beginning January 1, 2019 by applying a modified retroactive basis, which were are currently assessing. As of December 31, 2015, we have a number of operating leases that will be affected (see Note 21, Commitments and Contingencies to our consolidated financial statements).

On April 7, 2015 the FASB issued Accounting Standards Update No. 2015‑3, Interest – Imputation of Interest (or ASU 2015-3). ASU 2015-3 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in ASU 2015-3 are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We will adopt ASU 2015-3 beginning January 1, 2016 by applying the new guidance on a retroactive basis. As of December 31, 2015 and 2014, we have unamortized debt issuance costs of $832,000 and $1.2 million, respectively that are currently recorded within prepaid expenses and other assets.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (or ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for RLJE on January 1, 2018. Early application is not permitted. The standard permits the use of one of three transition methods. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We are also assessing the transition methods available to implement this new accounting standard. This update could impact the timing and amounts of revenue recognized within our consolidated financial statements.

limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, U.S. GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. We will adopt this ASU beginning with our annual period ending December 31, 2016, and interim periods within annual periods beginning after December 15, 2016. Upon adoption, we will begin evaluating going concern under this guidance.

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by management and the related disclosures have been reviewed with the Audit Committee of our Board of Directors. We consider the following accounting policies to be critical in the preparation of our consolidated financial statements:

Revenue is 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 revenue primarily from the exploitation of acquired or produced content rights through various distribution channels. The content is monetized in DVD format to wholesale, licensed to broadcasters including cable companies and digital platforms like Amazon and Netflix, and exploited through other windows including: video-on-demand, direct-to-consumer, catalogs and subscription streaming channels. Revenue is presented net of sales returns, rebates, unit price adjustments, sales return reserves, sales discounts and market development fund reserves.

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 customers (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.

Revenues from our catalog sales are recognized net of an allowance for estimated returns once payment has been received from the customer and the item ordered has been shipped. Revenues from our proprietary, subscription-based, streaming channels are recognized on a straight-line basis over the subscription period once the subscription has been activated.

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.

Investments in content include the unamortized costs of completed 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.

Royalty and Distribution Fee Advances – Royalty and distribution fee advances 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 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 are charged to cost of sales 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.

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.

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 the lower-of-average-cost or market, as well as componentry.

value. The impairment test follows a two-step approach. The first step determines if the goodwill is potentially impaired, and the 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 as 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 projections 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.

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. Costs incurred to develop and implement our websites 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 on 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), website (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, 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 value is lower than the current carrying value.

We have warrants outstanding to purchase 30.4 million shares of our common stock, which are recorded at fair value on the consolidated balance sheets. Warrants issued in 2012 to acquire 21.0 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, these warrants are accounted for as a derivative liability in accordance with ASC 815-40, Contracts in Entity’s Own Equity.

In May 2015, we issued additional warrants to acquire 9.3 million shares of our common stock. We are accounting for these warrants as a derivative liability because the warrants contain 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.

Our preferred stock is convertible into shares of common stock at an exchange rate equal to 1,000 shares of common stock for each share of preferred stock, subject to adjustment for any unpaid dividends. The conversion rate is also subject to anti-dilution protection including adjustments for offering consummated at a per-share price of less than $1.00 per common share. Because of the potential adjustments to the conversion rate, we have bifurcated the conversion feature from its host instrument (a preferred share) and we are accounting for the conversion feature as a derivative liability in accordance with ASC 815-40.

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.

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.

For a discussion of each of all our significant accounting policies, including information and analysis of estimates and assumptions involved in their application, see Note 2, Summary of Significant Accounting Policies to our consolidated financial statements.

We typically acquire content via separately executed licensing or distribution agreements with content suppliers. These contracts generally require that we make advance payments before the content is available for exploitation. Advance payments are generally due prior to and upon delivery of the related content. To the extent payment is not due until delivery has occurred, we do not recognize our payment obligations under our licensing and distribution agreements prior to the content being delivered. As of December 31, 2015, we had entered into licensing and distribution agreement for which we are obligated to pay $10.5 million once the related content has been delivered.

A table with our contractual commitments is not required for smaller reporting companies within our MD&A. For information regarding our contractual commitments refer to Note 10, Debt and Note 21, Commitment and Contingencies to our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk is not required for smaller reporting companies.

We have audited the accompanying consolidated balance sheet of RLJ Entertainment, Inc. as of December 31, 2015 and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ (deficit) equity, and cash flows for the year ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RLJ Entertainment, Inc. at December 31, 2015, and the results of its operations and its cash flows for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheet of RLJ Entertainment, Inc. and subsidiaries as of December 31, 2014, and the related consolidated statements of operations, comprehensive loss, equity, and cash flows for the year ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RLJ Entertainment, Inc. and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

(In thousands, except share data)	December 31,
	2015			2014
ASSETS
Cash	$	4,530		$	6,662
Accounts receivable, net		24,997			17,389
Inventories, net		10,742			13,029
Investments in content, net		60,407			67,525
Prepaid expenses and other assets		2,801			2,633
Property, equipment and improvements, net		2,485			2,372
Equity investment in affiliate		20,098			22,281
Other intangible assets, net		10,769			15,272
Goodwill		14,631			44,891
Total assets	$	151,460		$	192,054
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities	$	23,233		$	24,582
Accrued royalties and distribution fees		51,552			42,493
Deferred revenue		1,900			5,006
Debt, net of discount		62,082			80,913
Deferred tax liability		1,839			2,002
Stock warrant and other derivative liabilities		10,678			601
Total liabilities		151,284			155,597
Redeemable convertible preferred stock, $0.001 par value, 1,000,000 shares authorized; 31,046 shares issued and outstanding at December 31, 2015; and zero shares issued and outstanding at December 31, 2014; liquidation preference of $32,617 at December 31, 2015 and zero at December 31, 2014		21,346			—
Shareholders' (Deficit) Equity:
Common stock, $0.001 par value, 250,000,000 shares authorized, 14,151,519 shares issued and outstanding at December 31, 2015 and 13,724,756 shares issued and 13,335,258 shares outstanding at December 31, 2014		14			14
Additional paid-in capital		85,391			87,706
Accumulated deficit		(105,514	)		(50,534	)
Accumulated other comprehensive loss		(1,061	)		(729	)
Treasury shares, at cost, zero shares at December 31, 2015 and 389,498 at December 31, 2014		—			—
Total shareholders' (deficit) equity		(21,170	)		36,457
Total liabilities and shareholders' (deficit) equity	$	151,460		$	192,054

	Years Ended December 31,
(In thousands, except per share data)	2015			2014

Revenues	$	124,917		$	137,689
Cost of sales
Content amortization and royalties		54,624			58,807
Manufacturing and fulfillment		36,704			42,647
Total cost of sales		91,328			101,454
Gross profit		33,589			36,235

Selling expenses		25,161			24,510
General and administrative expenses		19,247			19,525
Depreciation and amortization		5,956			5,694
Goodwill impairment		30,260			981
Total operating expenses		80,624			50,710
LOSS FROM OPERATIONS		(47,035	)		(14,475	)

Equity earnings of affiliate		2,217			2,580
Interest expense, net		(9,968	)		(9,615	)
Change in fair value of stock warrants and other derivatives		1,373			3,522
Loss on extinguishment of debt		—			(1,457	)
Other expense		(1,402	)		(1,356	)
LOSS BEFORE PROVISION FOR INCOME TAXES		(54,815	)		(20,801	)
Provision for income taxes		(165	)		(399	)
NET LOSS		(54,980	)		(21,200	)
Accretion on preferred stock		(2,626	)		—
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(57,606	)	$	(21,200	)
Net loss per common share:
Basic and diluted	$	(4.52	)	$	(1.69	)

