Mr. Eric Ellenbogen reports
WILDBRAIN REPORTS RESULTS FOR Q3 2020 AND ANNOUNCES $25 MILLION FINANCING FOR GROWTH INITIATIVES
Wildbrain Ltd. has released its fiscal 2020 third quarter and nine-month (year-to-date 2020) results for the periods ended March 31, 2020.
"With the $25-million financing announced today, we're doubling down on our integrated [intellectual property] strategy," said Eric Ellenbogen, chief executive officer of Wildbrain. "To be clear, this is exclusively growth capital to fund strategic, accretive transactions across the company, with a special focus on our [ad-based video-on-demand] business, Wildbrain Spark. This is not working capital for our business. We've taken measures to contain costs and to address working capital and cash flow (3). The Wildbrain Spark platform is not only a rich source of emerging IP and promotion for both our proprietary and partner content, but also a beneficiary of advertising dollars migrating from linear to non-linear TV. In the media business, advertising dollars follow eyeballs, and at nearly four billion monthly views, Wildbrain Spark has one of the largest and most engaged global audiences in the kids and family space. We remain steadfast in our belief that Wildbrain Spark represents a significant monetization opportunity."
Mr. Ellenbogen continued: "Our third quarter results reflected resilience across production, television and consumer products. Our studio is producing at over 95-per-cent capacity, including new Peanuts content for Apple TV+ and a new
series for Netflix. Revenue at Wildbrain Spark was showing signs of recovery from the changes in YouTube's advertising policy implemented in January. However, global pullbacks in advertising due to COVID-19 impacted revenue late in Q3, and we anticipate these conditions will extend into our fiscal 2021. Nonetheless, we continued to see record-level audience growth at Wildbrain Spark with views up 36 per cent and watch times up 71 per cent through April. We're very focused on our customers and advertising sales, and we're strengthening our AVOD business for when the advertising market recovers. We believe the strength of our brands, the depth of our content library, and our capabilities in production and distribution continue to underpin our long-term growth."
Aaron Ames, chief financial officer of Wildbrain, added: "We are approaching our performance and balance sheet leverage from all sides. We hired the right people to lead and grow our businesses, paid down approximately $300.0-million of debt over the last two years, implemented additional cost cutting of $2.0-million a quarter, and have just agreed on a financing, which will allow us to take advantage of growth opportunities. The financing is structured to not affect our leverage ratio for covenant purposes under our term facility. With respect to the impact of recent events on advertising, Wildbrain Spark remains a contributor to [earnings before interest, taxes, depreciation and amortization] in this fiscal year and, we expect, into fiscal 2021 as well. Further, our television business isn't highly dependent on advertising, with approximately 90 per cent of its revenue derived from subscriber fees."
Mr. Ames continued: "In Q3, we took a non-cash goodwill impairment charge of $184.5-million in light of the potential impacts of global economic uncertainties and the effects of changes made by YouTube related to targeted advertising. This charge does not affect our operations, cash flows or our ability to meet debt obligations."
Financing for growth initiatives
Summary of the financing
Wildbrain announced today that it has entered into a binding term sheet with Fine Capital Partners LP, on behalf of certain funds managed by it, the company's largest shareholder and a related party (1), for the purchase of up to $25.0-million in exchangeable secured debentures to be issued by a newly formed subsidiary of the company (Subco). Net proceeds from the exchangeable debentures will be used to finance acquisitions and other investments to drive Wildbrain's content and brand strategy across the company, with a special focus on its AVOD or ad-supported video-on-demand business.
Fine Capital has agreed to purchase $16.5-million of exchangeable debentures at the initial closing of the financing with the rest to be drawn at the company's discretion prior to maturity three years from the closing date. The exchangeable debentures will bear interest at 7.5 per cent per annum payable at maturity and will be secured by a first-ranking security interest in all of the assets of Subco. The exchangeable debentures will be non-recourse to the company and excluded from the calculation of the total net leverage ratio (2) debt covenant under the company's term facility.
Concurrent with the issuance of the initial debentures, the company will issue to Fine Capital warrants to purchase five million variable voting shares of Wildbrain at a price of $1.45 per share, which will expire five years from the initial closing.
