- Binding term sheet signed with Fine Capital, the company's
largest shareholder, for $25.0
million in debentures to fund growth initiatives.
- Financing structure will not affect the Company's leverage
ratio for covenant purposes under its Term Facility.
Consistent with WildBrain's April 29,
2020 pre-earnings release:
- Revenue was $98.3 million in Q3
2020 vs $110.0 million in Q3 2019.
YTD 2020 revenue was $332.7 million
vs $331.0 million YTD 2019.
- Positive operating cash flow of $12.9
million in Q3 2020 vs $13.7
million in Q3 2019. YTD 2020 operating cash flow of
$78.3 million vs $15.3 million YTD 2019.
- Negative free cash flow of $3.2
million in Q3 2020 vs negative free cash flow of
$1.1 million in Q3 2019. YTD
2020 positive free cash flow of $17.8
million vs free cash flow of $6.4
million YTD 2019.
- Adjusted EBITDA was $17.9 million
vs $20.1 million in Q3 2019. YTD 2020
adjusted EBITDA of $63.1 million vs
$59.4 million YTD 2019.
- Net loss of $221.7 million, due
largely to a non-cash goodwill impairment of $184.5 million in the quarter6, vs a
net loss of $18.4 million in Q3 2019.
YTD 2020 net loss of $240.0 million
vs a net loss of $38.7 million YTD
2019.
- WildBrain Spark views grew 19% to over 10.3 billion in Q3 2020
vs Q3 2019. YTD 2020, views grew 42% to 59.1 billion vs YTD
2019.
- Net leverage ratio of 5.29x as at March 31, 2020 vs 5.92x as at year-ended
June 30, 2019.
HALIFAX, May 13, 2020 /CNW/ - WildBrain Ltd.
("WildBrain" or the "Company") (TSX: WILD), a global leader in kids
and family entertainment, today reported its Fiscal 2020
third-quarter (Q3 2020) and nine-month (YTD 2020) results for the
periods ended March 31, 2020.
"With the $25 million financing
announced today, we're doubling down on our integrated IP
strategy," said Eric Ellenbogen, CEO
of WildBrain. "To be clear, this is exclusively growth capital to
fund strategic, accretive transactions across the Company, with a
special focus on our AVOD 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. 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."
Ellenbogen continued: "Our third-quarter results reflected
resilience across production, television and consumer products. Our
studio is producing at over 95% capacity, including new Peanuts
content for Apple TV+ and a new Johnny
Test 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% and watch times up 71% 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, CFO 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 EBITDA 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% of its revenue
derived from subscriber fees."
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 L.P., on behalf of certain
funds managed by it ("Fine Capital"), the Company's largest
shareholder and a related party1, for the purchase of up
to $25.0 million in exchangeable
secured debentures (the "Exchangeable Debentures") to be
issued by a newly-formed subsidiary of the Company
("Subco"). Net proceeds from the Exchangeable Debentures
will be used to fund 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 (the "Initial Debentures") with the remainder
(the "Subsequent Debentures") to be drawn at the Company's
discretion prior to maturity three years from the closing date
("Maturity"). The Exchangeable Debentures will bear interest
at 7.5% 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
Ratio2 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 5,000,000
Variable Voting Shares (the "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 below, 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% to the 20-day volume
weighted average price (the "VWAP") of the Shares on the TSX
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 (the "TSX").
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% 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% 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 (the "Exchange Cap"). At
WildBrain's 2020 annual shareholder meeting (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. 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 is subject to the execution of definitive
agreements, TSX approval and other customary closing
conditions.
Board Approval
The terms of the financing were negotiated on behalf of the
Company by the Corporate Finance Committee of WildBrain's board of
directors (the "Board"), each of whom 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 ("Origin") as independent
financial advisor and received legal advice from Goodmans LLP.
Following an evaluation of the proposed financing and
consideration of alternatives 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).
Q3 2020 Performance - Executing on Priorities
PRIORITIES
|
HIGHLIGHTS
|
Grow Brands and
Build Awareness on WildBrain Spark
|
- WildBrain Spark's
online audience up by 19% to over 10.3 billion views in the quarter
vs the same period a year ago. This amounted to more than 59.1
billion minutes of videos watched, increasing 42% from Q3
2019.
|
Create Premium
Kids' Content to Drive Franchise Brands
|
- More new Peanuts
content underway 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 Q3 2020 vs $13.7
million in Q3 2019. YTD 2020 operating cash flow was $78.3 million
vs $15.3 million YTD 2019.
- Free cash flow was
negative $3.2 million in Q3 2020 vs negative free cash flow of
$1.1 million in Q3 2019. YTD 2020 positive free cash flow of
$17.8 million vs free cash flow of $6.4 million YTD 2019.
- Net leverage ratio
was 5.29x at Q3 2020 vs 5.92x at year-ending June 30,
2019.
|
Financial Highlights
Financial
Highlights
(in millions of
Cdn$)
|
Three Months
ended
March
31,
|
Nine Months
ended
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)
|
Q3 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 our global Distribution segment, including WildBrain
Spark, our ad-based video-on-demand ("AVOD") business. YTD 2020
revenue was $332.7 million versus
$331.0 million in the same nine-month
period a year ago.