Weighted average shares outstanding:
Basic and diluted		12,753			12,532

	Common Stock															Treasury Stock
(In thousands)	Shares			Par Value			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Shares			At Cost		Total Equity
Balance at January 1, 2014		13,701		$	13		$	86,938		$	(29,334	)	$	310			—		$	—	$	57,927
Issuance of restricted common stock for services		190			1			(1	)		—			—			(166	)		—		—
Forfeiture of restricted common stock		(97	)		—			—			—			—			97			—		—
Forfeiture of founder shares		(459	)		—			—			—			—			459			—		—
Stock-based compensation		—			—			769			—			—			—			—		769
Foreign currency translation		—			—			—			—			(1,039	)		—			—		(1,039	)
Net loss		—			—			—			(21,200	)		—			—			—		(21,200	)
Balance at December 31, 2014		13,335			14			87,706			(50,534	)		(729	)		390			—		36,457
Issuance of restricted common stock for services		1,305			1			—			—			—			(878	)		—		1
Forfeiture of restricted common stock		(51	)		—			—			—			—			51			—		—
Forfeiture of founder shares		(437	)		(1	)		1			—			—			437			—		—
Accretion on preferred stock		—			—			(2,626	)		—						—					(2,626	)
Stock-based compensation		—			—			310			—			—			—			—		310
Foreign currency translation		—			—			—			—			(332	)		—			—		(332	)
Net loss		—			—			—			(54,980	)		—			—			—		(54,980	)
Balance at December 31, 2015		14,152		$	14		$	85,391		$	(105,514	)	$	(1,061	)		—		$	—	$	(21,170	)

(In thousands)	Years Ended December 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(54,980	)	$	(21,200	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Equity earnings of affiliate		(2,217	)		(2,580	)
Content amortization and royalties		54,624			58,807
Depreciation and amortization		5,956			5,694
Goodwill impairment		30,260			981
Deferred tax provision		(70	)		188
Foreign currency exchange loss		1,111			1,149
Fair value adjustment of stock warrant and other derivative liabilities		(1,373	)		(3,522	)
Non-cash interest expense		3,001			2,314
Loss on extinguishment of debt		—			1,457
Stock-based compensation expense		310			769
Dividends received from affiliate		3,300			4,040
Changes in assets and liabilities:
Accounts receivable, net		(7,859	)		2,661
Inventories, net		2,190			2,476
Investments in content, net		(38,868	)		(44,611	)
Prepaid expenses and other assets		(564	)		833
Accounts payable and accrued liabilities		(921	)		(7,768	)
Deferred revenue		(3,060	)		737
Net cash (used in) provided by operating activities		(9,160	)		2,425
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(1,811	)		(1,655	)
Net cash used in investing activities		(1,811	)		(1,655	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock and warrants		22,500			—
Proceeds from senior debt, net of discount		—			65,110
Deferred financing costs, senior debt		—			(1,309	)
Repayment of senior debt		(12,449	)		(48,893	)
Repayments of borrowings under revolving credit facility		—			(14,949	)
Proceeds from production loan		—			9,865
Repayment of production loan		—			(11,155	)
Payment of preferred stock and warrant issuance costs		(783	)		—
Payment of senior debt modification costs		(450	)		—
Cash paid to extinguish debt		—			(30	)
Net cash provided by (used in) financing activities		8,818			(1,361	)
Effect of exchange rate changes on cash		21			(421	)
NET DECREASE IN CASH:		(2,132	)		(1,012	)
Cash at beginning of year		6,662			7,674
Cash at end of year	$	4,530		$	6,662

RLJ Entertainment, Inc. (or RLJE) is a global entertainment company with a direct presence in North America, the United Kingdom (or U.K.) and Australia 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 subsidiaries RLJE International Ltd (or RLJE U.K.), RLJ Entertainment Australia Pty Ltd. (or RLJE Australia) and RLJ Entertainment Ltd (or RLJE Ltd.). In February 2012, Acorn Media acquired a 64% ownership of Agatha Christie Limited (or ACL). References to Image include its wholly-owned subsidiary Image/Madacy Home Entertainment, LLC. “We,” “our” or “us” refers to RLJE and its subsidiaries unless otherwise noted. Our principal executive offices are located in Silver Spring, Maryland, with additional locations in Woodland Hills, California, Stillwater, Minnesota, and international locations 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:

We market our products through a multi-channel strategy encompassing (1) the licensing of original drama and mystery content managed and developed through our wholly-owned subsidiary, RLJE Ltd., and our majority-owned subsidiary, ACL, (our Intellectual Property, or IP, Licensing segment); (2) wholesale exploitation through partners covering broadcast/cable, digital, mobile, ecommerce and brick and mortar outlets (our Wholesale segment); and (3) direct relations with consumers via proprietary ecommerce, catalog and subscription-based video on demand (or SVOD) channels (our Direct-to-Consumer segment).

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, Netflix, Walmart, Target, Costco, Barnes & Noble, iTunes, BET, Showtime, PBS, DirecTV and Hulu.

Our Direct-to-Consumer segment includes the sale of video content and complementary merchandise directly to consumers through proprietary ecommerce websites and catalogs and the continued roll-out of our proprietary subscription-based SVOD channels, such as Acorn TV and UMC (or Urban Movie Channel).

RLJE’s management views the operations of the Company based on these three distinctive reporting segments: (1) IP Licensing, (2) Wholesale and (3) Direct-to-Consumer. Operations and net assets that are not associated with any of these stated segments are reported as “Corporate” when disclosing and discussing segment information. The IP Licensing segment includes intellectual property rights that we own or create and then sublicense for exploitation worldwide. Our Wholesale and Direct-to-Consumer segments consist of the acquisition, content enhancement and worldwide exploitation of exclusive content in various formats, including broadcast (which includes cable and satellite), DVD, Blu-ray, digital, video-on-demand (or VOD), SVOD, downloading and sublicensing. The Wholesale segment exploits content through third-party vendors, while the Direct-to-Consumer segment exploits the same content and digitally streaming channels.

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 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 estimates to be reasonably accurate, actual amounts may differ.

Certain amounts reported previously in our consolidated financial statements have been reclassified or adjusted to be comparable with the classifications used for our 2015 consolidated financial statements. We are now reporting our cost of sales in two

components, which are (a) content amortization and royalties and (b) manufacturing and fulfillment. Furthermore, certain amounts previously reported in our consolidated financial statements for 2014 have been adjusted. We are now reporting amortization of deferred financing costs of $156,000 as interest expense. Previously, we were reporting amortization of deferred financing costs as general and administrative expenses. We are now reporting dividends received from affiliate of $4.0 million as a source of cash flows from operating activities. Previously, we were reporting dividends received as part of our cash flows from investing activities.

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.

For the years ended December 31, 2015 and 2014, we recognized a net loss of $55.0 million and $21.2 million, respectively, and we used $9.2 million of cash for operating activities during 2015. At December 31, 2015, our cash balance was $4.5 million. At December 31, 2015, we had $62.1 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. (1) We continue to have significant past-due vendor payables, which currently exceed $12.0 million. These past-due payables are largely a result of significant past-due vendor payables acquired in 2012 when purchasing Image. As we work to catch up on the acquired past-due payables, we have fallen behind on other payables. We continue to work with our vendors to make payment arrangements that are agreeable with them and that give us flexibility in terms of when payments will be made. (2) We are forecasting that we may need to make an accelerated principal payment, which may be significant, on our senior debt during the fourth quarter of 2016 in order to meet our bank covenants. This is because our bank covenants become more restrictive during the fourth quarter of 2016. For example, our senior debt-to-Adjusted EBITDA ratio goes from 4.03 : 1.00 currently to 2.67 : 1.00. For us to meet these more restrictive bank covenants, we will need to improve our Adjusted EBITDA and/or pay down our senior debt balance. (3) We must maintain a certain level of content spend necessary to acquire new content that allows us to generate the revenues and margins necessary to meet our obligations.