Subject to the limits described herein, the exchangeable debentures are exchangeable for shares at an initial price of $1.45 per share (subject to shareholder approval in the case of the subsequent debentures), which represents a conversion premium of 66.7 per cent to the 20-day volume-weighted average price (the VWAP) of the shares on the Toronto Stock Exchange, calculated from May 12, 2020. If Wildbrain shareholders do not approve the $1.45 exchange price for the subsequent debentures, the exchange price of each subsequent debenture will instead be the greater of: (i) $1.45; and (ii) the market price of the shares at the time such subsequent debentures are issued less the maximum discount permitted by the Toronto Stock Exchange.
Starting 18 months after the initial closing, the company will have the right to redeem the exchangeable debentures at a price equal to the outstanding principal amount plus accrued and unpaid interest at any time provided that the 20-day VWAP of the shares on the TSX is at least 135 per cent of the exchange price of the exchangeable debentures.
Subject to certain conditions, including the receipt of all necessary regulatory approvals, the company will have the right to satisfy its obligation to pay principal and interest in respect of the exchangeable debentures by delivering shares (valued at 95 per cent of the 20-day VWAP of the shares on the TSX at the time the payment obligation arises) in lieu of cash.
In accordance with TSX requirements, the maximum number of shares issuable to Fine Capital upon any exchange, redemption or maturity of the exchangeable debentures, in satisfaction of accrued and unpaid interest thereon and the exercise of the warrants, will initially be capped at 17 million. At Wildbrain's 2020 annual shareholder meeting, the company will seek shareholder approval to remove the exchange cap and for a $1.45 exchange price in respect of the subsequent debentures. If shareholders approve the removal of the exchange cap, there will be no limit on the amount of shares issuable to Fine Capital upon any exchange, redemption or maturity of the debentures, in satisfaction of accrued and unpaid interest thereon and the exercise of the warrants (other than regulatory limitations on ownership pursuant to the Competition Act (Canada) and the Broadcasting Act (Canada)).
The initial closing of the financing and the issuance of the initial debentures are subject to the execution of definitive agreements, TSX approval and other customary closing conditions.
The terms of the financing were negotiated on behalf of the company by the corporate finance committee of Wildbrain's directors. Each of such directors is an independent director without an interest in the financing and is independent of Fine Capital. In connection with its review, consideration and negotiation of the financing, the corporate finance committee engaged Origin Merchant Partners as independent financial adviser and received legal advice from Goodmans LLP.
Following an evaluation of the proposed financing and consideration of alternatives that the corporate finance committee believed may reasonably be available to the company, and based in part on Origin's advice, the corporate finance committee unanimously concluded that the financing is in the best interests of the company. Having received the unanimous recommendation of the corporate finance committee, the board unanimously determined that the financing is in the best interests of the company and approved the financing (Jonathan Whitcher recused himself from the board meetings during, and did not participate in, the deliberations and the voting on this matter due to his interest in the financing as a result of his role as chief executive officer and chief investment officer of Fine Capital).
Third quarter 2020 performance -- executing on priorities
Expand brands and build awareness on Wildbrain Spark: Wildbrain Spark's on-line audience up by 19 per cent to over 10.3 billion views in the quarter versus the same period a year ago; this amounted to more than 59.1 billion minutes of videos watched, increasing 42 per cent from third quarter 2019
Create premium kids content to drive franchise brands: more new Peanuts content under way for Apple TV+;
New Johnny Test original series in production for Netflix
Improve cash flow and balance sheet: generated $12.9-million in positive operating cash flow for third quarter 2020 versus $13.7-million in third quarter 2019; YTD 2020 operating cash flow was $78.3-million versus $15.3-million YTD 2019; free cash flow was negative $3.2-million in third quarter 2020 versus negative free cash flow of $1.1-million in third quarter 2019; YTD 2020 positive free cash flow of $17.8-million versus free cash flow of $6.4-million YTD 2019; net leverage ratio was 5.29 times at third quarter 2020 versus 5.92 times at year ending June 30, 2019
(in millions of $)
Three months ended Nine months ended
March 31, March 31,
2020 2019 2020 2019
Revenue $98.3 $110.0 $332.7 $331.0
Gross margin $44.4 $47.3 $148.3 $138.8
Gross margin (%) 45% 43% 45% 42%
Adjusted EBITDA attributable to Wildbrain $17.9 $20.1 $63.1 $59.4
Net (loss) attributable to Wildbrain ($221.7) ($18.4) ($240.0) ($38.7)
Basic (loss) per share ($1.30) ($0.14) ($1.58) ($0.29)
Third quarter 2020 revenue was $98.3-million compared with $110.0-million in the same prior-year quarter. Lower revenue for the quarter was mainly driven by the company's global distribution segment, including Wildbrain Spark, the company's ad-based video-on-demand business. YTD 2020 revenue was $332.7-million versus $331.0-million in the same nine-month period a year ago.
