| Summary of Significant Accounting Policies | NOTE 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. The significant areas requiring the use of management estimates are related to provisions for lower-of-cost or market inventory write-downs, accounts receivable allowances and provision for doubtful accounts and sales returns reserves, valuation of deferred taxes, valuation of warrants, goodwill impairments, and ultimate projected revenues of our film library, which impact amortization of investments in content and related impairment assessments. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results may ultimately differ materially from those estimates. Revenues and Receivables Revenue Recognition Revenue is recognized upon meeting the recognition requirements of the Financial Accounting Standards Board Accounting Standards Codification (or ASC 926 Entertainment—Films Revenue Recognition 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. Allowances for Sales Returns For each reporting period, we evaluate product sales and accounts receivable to estimate their effect on revenues due to product returns, sales allowances and other credits given, and delinquent accounts. Our estimates of product sales that will be returned and the amount of receivables that will ultimately be collected require the exercise of judgment and affect reported revenues and net earnings. In determining the estimate of product sales that will be returned, we analyze historical returns (quantity of returns and time to receive returned product), historical pricing and other credit data, current economic trends, and changes in customer demand and acceptance of our products, including reorder activity. Based on this information, we reserve a percentage of each dollar of product sales where the customer has the right to return such product and receive a credit. Actual returns could differ from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings. Estimates of future sales returns and other credits are subject to substantial uncertainty. Factors that could negatively impact actual returns include retailer financial difficulties, the perception of comparatively poor retail performance in one or several retailer locations, limited retail shelf space at various times of the year, inadequate advertising or promotions, retail prices being too high for the perceived quality of the content or other comparable content, the near-term release of similar titles, and poor responses to package designs. Underestimation of product sales returns and other credits would result in an overstatement of current revenues and lower revenues in future periods. Conversely, overestimation of product sales returns would result in an understatement of current revenues and higher revenues in future periods. Allowances Received From Vendors In accordance with ASC 605-50, Revenue Recognition—Customer Payments and Incentives, Shipping Revenues and Expenses In accordance with ASC 605-45, Revenue Recognition—Principal Agent Considerations Market Development Funds In accordance with ASC 605-50, Revenue Recognition—Customer Payment and Incentives Investments in Content 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. Acquired Distribution Rights and Produced Content 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. Production Development Costs The costs to produce licensed content for domestic and international exploitation include the cost of converting film prints or tapes into the optical disc format. Depending on the platform for which the content is being exploited, costs may include menu design, authoring, compression, subtitling, closed captioning, service charges related to disc manufacturing, ancillary material production, product packaging design and related services. These costs are capitalized as incurred. A percentage of the capitalized production costs are amortized to expense based upon: (i) a projected revenue stream resulting from distribution of new and previously released content related to such production costs; and (ii) management’s estimate of the ultimate net realizable value of the production costs. Estimates of future revenues are reviewed periodically and amortization of production costs is adjusted accordingly. If estimated future revenues are not sufficient to recover the unamortized balance of production costs, such costs are reduced to their estimated fair value. Inventories For each reporting period, we review the value of inventories on hand to estimate the recoverability through future sales. Values in excess of anticipated future sales are recorded as obsolescence reserve. Inventories consist primarily of packaged goods for sale, which are stated at the lower-of-average-cost or market, as well as componentry. Goodwill and Other Intangible Assets Goodwill Goodwill represents the excess of acquisition costs over the tangible and identifiable intangible assets acquired and liabilities assumed in a business acquisition. Goodwill is recorded at our reporting units, which are consolidated into our reporting segments. Goodwill is not amortized but is reviewed for impairment annually on October 1 st 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 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 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. Additional amortization expense is provided on an accelerated basis when the useful life of an intangible asset is determined to be less than originally expected. Other intangible assets are reviewed for impairment when an event or circumstance indicates the fair value is lower than the current carrying value. As described in Note 9, Goodwill and Other Intangible Assets Warrant and Other Derivative Liabilities 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 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. 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. Income Taxes We account for income taxes pursuant to the provisions of ASC 740, Income Taxes 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. Foreign Currency Translation 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 Fair Value of Financial Instruments The carrying amount of our financial instruments, which principally include cash, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relative short maturity of such instruments. The carrying amount of our debt under our senior credit agreement approximates 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 1 —Quoted prices in active markets for identical assets or liabilities. Level 2 —Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our recurring fair value measurements of stock warrants and other derivative liabilities and our non-recurring fair value measurements of investments in content are disclosed in Note 15, Fair Value Measurements Goodwill and Other Intangible Assets Concentrations of Credit Risk Financial instruments which potentially subject RLJE to concentrations of credit risk consist primarily of deposit accounts and trade accounts receivable. RLJE maintains bank accounts at financial institutions, which at times may exceed amounts insured by the Federal Deposit Insurance Corporation (or FDIC SIPC With respect to trade receivables, we perform ongoing credit evaluations of our customers’ financial conditions and limit the amount of credit extended when deemed necessary but generally require no collateral. Major Customers and Distribution Facilitators We have a high concentration of net revenues from relatively few customers, the loss of which may adversely affect our liquidity, business, results of operations, and financial condition. During 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 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 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). Impairment of Long-Lived Assets We review long-lived and specific, definite-lived, identifiable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An impairment loss of the excess of the carrying value over fair value would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. We have no intangible assets with indefinite useful lives. Leases We lease all of the office space utilized for our operations. All of our leases are operating leases in nature. A majority of our leases have fixed incremental increases over the lease terms, which are recognized on a straight-line basis over the term of the lease. Equity Method Investments We use the equity method of accounting for investments in companies in which we do not have voting control but where we do have the ability to exert significant influence over operating decisions of the companies. Our equity method investments are periodically reviewed to determine whether there has been a loss in value that is other than a temporary decline. Debt Discounts The difference between the principal amount of our debt and the amount recorded as the liability represents a debt discount. The carrying amount of the liability is accreted up to the principal amount through the amortization of the discount, using the effective interest method, to interest expense over the expected term of the debt. Advertising Costs Our advertising expense consists of expenditures related to advertising in trade and consumer publications, product brochures and catalogs, booklets for sales promotion, radio advertising and other promotional costs. In accordance with ASC 720-35, Other Expenses—Advertising Costs Other Assets and Deferred Costs—Capitalized Advertising Costs Stock Options and Restricted Stock Awards We expense our stock-based awards in accordance with ASC 718, Compensation—Stock Compensation Earnings/Loss per Common Share Basic earnings/loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed using the combination of dilutive common share equivalents and the weighted-average shares outstanding during the period. For the periods reporting a net loss, diluted loss per share is equivalent to basic loss per share, as inclusion of common share equivalents would be anti-dilutive. Recently Issued Accounting Standards On February 25, 2016 the Financial Accounting Standards Board (or FASB ASU Leases Update Commitments and Contingencies On April 7, 2015 the FASB issued Accounting Standards Update No. 2015‑3, Interest – Imputation of Interest ASU 2015-3 On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ASU 2014-09 On August 27, 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern ASU 2014-15 |