We have taken actions to improve our operating results and Adjusted EBITDA in 2016 by exiting certain non-core operations that have been generating losses. During December 2015, we approved and started implementing a plan to close our Acacia catalog operations (see Note 3, Segment Information). We are also exploring various financing alternatives, which includes raising additional capital and/or refinancing our existing senior debt. There can be no assurances that we will be able to secure additional capital or be able to refinance our senior debt. While our ability to meet our commitments is not dependent upon these efforts, if we were to complete one of these transactions, it would help to address our liquidity risk. We believe that our current financial position combined with our 2016 forecasted operational results and management efforts will be sufficient to meet our commitments. However, there can be no assurances that we will be successful in realizing improved results from operations including improved adjusted EBITDA, generating sufficient cash flows from operations necessary to meet our future covenant requirements, or agreeing with vendors on revised payment terms.

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.

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.

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.

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.

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.

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 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 as 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 projections 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 and 2014, we recognized goodwill impairments of $30.3 million and $981,000, respectively (see Note 9, Goodwill and 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 website expenditures. Similar to how we account for internal-use software development, costs incurred to develop and implement our websites 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 on 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), website (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.

As described in Note 9, Goodwill and Other Intangible Assets, during the third and fourth quarters of 2015, we recorded accelerated amortization expense totaling $1.3 million related to our brand name assets. During 2015 and 2014, we did not recognize any impairment on our other intangible assets.

We have warrants outstanding to purchase 30.4 million shares of our common stock, which are recorded at fair value on the consolidated balance sheets (see Note 12, Stock Warrants). Warrants issued in 2012 to acquire 21.0 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, these warrants are accounted for as a derivative liability in accordance with ASC 815-40, Contracts in Entity’s Own Equity.

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.

The changes in the fair value of the warrants and bifurcated conversion feature are recorded as “Change in fair value of stock warrants and other derivatives” within our consolidated statements of operations.

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. give rise to foreign tax credits that we may use to offset taxable income in the United States.

The consolidated financial statements are presented in our company’s functional and 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 U.K. and RLJE Ltd.; 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 the statement of operations as a component of other income (expense).

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 fair value as the debt bears market rates of interest. The carrying amount of our subordinated debt, which includes accrued interest, is $1.6 million more than its fair value of $7.9 million as a result of its reduced interest rate from 12.0% to 1.5% for two years beginning January 1, 2015. The fair value of subordinated debt was determined by discounting future interest and principal payments by an estimated market rate of interest of 12.0%. This fair value assessment of our subordinated debt is a level 3 measurement as provided by ASC 820, “Fair Value Measurements and Disclosures.”

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 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.

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.

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 2015, sales reported within our wholesale segment to Amazon and Walmart represented 21.7% and 12.6%, respectively, of our net revenues. Our top five customers accounted for 54.8% of net revenues during the same period. During 2014, sales to Amazon accounted for 19.0% of our net revenues. Our top five customers accounted for approximately 46.2% 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, 2015, SPHE and Netflix accounted for approximately 38.4% and 22.1%, respectively, of our gross accounts receivable. At December 31, 2014, SPHE and Netflix accounted for approximately 44.0% and 21.4%, respectively, or our gross accounts receivable.

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.

Depreciation and amortization are computed by applying the straight-line method over the estimated useful lives of the furniture, fixtures and equipment (3 to 7 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 to 10 years).

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.

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.

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.

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.

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, 2015 and 2014, advertising expense was $3.8 million and $3.3 million, respectively.

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 reduced by estimated forfeitures.

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.

applying a modified retroactive basis, which were are currently assessing. As of December 31, 2015, we have a number of operating leases that will be affected (see Note 21, Commitments and Contingencies).

On April 7, 2015 the FASB issued Accounting Standards Update No. 2015‑3, Interest – Imputation of Interest (or ASU 2015-3). ASU 2015-3 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in ASU 2015-3 are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We will adopt AUS 2015-3 beginning January 1, 2016 by applying the new guidance on a retroactive basis. As of December 31, 2015 and 2014, we have unamortized debt issuance costs of $832,000 and $1.2 million, respectively that are currently recorded within prepaid expenses and other assets.

On August 27, 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern (or ASU 2014-15), which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. Under U.S. GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, U.S. GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. We will adopt this ASU beginning with our annual period ending December 31, 2016, and interim periods within annual periods beginning after December 15, 2016. Upon adoption, we will begin evaluating going concern under this guidance.

In accordance with the requirements of the ASC 280 “Segment Reporting,” selected financial information regarding our reportable business segments, IP Licensing, Wholesale and Direct-to-Consumer, 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 customer base or acquires content differently. 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 segment consists of the acquisition, enhancement and worldwide exploitation of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), VOD, streaming video, downloading and sublicensing. Our Direct-to-Consumer segment consists of our mail-order catalog and ecommerce businesses and our proprietary digital streaming channels.

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, 2015 and 2014:

(In thousands)	Year Ended December 31, 2015
	IP Licensing			Wholesale			Direct-to- Consumer			Corporate			Total

Revenues	$	3,107		$	86,241		$	35,569		$	—		$	124,917
Operating costs and expenses		(2,276	)		(80,972	)		(41,303	)		(11,185	)		(135,736	)
Depreciation and amortization		(143	)		(2,213	)		(3,084	)		(516	)		(5,956	)
Goodwill impairment		—			(30,260	)		—			—			(30,260	)
Share in ACL earnings		2,217			—			—			—			2,217
Segment contribution	$	2,905		$	(27,204	)	$	(8,818	)	$	(11,701	)	$	(44,818	)

(In thousands)	Year Ended December 31, 2014
	IP Licensing			Wholesale			Direct-to- Consumer			Corporate			Total

Revenues	$	8,752		$	91,379		$	37,558		$	—		$	137,689
Operating costs and expenses		(6,662	)		(85,595	)		(41,413	)		(11,819	)		(145,489	)
Depreciation and amortization		(115	)		(1,684	)		(3,415	)		(480	)		(5,694	)
Goodwill impairment		—			—			(981	)		—			(981	)
Share in ACL earnings		2,580			—			—			—			2,580
Segment contribution	$	4,555		$	4,100		$	(8,251	)	$	(12,299	)	$	(11,895	)

Operating costs and expenses exclude costs related to depreciation and amortization, as well as goodwill impairments, which are separately presented in the tables above. Included in our Wholesale segment contribution for the year ended December 31, 2014 is a loss of $3.1 million incurred during the sell-off period under a terminated feature film content output deal that was recognized in the first quarter of 2014.

Despite generating revenues in excess of $10.0 million for each of the past two years, the Acacia catalog, which is included in our Direct-to-Consumer segment, has not secured a large enough market share to become profitable. The health and fitness sector has become increasingly competitive and digital in nature, thereby reducing opportunities for merchandise cross and up-selling. Management has therefore decided to exit the Acacia catalog and online business and focus on distributing Acacia content through RLJE’s third-party wholesale channels and its direct-to-consumer SVOD service Acacia TV. For the years ended December 31, 2015 and 2014, Acacia catalog net revenues were $11.1 million and $13.3 million, respectively. Significant operating costs and expenses consist of cost of goods sold and selling expense, which include advertising and marketing costs, catalog expenses and postage. As a percentage of revenues, these significant expenses were 128% and 108% of revenues for 2015 and 2014, respectively. The Acacia catalog generated operating losses, which are included in segment contribution, of $4.0 million and $1.8 million for the years ended December 31, 2015 and 2014, respectively.

