10-Q
RLJ ENTERTAINMENT, INC. filed this Form 10-Q on 11/09/2017
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AME 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 vast majority of 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 2014, ACL published its first book since the death of Agatha Christie, The Monogram Murders. In September 2016, ACL released another new book, Closed Casket.

The IP Licensing and Wholesale Distribution segments exploit content primarily through third-party vendors. 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, Comcast, DirecTV, Hulu, iTunes, Netflix, PBS, Showtime, Starz, 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), UMC (urban), Acacia (fitness), and Athena (documentaries).

On June 24, 2016, we entered into a licensing agreement with Universal Screen Arts (or USA) whereby USA took over our Acorn U.S. catalog/ecommerce business becoming the official, exclusive, direct-to-consumer seller of Acorn product in the U.S. During the quarter ended June 30, 2016, we also electronically distributed our last Acacia catalogs. As a result of these actions, we have classified the U.S. catalog/ecommerce business as discontinued operations. For the majority of 2016, these businesses were included in our Digital Channels segment. In the fourth quarter of 2016, we reclassified our remaining U.K. catalog/ecommerce business from our Digital Channels segment to our Wholesale Distribution segment to reflect adjustments we made internally in terms of how we are viewing and managing our operations after the disposal of our U.S. ecommerce/catalog business. The reclassification for both our U.S. and U.K. catalog and ecommerce businesses were made retroactively for all periods presented.

HIGHLIGHTS

Highlights and significant events for the three months ended September 30, 2017 and 2016 are as follows:

 

Digital Channels paying subscribers increased over 50% from the third quarter of 2016 to over 620,000.

 

Digital Channels segment revenues increased 58.6% to $7.0 million from $4.4 million in the third quarter of 2016.

 

Total net revenues increased 13.9% year-over-year to $20.9 million, primarily driven by a 58.6% increase in Digital Channels revenue. Our Wholesale Distribution segment revenues remained flat compared to the third quarter of 2016.

 

Gross profit increased 16% to $8.2 million from the third quarter of 2016 as higher revenues from the Digital Channels segment offset the increased investment in content.

 

Equity Earnings from ACL increased by 74.0% to $1.7 million from the third quarter of 2016 as ACL continued to improve its film, TV distribution and publishing business segments.

 

Net loss was $2.7 million, an improvement of $1.2 million from third quarter of 2016.

 

Adjusted EBITDA grew 3.4% to $2.9 million from the third quarter of 2016 as a result of continued growth of the higher-margin Digital Channels segment and higher equity earnings from ACL.

Highlights and significant events for the nine months ended September 30, 2017 and 2016 are as follows:

 

Digital Channels segment revenues grew by 75.1% to $19.4 million as a result of continued subscriber growth.

 

Revenues increased $1.7 million to $53.6 million. The growth in revenues from our Digital Channels segment was partially offset by a $6.6 million decline in the revenues from our Wholesale Distribution segment primarily due to the release of less content during the first half of 2017. As a result, revenues increased 3.3% to $53.6 million compared to the same period in 2016.

 

Our Digital Channels segment contribution to income from continuing operations increased 55.7% to $6.3 million from $4.1 million during the nine months ended September 30, 2016.

 

Gross margin increased to 42.3% from 32.6% for the nine months ended September 30, 2016, primarily attributable to (i) the Digital Channels segment, a higher proportion of higher-margin proprietary Digital Channels revenue mix and expanding gross margin as fixed costs are leveraged through subscriber and revenue growth and (ii) in the Wholesale

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