10-Q
RLJ ENTERTAINMENT, INC. filed this Form 10-Q on 11/09/2017
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channels. Revenues from these channels for the three months ended September 30, 2017 account for 33.3% of our total revenues as compared to 23.9% for the three months ended September 30, 2016. This business generates a higher gross margin than our other businesses especially as its revenues increase.

COS decreased by $4.1 million to $30.9 million for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease in COS is attributed to lower sales of physical content and lower impairment charges in our Wholesale Distribution segment. Impairment charges recorded for content investments and inventories total $2.1 million and $3.9 million for the nine months ended September 30, 2017 and 2016, respectively. Our step-up amortization was $2.0 million for each of the nine months ended September 30, 2017 and 2016. Impairment charges decreased due to improved performance of our released content relative to our estimation of future revenues.

As a percentage of revenues, our gross margin improved to 42.3% for the nine months ended September 30, 2017 as compared to 32.6% for the same period last year. The improvement is primarily attributable to lower impairments and to revenue growth of our proprietary digital channels. Revenues from these channels for the nine months ended September 30, 2017 account for 36.1% of our total revenues as compared to 21.3% for the nine months ended September 30, 2016. This business generates a higher gross margin than our other businesses especially as its revenues increase. The Wholesale Distribution segment margins also increased due to the positive impact of a few one-time sales and licensing renewal transactions during the second quarter which had very little associated cost.

Selling, General and Administrative Expenses (“SG&A”)

A summary of SG&A expenses for the three and nine months ended September 30, 2017 and 2016 is as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(In thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Selling expenses

 

$

3,972

 

 

$

2,536

 

 

$

9,131

 

 

$

6,882

 

General and administrative expenses

 

 

4,926

 

 

 

4,068

 

 

 

14,165

 

 

 

13,563

 

Depreciation and amortization

 

 

974

 

 

 

831

 

 

 

2,751

 

 

 

2,100

 

Total selling, general and administrative expenses

 

$

9,872

 

 

$

7,435

 

 

$

26,047

 

 

$

22,545

 

 

For the three and nine months ended September 30, 2017, SG&A increased by $2.4 million and $3.5 million, respectively, compared to the same periods in 2016. The increase in both periods is primarily attributable to targeted marketing expenses which increased $1.4 million during the quarter and $2.2 million during the nine-month period primarily due to increased marketing related to our Digital Channel segment. General and administrative expenses increased primarily due to increased incentive compensation costs including increased expenses associated with stock-based compensation for executives and employees. For the three and nine months ended September 30, 2017, depreciation and amortization expenses increased by $0.1 million and $0.7 million, respectively, which is primarily attributable to continued investment in our digital platforms to support the growth of our Digital Channels segment.

Equity Earnings of Affiliate

Equity earnings of affiliate (which is ACL) increased by $0.7 million and $0.9 million in each of the three- and nine-month periods ended September 30, 2017, when compared to the same periods in 2016. During 2017, ACL’s gross profit margin and its income from operations are higher when compared to 2016 due to higher publishing and licensing revenues, as a percent of its total revenues, which generate higher margins when compared to its other operations. In addition, ACL’s results were impacted by the receipt of additional licensing revenues from one title.

Interest Expense, Net

Interest expense increased by $0.1 million for the three-month period ended September 30, 2017 compared to the same period in 2016 which is primarily a result of higher average outstanding debt balances partially offset by reduced interest rates on our senior debt. Interest expense decreased by $0.3 million for the nine-month period ended September 30, 2017 as compared to the same period in 2016 primarily due to reduced interest rates on our senior debt partially offset by higher average outstanding debt balances during 2017 as compared to 2016.

Change in Fair Value of Stock Warrants and Other Derivatives

The change in the fair value of our warrant 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

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