A reconciliation of total segment contribution (loss) to loss before provision for income taxes is as follows:

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.

During the year ended December 31, 2015, we had capital expenditures of $1.6 million, which includes $76,000 that was accrued for in accounts payable. The capital expenditures by segment during 2015 were $112,000, $682,000, $548,000 and $239,000 for the IP Licensing, Wholesale, Direct-to-Consumer and Corporate segments, respectively. During the year ended December 31, 2014, we had capital expenditures of $2.0 million, which includes $300,000 that was accrued for in accounts payable. The capital expenditures by segment during 2014 were $437,000, $716,000, $437,000 and $365,000 for the IP Licensing, Wholesale, Direct-to-Consumer and Corporate segments, respectively.

Long-lived assets include goodwill, other intangibles assets, equity investment in ACL, investments in content and property, equipment and improvements.

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.

The following summarized financial information is derived from financial statements of ACL as of December 31, 2015 and 2014 (balance sheets), and for the years ended December 31, 2015 and 2014 (income statements):

Balance sheet amounts have been translated from the GBP to U.S. dollar using the December 31, 2015 and 2014 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.

Accounts receivable are primarily derived from: (1) the sale of physical content (DVDs) to retailers and wholesale distributors who ship to mass retail, (2) direct-to-consumer, e-commerce, catalog and download-to-own sales and (3) video content we license to broadcast, cable/satellite providers and digital subscription platforms like Netflix and Amazon. Our accounts receivable typically trends with retail seasonality.

Wholesale receivables include amounts billed by our U.S. distribution facilitation partner, SPHE. Each quarter, our distribution partner preliminarily settles 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 our distribution partner. Amounts vary and tend to be seasonal following our sales activity. As of December 31, 2015, our distribution partner owed us $826,000 for receivables settled as of year-end; and as of December 31, 2014, we owed our distribution partner $3.1 million for receivables settled as of year-end. The wholesale receivables are reported net of amounts owed to the distribution partner as amounts are offset against each other when settling.

As of December 31, 2015 and 2014, the net wholesale receivables with our distribution partner were $11.1 million and $6.6 million respectively, which is included in accounts receivable.

Our Direct-to-Consumer receivable represents amounts due to us from our merchant bank related to our credit card transactions processed as of year-end.

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 $11.4 million and $11.1 million as of December 31, 2015 and 2014, 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, 2015 and 2014, we recorded impairment charges of $1.6 million and $2.4 million, respectively. These charges are included in cost of sales as manufacturing and fulfillment cost.

During the years ended December 31, 2015 and 2014, we recorded no impairment to property, equipment and improvements. Depreciation expense was $917,000 for the year ended December 31, 2015 and $878,000 for the year ended December 31, 2014.

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, 2015 and 2014 were $3.2 million and $4.8 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.

Of the goodwill recognized, approximately $21.4 million will be 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 segment during 2015 and $981,000 in our Direct-to-Consumer segment during 2014.

During the fourth quarter of 2015, our Wholesale segment performance, primarily in the U.S., was below its forecast for the quarter. Also, during this 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. Our ability to increase our investments in future content will continue to be hindered in the near term by accelerated principal reduction payments that may be necessary in 2016 (see Liquidity in Note 1, Description of Business). We considered these decreases to be a triggering event and hired a valuation firm to fair value our U.S. Wholesale reporting unit, which held the majority of our goodwill. The valuation firm valued our U.S. Wholesale 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 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.

During the fourth quarter of 2014, the stock price of our publicly traded common stock decreased by 48% and our Direct-to-Consumer segment recognized lower revenue during the quarter compared to prior year’s fourth quarter. Given the magnitude of these decreases, we considered these to be triggering events and hired a valuation firm to fair value our reporting units that held the majority of our goodwill. The valuation firm fair valued our reporting units 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 valuations were that only our Direct-to-Consumer segment in the UK had a carrying book value in excess of its fair value. Management assessed the amount of implied goodwill within this reporting unit and concluded that its goodwill was fully impaired. The goodwill that remains in our Direct-to-Consumer segment is associated with our proprietary SVOD channels.

	December 31, 2015
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net

Trade name	$	9,875	$	(2,602	)	$	7,273
Customer relationships		9,290		(7,664	)		1,626
Websites		3,864		(3,115	)		749
Supplier contracts		1,720		(868	)		852
Option for future content		900		(631	)		269
Leases		400		(400	)		—
	$	26,049	$	(15,280	)	$	10,769

	December 31, 2014
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net

Trade name	$	10,950	$	(1,642	)	$	9,308
Customer relationships		9,290		(6,039	)		3,251
Websites		3,331		(2,211	)		1,120
Supplier contracts		1,720		(609	)		1,111
Option for future content		900		(418	)		482
Leases		400		(400	)		—
	$	26,591	$	(11,319	)	$	15,272

Amortization expense for the years ended December 31, 2015 and 2014 was $5.0 million and $4.8 million, respectively. Costs incurred to develop, upgrade or enhance functionality of websites are capitalized while website operating costs are expensed as incurred. During the years ended December 31, 2015 and 2014, we capitalized $548,000 and $437,000 of costs related to our websites, respectively.

During the third quarter of 2015, we committed to using the RLJE brand for all new feature-film content. We will 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. Now 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 $463,000 of accelerated amortization during 2015. The change will result in increased amortization expense through 2019, and then reduced amortization expense thereafter, as follows:

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 (see Note 3, Segment Information). As a result, we re-assessed the recoverability and the remaining useful life of our Acacia brand and recognized $842,000 of accelerated amortization 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 the year ended December 31, 2015, as a result of the changes in estimates related to the accelerated amortization of trade names, our loss from operations and net loss each increased by a total of $1.3 million and our basic and diluted loss per share increased by $0.10.

As of December 31, 2015, the remaining amortization by year for intangible assets is as follows:

The subordinated notes mature in 2018 and the senior notes mature in 2019; however, if we do not subsequently extend the subordinated debt maturity, then the new senior notes’ maturity would accelerate in conjunction with the repayment of the subordinated notes in 2018. The above table reflects the assumption that no extension of the subordinated notes occurs. The senior notes’ minimum principal payments in 2018 would be $5.3 million if the senior notes’ maturity is not accelerated.

On September 11, 2014, we entered into a $70.0 million Credit and Guaranty Agreement (the Credit Agreement) with a syndicate of lenders led by McLarty Capital Partners, as administrative agent. On April 15, 2015, we entered into an agreement with the lenders to amend the Credit Agreement whereby (i) the interest rate was increased to LIBOR plus 10.64%, (ii) certain financial statement and other reporting and lending communication requirements were modified, (iii) certain financial covenants were made less restrictive for the quarters ended March 31, 2015 and June 30, 3015, (iv) the Minimum Cash Balance (as defined in the Credit Agreement) that we are required to maintain was lowered to $1.0 million, (v) the lender waived an event of default as our cash balance was below the Minimum Cash Balance required, and (vi) the lenders consented to the issuance of preferred stock and warrants (see Note 11, Redeemable Convertible Preferred Stock). The Credit Agreement consists of a term loan totaling $70.0 million with a maturity of five years, at an interest rate equal to LIBOR plus 10.64%. LIBOR has a floor of 0.25%. Principal payment obligations as a percentage of the amount initially borrowed are 3.5% per annum paid quarterly for the first two years, 5.0% for the third year and 7.5% for the remaining term with any unpaid principal balance due at maturity. The obligations under the Credit Agreement are

secured by a lien on substantially all of our consolidated assets pursuant to the Pledge and Security Agreement, dated as of September 11, 2014.