In third quarter 2020, distribution revenue (excluding Wildbrain Spark) was $15.6-million compared with $20.7-million a year ago, indicative of the fluctuations the company sees in revenue quarter by quarter partly due to the timing of deals. YTD 2020, distribution revenue (excluding Wildbrain Spark) increased 6 per cent to $45.8-million compared with the same prior-year period, benefiting from a number of large library deals in the first half of fiscal 2020.
Wildbrain Spark revenue was $9.5-million in third quarter 2020 versus $14.9-million a year ago, a decrease of 37 per cent, in line with expectations communicated in second quarter due to the changes implemented by YouTube in January, 2020, related to discontinuing targeted advertising on kids content, as well as the adverse impact of COVID-19 on the global advertising industry beginning in March, 2020. The company continues to see considerable opportunities in the large audience tuning into its AVOD network, and it is pursuing numerous ways to monetize this growing user base over the long term. In third quarter 2020, the company reached 10.3 billion views, up 19 per cent from the prior year. This amounted to more than 59.1 billion of minutes of videos watched on Wildbrain Spark in third quarter 2020, up 42 per cent from the prior-year quarter. YTD 2020, Wildbrain Spark revenue rose 9 per cent to $55.8-million versus $51.1-million compared with the same prior-year period.
The company's consumer-product-owned revenue remained steady at $37.7-million in third quarter 2020 versus $37.5-million in third quarter 2019, despite the expiry of the MetLife contract on Peanuts in December, 2019. Excluding the contribution of MetLife in third quarter 2019, consumer-product-owned revenue increased by 10 per cent in third quarter 2020 versus the third quarter in fiscal 2019. For the first nine months of fiscal 2020, revenue rose 3 per cent to $125.1-million compared with a year ago, reflecting the timeless appeal of the Peanuts brand. Normalizing for MetLife, YTD 2020 revenue increased 6 per cent versus YTD 2019.
Gross margin increased to 45 per cent in both third quarter 2020 and YTD 2020. This compared with 43 per cent and 42 per cent for each of third quarter 2019 and YTD 2019, respectively. The increase in gross margin percentage was primarily due to higher non-Wildbrain Spark distribution business as a percentage of the total and the impact of international financial reporting standard 16 (4).
As part of the previously stated reorganization initiatives, from which the company expects to incur one-time cash charges in the range of $10.0-million to $12.0-million, approximately $9.6-million was expensed YTD 2020. These initiatives are substantially completed. A portion of the estimated $10.0-million in annual savings was redeployed back into key areas, including creative, its AVOD business and brands.
In third quarter 2020, the company generated cash flows from operating activities of $12.9-million versus $13.7-million in third quarter 2019. YTD 2020 operating cash flow was $78.3-million versus $15.3-million YTD 2019. YTD 2020, the increase was primarily due to the collection of tax credits and other trade receivables, and timing of payments.
Free cash flow for third quarter 2020 was negative $3.2-million, compared with negative free cash flow of $1.1-million in third quarter 2019. YTD 2020, the company generated positive free cash flow of $17.8-million versus free cash flow of $6.4-million YTD 2019. The variances period over period were driven by timing of working capital, including higher tax credit collection in YTD 2020.
Adjusted EBITDA was $17.9-million in third quarter 2020 compared with $20.1-million in third quarter 2019. The adoption of IFRS 16 positively impacted adjusted EBITDA by $1.9-million in third quarter 2020. Normalizing for this impact, adjusted EBITDA decreased $4.1-million in third quarter 2020. YTD 2020 adjusted EBITDA was $63.1-million compared with $59.4-million YTD 2019. YTD 2020, IFRS 16 positively impacted adjusted EBITDA by $6.0-million while the first quarter of fiscal 2019 benefited from $1.3-million related to a higher ownership stake in Peanuts for part of that quarter (5). Normalizing for these items, adjusted EBITDA declined by $1.1-million in the first nine months of fiscal 2020.