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

The Credit Agreement 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 Credit Agreement, we must maintain at all times a cash balance of $1.0 million. As of December 31, 2015, we were in compliance with all covenants as stipulated in the Credit Agreement.

When repaying the previous credit facility on September 11, 2014, we recognized a $1.5 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.

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). The subordinated promissory notes mature on the earlier of October 3, 2018 or six months after the latest stated maturity of the senior debt issued pursuant to the Credit Agreement. The

unsecured subordinated promissory notes currently bear an interest rate of 1.5% per annum, of which 45% is payable in cash annually and the balance is accrued and added to the principal, which is payable upon maturity.

During the second quarter of 2014, interest was due of $1.8 million of which $992,000 was added to the principal balance of these notes and the remainder was paid to the Subordinated Note Holders.

We are providing interest expense on our subordinated notes payable using the effective interest rate method at an annual interest rate of approximately 5%.

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 shares of preferred stock and 2,563,873 warrants (see Note 12, Stock Warrants).

On May 20, 2015, we closed a transaction in which we sold 31,046 shares of preferred stock and warrants to acquire 9,313,873 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 4,950,000 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 Credit Agreement 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, $878,000 was recorded against the proceeds received, $450,000 was recorded as additional debt discounts, $250,000 was included as interest expense and the balance was included in other expense. There were no shares of preferred stock issued or outstanding at December 31, 2014.

In connection with the sale, 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.

We issued warrants with a term of five years beginning October 3, 2012 that provide the warrant holder the right to acquire a share of our common stock for $12.00 per share (the 2012 Warrants). The warrants are redeemable by us for $0.01 per warrant share if our common stock trades at $17.50 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 $6.00 and $9.00 assuming no additional consideration was received.

On May 20, 2015, we issued warrants to acquire 9.3 million shares of our common stock (the 2015 Warrants). The terms are described in Note 11, Redeemable Convertible Preferred Stock.

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. At December 31, 2015, there were 14,151,519 shares of common stock issued and outstanding. As of December 31, 2014, there were 13,724,756 shares issued and 13,335,258 shares 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, 2015, no demand had been received.

Included in our common shares outstanding at December 31, 2014 were 437,241 shares held by certain founding shareholders as part of the initial public offering of RLJE. These shares were subject to forfeiture over a two-year period if certain stock price targets were not achieved. All shares were forfeited and returned in January 2015.

As shares are forfeited, they become treasury shares. Forfeiture of shares occurs when directors or employees resign or stop working for us prior to achieving vesting conditions for certain stock-based compensation awards, when performance conditions are not met regardless of continued employment or service or when Sponsor shares are returned to us as discussed above. Treasury shares are available to RLJE for future grants or issuances of shares at our discretion. At December 31, 2015, we did not hold any treasury shares. At December 31, 2014, we held 389,498 shares of common stock in treasury.

As of December 31, 2015 and 2014, 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 6,244,153 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 750,000 shares or (ii) restricted stock, restricted stock units, performance shares and/or other stock-based awards with respect to more than 750,000 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, 2015 and 2014, there were 4,534,166 and 787,668 shares, respectively, available for future grants under the Incentive Plan.

Compensation expense relating to the restricted stock awards for the years ended December 31, 2015 and 2014 was $310,000 and $769,000, respectively. Unrecognized stock-based compensation expense relating to these restricted stock awards of approximately $843,000 at December 31, 2015 is expected to be expensed ratably over the remaining vesting period through October 2016. The weighted average remaining vesting period for non-vested shares is six months. Compensation expense related to restricted stock awards is included in general and administrative expenses. On June 30, 2015, we allowed 57,224 shares of common stock to vest that were granted to those board members who resigned on June 4, 2015 (see Note 11, Redeemable Convertible 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 $146,000 during the year ended December 31, 2015.

During the year ended December 31, 2015, 1,304,248 shares of restricted common stock were granted. Of the 1,304,248 shares granted, 476,005 shares were granted to executive officers and directors and 828,243 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 $0.69 to $1.22 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. The vesting of restricted shares is subject to the achievement of certain service criteria, qualitative performance criteria, or both. The amount of expense recognized to date has been reduced by estimated forfeitures related to certain performance targets that are not likely to be achieved. The restricted stock may be subject to further forfeitures if the employee or director terminates his or her service during the vesting period or future performance measures are not achieved. 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, 2015, and changes during the year then ended are presented below:

During the year ended December 31, 2014, 190,280 shares of restricted common stock were granted, 182,206 shares were vested and 93,742 shares were forfeited. Of the 190,280 shares granted, 164,780 shares were granted to executive officers and directors and 25,500 shares were granted to other members of management. Of the shares forfeited, 65,297 shares of restricted stock were forfeited based upon the failure to achieve the required performance conditions and the remainder of the forfeitures were due to employee resignations. The shares granted in 2014 were fair valued on the date of grant with a range of $3.49 to $5.00 per share, for a total value of approximately $766,000. These restricted shares will vest and be expensed over a three-year period for executive management and other management while restricted shares granted to directors vest and are expensed over a one-year period as a component of general and administrative expenses. The vesting of restricted shares is subject to the achievement of certain service criteria, qualitative performance criteria, or both. The amount of expense recognized to date has been reduced by estimated forfeitures related to certain performance targets that are not likely to be achieved. The restricted stock may be subject to further forfeitures if the employee or director terminates his or her service during the vesting period or future performance measures are not achieved.

Restricted stock award activity under the Incentive Plan for the year ended December 31, 2014, and changes during the year then ended are presented below:

We have warrants outstanding to purchase 30,355,540 shares of our common stock, which are recorded at fair value on the consolidated balance sheets. We issued the 2012 Warrants to purchase 21,041,667 shares of our common stock in 2012 and we issued the 2015 Warrants to purchase 9,313,873 shares of our common stock in 2015.

Of the 2012 Warrants, 15,375,000 are registered under the Securities Act and are available for trading on the over-the-counter market. Since the first quarter of 2014, there has been a lack of trading activity for the registered warrants, and as such, when assessing their fair value we transferred them from Level 1 to Level 3 within the fair-value hierarchy. As of December 31, 2015 and 2014, we determined the fair value of the registered warrants using a Monte Carlo simulation model. Inputs to the model are stock volatility, contractual warrant terms (which are remaining life of the warrant, the redemption feature, the exercise price, and assumptions for the reduction in exercise price if we were to reorganize as a private company), the risk-free interest rate, and a discount for the lack of marketability (DLOM) pertaining to the underlying common stock as the shares acquirable are not registered. We use the closing market price of our common stock to compute stock volatility. The DLOM is determined using the Finnerty Average-Strike Put Option Marketability Discount Model (Finnerty Model), which takes into consideration the discount period, stock dividend rates, and stock volatility. We used a DLOM rate of 19.0% as of December 31, 2015 and 11.2% as of December 31, 2014.

Assumptions regarding adjustments to the exercise price are based on management’s best estimates of the likelihood of reorganizing as a private company and the amount of the resulting exercise-price adjustment.

The remaining 2012 Warrants, consisting of Sponsor warrants of 3,816,667 and unregistered warrants of 1,850,000, are classified as Level 3 within the fair-value hierarchy. Because RLJE has agreed not to exercise its redemption right pertaining to certain warrants held by RLJ SPAC Acquisition LLC (or the Sponsor) and because the unregistered warrants generally have a discounted fair value as compared to the registered warrants, the valuation of the sponsor warrants and the unregistered warrants has always been a Level 3 measurement. We determined the fair value of the Sponsor warrants using a Monte Carlo simulation model and using the same assumptions used for the registered warrants, except we did not include the redemption feature.