Third quarter 2020 saw a net loss of $221.7-million versus a net loss of $18.4-million in the same quarter last year. YTD 2020, net loss was $240.0-million compared with a net loss of $38.7-million in the same period a year ago. The higher net losses were largely driven by a non-cash goodwill impairment charge in third quarter 2020 of $184.5-million
(6), which was taken due to the impact on advertising revenue from YouTube's changes to targeted ads, as well as potential impacts of global economic uncertainties from COVID-19.
(1) Related party: Since Fine Capital beneficially owns and controls more than 10 per cent of the company's outstanding voting securities, the financing constitutes a related-party transaction under Multilateral Instrument 61-101 (Protection of Minority Security Holders in Special Transactions). MI 61-101 provides that, unless exempted, a related-party transaction must be approved by at least a simple majority of the votes cast by minority shareholders of each class of affected securities, and the issuer must obtain a formal valuation of the subject matter of the transaction from a qualified and independent valuator. However, an exemption from both the shareholder approval and formal valuation requirements is available if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, insofar as it involves interested parties, exceeds 25 per cent of the issuer's market capitalization. Assuming the issuance of the maximum number of exchangeable debentures under the financing, neither the consideration paid for the securities issuable to Fine Capital, nor the fair market value of such securities, will exceed 25 per cent of the company's market capitalization. Accordingly, the company does not intend to seek minority shareholder approval or obtain a formal valuation in respect of the financing. However, as noted herein, at the AGM, the company will seek shareholder approval to remove the exchange cap and for a $1.45 exchange price in respect of the subsequent debentures in accordance with TSX rules.
(2) Net debt includes long-term debt, lease liabilities and bank indebtedness less cash, and excludes interim production financing. Net leverage ratio as discussed in this press release is a reference to the total net leverage ratio as defined in the company's senior secured credit agreement available on SEDAR.
(3) Free cash flow, gross margin and adjusted EBITDA are non-generally accepted accounting principle financial measures. Free cash flow is defined as operating cash flow less distributions to non-controlling interests, changes in interim production financing and repayments of lease liabilities. Gross margin means revenue less direct production costs and expense of film and television programs produced (per the financial statements). Adjusted EBITDA represents income of the company before amortization, finance income (expense), taxes, development expenses, impairments, equity-settled share-based compensation expense and adjustments for other identified charges. Further details on the definitions of and reconciliation to free cash flow, gross margin and adjusted EBITDA can be found in the "Non-GAAP Financial Measures" section of the company's third quarter 2020 management's discussion and analysis.
(4) The company implemented the IFRS 16 accounting standard in first quarter 2020, which introduced a single accounting model and eliminated the distinction between operating and finance leases for lessees. The adoption of IFRS 16 affected adjusted EBITDA and net income. See Note 3 in the third quarter 2020 interim financial statements.
(5) On July 23, 2018, the company sold a stake in Peanuts, reducing its ownership from 80 per cent to 41 per cent in the franchise. As a result of the sale, first quarter 2019 adjusted EBITDA attributable to Wildbrain included 23 days of the company's 80-per-cent ownership and 69 days of the company's 41-per-cent stake.
(6) The non-cash goodwill impairment charge of $184.5-million excludes goodwill held in the company's Peanuts and Television cash-generating units (CGUs).
Third quarter 2020 conference call
The company will hold a conference call on May 14, 2020, at 9:30 a.m. ET, to discuss third quarter 2020 results.
To listen, call 1-888-231-8191 toll-free or 1-647-427-7450 internationally and reference conference ID 9975808. Please allow 10 minutes to be connected to the conference call. Replay will be available after the call on 1-855-859-2056 toll-free, under passcode 9975808, until 11:59 p.m. ET on May 22, 2020.
The audio and transcript will also be archived on the company's website approximately two days after the event.
About Wildbrain Ltd.
At Wildbrain, it makes great content for kids and families. With approximately 13,000 half-hours of filmed entertainment in its library -- one of the world's most extensive -- the company is home to such brands as Peanuts, Teletubbies, Strawberry Shortcake, Caillou, Inspector Gadget, Johnny Test
and Degrassi. Its shows are seen in more than 150 countries on over 500 telecasters and streaming platforms. Its AVOD business -- Wildbrain Spark -- offers one of the largest networks of kids channels on YouTube, with over 168 million subscribers.
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