The unregistered 2012 Warrants differ from the registered warrants in that they have not been registered under the Securities Act and are not available for trading. As of December 31, 2015 and December 31, 2014, we determined the fair value of these warrants by taking the fair value of a registered warrant and discounting it using the Finnerty Model for the lack of marketability as these warrants are not registered. We used a DLOM rate of 25.0% as of December 31, 2015 and 17.8% as of December 31, 2014. The 2012 Warrants decreased in fair value from $601,000 as of December 31, 2014 to $36,000 as of December 31, 2015.

We are using a lattice model to value the 2015 Warrants, which are classified as Level 3 within the fair-value hierarchy. Inputs to the model are stock volatility, contractual warrant terms (which are 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. We use the closing market price of our common stock to compute stock volatility. The 2015 Warrants increased in fair value since issuance from $2.1 million as of May 20, 2015 to $2.2 million as of December 31, 2015.

We are using the lattice model to value the preferred stock’s embedded conversion feature, which is classified as Level 3 within the fair-value hierarchy. Inputs to the model are stock volatility, contractual terms (which are 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. We use the closing market price of our common stock to compute stock volatility. The fair value of the embedded conversion feature decreased since issuance from $9.4 million as of May 20, 2015 to $8.4 million as of December 31, 2015.

The following tables represent the valuation of our warrant and other derivative liabilities within the fair-value hierarchy:

The following tables include a roll-forward of activity for our warrant and other derivative liabilities classified within Level 1 and Level 3 of the fair-value hierarchy:

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:

During the years ended December 31, 2015 and 2014, the investments in content were impaired by $3.2 million and $4.8 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.

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, 2015 and 2014:

We have outstanding warrants to acquire 30,355,540 shares of common stock that are not included in the computation of diluted net loss per common share as the effect would be anti-dilutive because their exercise prices which range from $1.50 to $12.00 per share exceed the fair value of our common stock. For the years ended December 31, 2015 and 2014, we have weighted average outstanding shares of approximately 36,000 and 613,000, respectively, which are held by founding shareholders that were forfeited in January 2015 (See Note 13, Equity), that are not included in the computation of basic or diluted net loss per share as the effect would be anti-dilutive. For the years ended December 31, 2015 and 2014, we have weighted average outstanding shares of approximately 234,000 and 923,000 shares, respectively, of compensatory restricted common stock, that are not included in the computation of basic and diluted net loss per share as the effect would be 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, 2015, 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, 2015, we had NOL carryforwards for Federal and state tax purposes of approximately $87.3 million and approximately $59.6 million, respectively, which are available to offset taxable income through 2035. 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.

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,
(In thousands)	2015						2014
	U.S. Federal and State			Foreign			U.S. Federal and State			Foreign
Deferred tax assets:
Intangible assets	$	14,079		$	—		$	—		$	—
Provision for lower of cost or market inventory write- downs		2,717			—			4,232			—
Net operating loss carryforwards		32,380			737			25,173			416
Allowance for sales returns		1,541			—			1,208			—
Allowance for doubtful accounts receivable		97			—			12			—
Marketing discounts and price protection reserves		1,925			—			2,559			—
Accrued compensation and benefits		170			—			173			—
Tax credits carryforwards		4,583			—			4,156			—
Other		444			12			371			13
Deferred tax assets		57,936			749			37,884			429
Less valuation allowance		(55,796	)		(737	)		(35,837	)		(416	)
Deferred tax assets		2,140			12			2,047			13
Deferred tax liabilities:
Warrant and other derivative liabilities		(2,140	)		—			(1,625	)		—
Goodwill amortization								(833	)		—
Equity income in ACL		—			(1,851	)		—			(1,604	)
Deferred tax liabilities		(2,140	)		(1,851	)		(2,458	)		(1,604	)
Net deferred tax assets and liabilities	$	—		$	(1,839	)	$	(411	)	$	(1,591	)

A reconciliation of income tax benefit based on the federal statutory rate to actual income tax expense (benefit) is as follows:

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 2015 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.

During the year ended December 31, 2014, we incurred severance charges of $548,000 as part of the implemented reorganization from the formation of RLJE with former employees. During the year ended December 31, 2015, we recognized additional severance charges of $574,000 associated with this reorganization. These charges were recorded as a component of general and administrative expense.

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. and Australia subsidiaries sponsor plans contribute between three to seven percent and nine percent, respectively, to employees beginning after a probationary period of three months to one year.

During the years ended December 31, 2015 and 2014, we incurred compensation expenses related to these plans of $578,000 and $539,000, respectively.

Future minimum annual rental payments by year under operating leases at December 31, 2015, are approximately as follows:

Rent expense was $1.9 million and 2.0 million, for the years ended December 31, 2015 and 2014, respectively.

At December 31, 2015, our future contractual obligations under four 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.

At December 31, 2015, 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 $10.5 million. To the extent payment is not due until delivery has occurred, these commitments will be recognized in 2016 within our consolidated financial statements upon the earlier of payment or upon delivery of content by the content supplier.

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.

We charged ACL overhead and personnel costs for the years ended December 31, 2015 and 2014, of approximately $1.0 million and $2.3 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 $4.0 million during the years ended December 31, 2015 and 2014, respectively. Dividends received were recorded as a reduction to the ACL investment account.

We have advanced ACL $2.6 million for distribution rights for Partners in Crime. During the third quarter of 2015, we received the title from ACL and began distributing it with third parties. For the year ended December 31, 2015, we recognized content amortization and royalty expense of $1.7 million, which is included in our cost of goods sold as content amortization and royalties. As of December 31, 2015, our remaining unamortized content advance is $0.9 million.

During 2015, we paid $120,000 of the $300,000 advance due to ACL for distribution rights for And Then There Were None. The remaining advance was paid in February 2016. There was no content amortization and royalty expense recognized in 2015 as the title was not released until 2016.

We recognize foreign currency gains and losses, as a component of other expense, on amounts lent by Acorn Media to RLJE Ltd. and RLJE Australia. As of December 31, 2015, Acorn Media had lent its U.K. subsidiaries approximately $8.5 million and its Australian subsidiary approximately $3.4 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, 2015 and 2014, we recognized foreign currency losses of $1.1 million and $1.1 million, respectively.

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 obligation 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, 2015 and 2014.

The chairman of our board of directors, Mr. Robert L. Johnson, through his company, RLJ SPAC Acquisition, LLC announced his intention to purchase up to $2.0 million of our outstanding common stock from time to time over a 24-month period beginning June 19, 2013. From June 2013 through January 2015, $1.7 million of common stock was purchased under this plan, which expired with an unused balance in June 2015. All purchases were made at the discretion of Lazard Capital Markets LLC in the open market or in privately negotiated transactions in compliance with applicable laws and regulations.

During the years ended December 31, 2015 and 2014, RLJ SPAC Acquisition LLC purchased 3,100 and 128,665 shares, respectively.

On May 20, 2015, certain former board members and their affiliate companies, including RLJ SPAC Acquisition, LLC, purchased 16,500 shares of preferred stock and warrants to acquire 4,950,000 share of common stock from us for $16.5 million.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (or Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We periodically review the design and effectiveness of our disclosure controls and internal control over financial reporting. We make modifications to improve the design and effectiveness of our disclosure controls and internal control structure, and may take other corrective action, if our reviews identify a need for such modifications or actions.

As of the end of the period covered by this Annual Report on Form 10-K for the year ended December 31, 2015 (or Annual Report), we evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Accounting Officer, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and our Chief Accounting Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Annual Report because of material weaknesses in our internal controls over financial reporting, relating to the review of content ultimates and the preparation and review of reconciliations, which we view as an integral part of our disclosure controls and procedures.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting at December 31, 2015. In conducting this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework– 1992 and identified material weaknesses in our internal control over financial reporting as of December 31, 2015 as defined in SEC Regulation S-X. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weaknesses described below, management concluded that, at December 31, 2015, our internal control over financial reporting was ineffective.

Management has concluded that we failed to maintain an effective control environment and monitoring activities as a result of (1) an ineffective design of the process level controls associated with the review of content ultimates and (2) a failure to design or maintain effective process level controls over certain reconciliations and management review.

In light of the material weaknesses, we performed the following action steps during 2015:

While the above action steps were implemented as of December 31, 2015, it will take time to properly transition roles and responsibilities, as well as provide necessary staff training. During 2016, we will be assessing the effectiveness of the changes made and make additional modifications as required.

Based upon the above changes, management believes that the financial statements included in this report fairly represent in all material aspects our Company’s financial position, results of operations and cash flows for the periods presented.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules that permit us to provide only management's report in this Annual Report.

The additional information required by this Item will be included in our company’s proxy statement for its 2016 Annual Meeting of Stockholders.

We have a Code of Ethics and Business Conduct Policy that applies to all of our employees, including our principal executive officer, principal financial and principal accounting officer, and to our directors. We have posted the Code of Ethics and Business Conduct Policy under the menu “Investors – Corporate Governance” on our website at www.rljentertainment.com. If we waive any material portion of our Code of Ethics and Business Conduct Policy that applies to our principal executive officer, principal financial officer or principal accounting officer or amend the Code of Ethics and Business Conduct Policy (other than technical, administrative or other non-substantive amendments), we will disclose that fact on our website at www.rljentertainment.com within four business days.

The information required by this Item will be included in our company’s proxy statement for its 2016 Annual Meeting of Stockholders.

3.1		Amended and Restated Articles of Incorporation of RLJ Entertainment, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S‑4 (File No. 333-180714) filed on August 10, 2012).

3.2		Form of Bylaws of RLJ Entertainment, Inc. (incorporated by reference to Exhibit 3.2 to Registrant’s Registration Statement on Form S‑4 (File No. 333-180714) filed on August 10, 2012).

3.3		Form of Certificate of Designation of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on May 15, 2015).

3.4		Form of Certificate of Designation of Series A-2 Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on May 15, 2015).

3.5		Form of Certificate of Designation of Series B-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on May 15, 2015).

3.6		Form of Certificate of Designation of Series B-2 Convertible Preferred Stock (incorporated by reference to Exhibit 3.4 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on May 15, 2015).

4.1		Specimen Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S‑4 (File No. 333-180714) filed on August 10, 2012).

4.2		Specimen Warrant certificate (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S‑4 (File No. 333-180714) filed on August 10, 2012).

4.3		Amended and Restated Warrant Agreement, dated as of February 1, 2015, by and between RLJ Entertainment, Inc., Computershare Inc. and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K (File No. 001-35675) filed on May 8, 2015).

4.4		Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 3.5 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on May 15, 2015).

10.1		RLJ Entertainment, Inc. 2012 Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S‑4 (File No. 333-180714) filed on August 10, 2012).

10.2		Amended and Restated Registration Rights Agreement, dated as of October 3, 2012, by and among RLJ Acquisition, Inc., RLJ Entertainment, Inc., JH Partners, LLC, JH Partners Evergreen Fund, LP, JH Investment Partners III, LP, JH Investment Partners GP Fund III, LLC, the shareholders of Acorn Media Group, Inc., Peter Edwards, as the Acorn Representative, RLJ SPAC Acquisition, LLC, William S. Cohen and Morris Goldfarb (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on October 10, 2012).

10.3		First Amendment to Amended and Restated Registration Rights Agreement, dated as of June 27, 2013, by and among RLJ Entertainment, Inc., RLJ Acquisition, Inc., RLJ SPAC Acquisition, LLC, JH Partners, LLC, JH Partners Evergreen Fund, L.P., JH Investment Partners III, L.P., JH Investment Partners GP Fund III, LLC, and Wexford Spectrum Investors, LLC (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35675) filed on August 5, 2013).

10.4		Form of Indemnity Agreement, by and between RLJ Entertainment and each Indemnitee (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on October 10, 2012).

10.5		Assignment, Assumption and Amendment Agreement, dated as of October 3, 2012, by and among RLJ Entertainment, Inc., RLJ Acquisition, Inc. and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on October 10, 2012).

10.6		Form of Unsecured Subordinated Promissory Note (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on October 10, 2012).

10.7†		Employment Agreement, dated as of July 18, 2013, by and between Miguel Penella and RLJ Entertainment, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35675) filed on November 7, 2013).

10.8		Credit and Guaranty Agreement, dated as of September 11, 2014, by and among RLJ Entertainment, Inc., as Parent Borrower, and Subsidiaries of Parent Borrower, as Guarantors, the Lenders party hereto from time to time, McLarty Capital Partners SBIC, L.P., as Administrative Agent, Collateral Agent, Arranger, Bookmanager, and Syndication Agent, and Crystal Financial LLC as Documentation Agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35675) filed on November 7, 2014).

10.9		Securities Purchase Agreement, dated as of April 15, 2015, by and between RLJ Entertainment, Inc. and each purchaser identified on the signature page (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on April 16, 2015).

10.10		First Amendment to Credit and Guaranty Agreement, dated as of April 15, 2015, by and among RLJ Entertainment, Inc., certain subsidiaries of RLJ Entertainment, Inc. as Guarantors, Various Lenders, MCP Opportunities LLC (as successor to McLarty Capital Partners SBIC, L.P.) as Administrative Agent and Collateral Agent, McLarty Capital Partners SBIC, L.P. as Arranger, Bookmanager, and Syndication Agent, and Crystal Financial LLC as Documentation Agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on April 16, 2015).

10.11		Note Amendment Agreement, dated as of April 15, 2015, by and between RLJ Entertainment, Inc. and JH Investment Partners III, LP, JH Partners Evergreen Fund, LP, JH Investment Partners GP Fund III, LLC, Forrestal, LLC, Taylor Rettig, Theodore S. Green, John P. Avagliano, Ray Gagnon and Producers Sales Organization (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on April 16, 2015).

10.12		Securities Purchase Agreement, dated as of May 14, 2015, by and between RLJ Entertainment, Inc. and each purchaser identified on the signature page (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on May 15, 2015).

10.13		Registration Rights Agreement, dated as of May 14, 2015, by and between RLJ Entertainment, Inc. and each purchaser identified on the signature page (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on May 15, 2015).

14.1		Code of Ethics (incorporated by reference to Exhibit 14.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35675) filed on October 10, 2012).

21.1*		Subsidiaries of the Registrant.

23.1*		Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.

23.2*		Consent of KPMG LLP, Independent Registered Public Accounting Firm.

31.1*		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2*		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1*		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema Document.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

	Title of Each Class:		Name of Each Exchange on Which Registered:
	Common Stock, par value $0.001		NASDAQ Capital Market

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

PART I			4

	ITEM 1.	Business	4
	ITEM 1A.	Risk Factors	16
	ITEM 1B.	Unresolved Staff Comments	24
	ITEM 2.	Properties	24
	ITEM 3.	Legal Proceedings	24
	ITEM 4.	Mine Safety Disclosures	24

PART II			25

	ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
	ITEM 6.	Selected Financial Data	26
	ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
	ITEM 8.	Financial Statements and Supplementary Data	43
	ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	81
	ITEM 9A.	Controls and Procedures	81
	ITEM 9B.	Other Information	82

PART III			83

	ITEM 10.	Directors, Executive Officers and Corporate Governance	83
	ITEM 11.	Executive Compensation	83
	ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
	ITEM 13.	Certain Relationships and Related Transactions and Director Independence	83
	ITEM 14.	Principal Accountant Fees and Services	83

PART IV			84

	ITEM 15.	Exhibits and Financial Statement Schedules	84

SIGNATURES			86

Certifications

Location	Primary Purpose	Lease Expiration	Reporting Segment ⁽¹⁾
Silver Spring, MD	Executive Office/Administrative/Sales/ Content Acquisition	November 15, 2020	Corporate
Woodland Hills, CA	Administrative/Sales/Content Acquisition	June 30, 2021	Wholesale
Stillwater, MN	Sales and Administration for Direct-to-Consumer	June 30, 2022	Direct-to-Consumer
London, England	Content Development and Production/Sales/ Administration for the U.K.	July 1, 2018	IP Licensing/Wholesale/ Direct-to-Consumer
Sydney, Australia	Sales/Administration	March 1, 2017	Wholesale

	December 31, 2014	December 31, 2015	2016	Thereafter
		(as amended)	(as amended)	(as amended)
Leverage Ratios:
Senior debt-to-Adjusted EBITDA	4.64 : 1.00	4.03 : 1.00	Ranges from 3.83 : 1:00 to 2:67 : 1.00	2.67 : 1.00
Total debt-to-Adjusted EBITDA	5.71 : 1.00	5.06 : 1.00	Ranges from 4.82 : 1:00 to 3.44 : 1.00	3.44 : 1.00
Fixed charge coverage ratio	1.10 : 1.00	1.20 : 1.00	Ranges from 1.24 : 1.00 to 1.59 : 1.00	1.59 : 1.00


British Mystery and Drama ·Foyle's War, Set 8 (Series 9) ·Foyle’s War, The Complete Saga ·Partners In Crime ·Doc Martin, Series 7 ·Doc Martin, Six Surly Seasons + Movies ·A Place to Call Home, Seasons 1 & 2 ·Anzac Girls ·Detectorists ·Vera, Set 5 ·Miss Fisher’s Murder Mysteries, Series 3 ·Murdoch Mysteries, Season 8 ·Murdoch Mysteries, The Movies ·Midsomer Murders, Set 25, ·Midsomer Murders, Series 16 & 17 ·The Code, Series 1 ·Brokenwood Mysteries, Series 1 ·New Tricks, Season 11 ·George Gently, Series 7 ·Restless
					Urban ·Blackbird ·Daddy’s Home ·Mysterious Ways ·Where the Children Play
Feature Films ·The Cobbler ·The Rewrite ·Bone Tomahawk ·Pay the Ghost ·Catching Faith ·The Journey Home


Horror ·Some Kind of Hate ·A Christmas Horror Story ·Condemned ·The Invoking 2 ·June ·Zombieworld ·Burying the Ex ·Return to Sender ·Infected ·Dark Was the Night ·Frankenstein vs. The Mummy ·Digging Up the Marrow ·Wolfcop ·The Houses October Built ·The Town That Dreaded Sundown
		DocumentarY ·The Story of Women and Art ·Understanding Art: Baroque & Rococo ·World War One: The People’s Story ·The Story of Women and Power ·The Art of the Heist
2016 Planned Releases ·Criminal Activities ·Kickboxer ·And Then There Were None ·Murdoch Mysteries, Season 9 ·The Fall, Series 2 ·Humans ·Soundbreaking ·The Last Panthers ·Vera, Series 6 ·19-2, Season 1 ·Agatha Raisin, Series 1 ·Suspects, Set 1 ·Nina ·Adulterers ·#LuckyNumber ·Bound: Africans vs. African Americans

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities referenced in the first column)⁽¹⁾
Equity compensation plans approved by security holders		—	$	—		4,534,166
Equity compensation plans not approved by security holders:		—		—		—
Total		—	$	—		4,534,166

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		Page

Reports of Independent Registered Public Accounting Firms		44

Consolidated Balance Sheets as of December 31, 2015 and 2014		46

Consolidated Statements of Operations for the years ended December 31, 2015 and 2014		47

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015 and 2014		48

Consolidated Statements of Changes in Shareholders’ (Deficit) Equity for the years ended December 31, 2015 and 2014		49

Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014		50

Notes to Consolidated Financial Statements		51

(In thousands)

Investment balance at December 31, 2013	$	25,233
Share of income before basis-difference amortization		3,169
Dividends received		(4,040	)
Basis-difference amortization		(589	)
Translation adjustment		(1,492	)
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

(In thousands)
Period	Estimated Amortization		Percentage

1 Year	$	16,396		30.7	%
2 - 3 Years		16,631		31.2	%
4 - 5 Years		9,242		17.3	%
6 - 7 Years		4,346		8.1	%
Thereafter		6,763		12.7	%
	$	53,378		100.0	%

(In thousands)
Year Ended December 31,	Revised Amortization		Original Amortization		Difference

2016	$	620	$	209	$	411
2017		384		209		175
2018		294		209		85
2019		226		209		17
2020		182		209		(27	)
Thereafter		291		1,415		(1,124	)

(In thousands)
Year Ended December 31,	Amount

2016	$	2,699
2017		2,145
2018		1,114
2019		858
2020		631
Thereafter		3,322
	$	10,769

(In thousands)	Maturity	Interest	December 31,
	Date	Rate	2015			2014

Senior secured term notes	September 11, 2019	LIBOR + 9.9% - 10.64%	$	56,938		$	69,388
Less: debt discount				(3,402	)		(4,509	)
Total senior-term notes, net of discount				53,536			64,879

Subordinated notes payable to prior Image shareholders	October 3, 2018	1.5% through 2016 then 12%		8,546			16,034
Debt, net of discount			$	62,082		$	80,913

(In thousands)			Subordinated
	Senior Notes		Notes		Total

2016	$	2,975	$	—	$	2,975
2017		4,375		—		4,375
2018		49,588		8,546		58,134
	$	56,938	$	8,546	$	65,484

(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		179		$	4.13		56		$	5.09
Granted		1,304			0.76		—			—
Vested		(164	)		3.65		—			—
Forfeited		(11	)		4.46		(39	)		4.89
Non-vested shares at December 31, 2015		1,308			0.83		17			5.45

(In thousands)	December 31, 2015
	Level 1		Level 2		Level 3		Total

Stock warrants	$	—	$	—	$	2,252	$	2,252
Embedded conversion feature	$	—	$	—	$	8,426	$	8,426

(In thousands)

Year Ended December 31,	Lease Commitment

2016	$	1,298
2017		1,291
2018		1,172
2019		1,017
2020		1,032
Thereafter		542
	$	6,352

(In thousands)

Year Ended December 31,	Employment Contracts

2016	$	1,077
2017		820
2018		750
2019		750
2020		750
	$	4,147

(a) The following documents are filed as a part of this report:		Page

1. Financial Statements.

	Reports of Independent Registered Public Accounting Firms	44
	Consolidated Balance Sheets as of December 31, 2015 and 2014	46
	Consolidated Statements of Operations for the years ended December 31, 2015 and 2014	47
	Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015 and 2014	48
	Consolidated Statements Equity for the years ended December 31, 2015 and 2014	49
	Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014	50

		RLJ ENTERTAINMENT, INC.
		A Nevada corporation

Dated: April 15, 2016		/s/ MIGUEL PENELLA
		MIGUEL PENELLA
		Chief Executive Officer
		(Principal Executive Officer)

Dated: April 15, 2016		/s/ MARK NUNIS
		MARK NUNIS
		Chief Accounting Officer
		(Principal Financial and Accounting Officer)