In Q3 2020, distribution revenue (excluding WildBrain Spark) was
$15.6 million compared with
$20.7 million a year ago, indicative
of the fluctuations we see in revenue quarter-by-quarter partly due
to the timing of deals. YTD 2020, distribution revenue (excluding
WildBrain Spark) increased 6% 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 Q3 2020 vs $14.9
million a year ago, a decrease of 37%, in line with
expectations communicated in Q2 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. We continue
to see considerable opportunities in the large audience tuning into
our AVOD network and we are pursuing numerous ways to monetize this
growing user base over the long term. In Q3 2020, we reached 10.3
billion views, up 19% from the prior year. This amounted to more
than 59.1 billion of minutes of videos watched on WildBrain Spark
in Q3 2020, up 42% from the prior year quarter. YTD 2020, WildBrain
Spark revenue rose 9% to $55.8
million vs $51.1 million
compared with the same prior year period.
Our consumer products-owned revenue remained steady at
$37.7 million in Q3 2020 vs
$37.5 million in Q3 2019, despite the
expiry of the MetLife contract on Peanuts in December 2019. Excluding the contribution of
MetLife in Q3 2019, consumer products-owned revenue increased by
10% in Q3 2020 vs the third quarter in Fiscal 2019. For the first
nine months of Fiscal 2020, revenue rose 3% 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% vs YTD 2019.
Gross margin increased to 45% in both Q3 2020 and YTD 2020. This
compared with 43% and 42% for each of Q3 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 IFRS 16.
As part of our previously stated reorganization initiatives,
from which we expect to incur one-time cash charges in the range of
$10.0 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, our AVOD
business and brands.
In Q3 2020, we generated cash flows from operating activities of
$12.9 million vs $13.7 million in Q3 2019. YTD 2020 operating cash
flow was $78.3 million vs
$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 Q3 2020 was negative $3.2 million, compared to negative free cash flow
of $1.1 million in Q3 2019. YTD 2020,
we generated positive free cash flow of $17.8 million vs. 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 Q3 2020 compared with $20.1
million in Q3 2019. The adoption of the IFRS 16 positively
impacted adjusted EBITDA by $1.9
million in Q3 2020. Normalizing for this impact,
adjusted EBITDA decreased $4.1
million in Q3 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 quarter5. Normalizing for
these items, adjusted EBITDA declined by $1.1 million in the first nine months of Fiscal
2020.
Q3 2020 saw a net loss of $221.7
million vs 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 Q3 2020 of $184.5 million6, 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% 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"). 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% 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% 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 above, 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 at www.sedar.com.
|
|
|
3.
|
Free Cash Flow,
Gross Margin and Adjusted EBITDA are non-GAAP 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 Q3 2020
MD&A.
|
|
|
4.
|
The Company
implemented the IFRS 16 accounting standard in Q1 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 Q3 2020 interim
|
|
|
5.
|
On July 23, 2018,
we sold a stake in Peanuts, reducing our ownership from 80% to 41%
in the franchise. As a result of the sale, Q1 2019 adjusted
EBITDA attributable to WildBrain included 23 days of our 80%
ownership and 69 days of our 41% 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).
|
Q3 2020 Conference Call
The Company will hold a conference call on May 14, 2020 at 9:30 a.m.
ET to discuss Q3 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, May 22, 2020.
The audio and transcript will also be archived on the Company's
website approximately two days after the event.
About WildBrain
At WildBrain we make great content for kids and families. With
approximately 13,000 half-hours of filmed entertainment in our
library - one of the world's most extensive - we are home to such
brands as Peanuts, Teletubbies, Strawberry
Shortcake, Caillou, Inspector Gadget, Johnny Test and Degrassi. Our shows
are seen in more than 150 countries on over 500 telecasters and
streaming platforms. Our AVOD business - WildBrain Spark -
offers one of the largest networks of kids' channels on YouTube,
with over 168 million subscribers. We also license consumer
products and location-based entertainment in every major territory
for our own properties as well for our clients and content
partners. Our television group owns and operates four family
entertainment channels that are among the most viewed in
Canada. WildBrain is headquartered
in Canada with offices worldwide
and trades on the Toronto Stock Exchange (WILD). Visit us at
www.wildbrain.com.
Forward-Looking Statements
This press release contains "forward-looking statements" under
applicable securities laws with respect to the Company including,
without limitation, statements regarding an exchangeable secured
debenture financing arrangement, terms and conditions applicable to
such financing, expected use of net proceeds from such financing,
expected timing for closing the financing, impact of the financing
on the Company's leverage, future growth and financial and
operating performance of WildBrain Spark, the markets and
industries in which the Company and its subsidiaries operate,
impacts of the COVID-19 situation on the Company, its business, the
markets and industries in which it operates, and future financial
and operating results, production capacity utilization,
reorganization initiatives and expected financial impacts from such
initiatives, the business strategies and operational activities of
the Company and its long-term prospects. Although the Company
believes that the expectations reflected in such forward-looking
statements are reasonable, such statements involve risks and
uncertainties and are based on information currently available to
the Company. Actual results or events may differ materially from
those expressed or implied by such forward-looking statements.
Factors that could cause actual results or events to differ
materially from current expectations, among other things, include
the ability of the Company to finalize the long form agreements for
the financing in a timely manner and complete the other conditions
to closing, the availability of investment opportunities and at
acceptable valuations, epidemics, pandemics or other public health
crises, including the current outbreak of COVID-19, the magnitude
and length of economic disruption as a result of the worldwide
COVID-19 outbreak, the reliance of the Company on the Internet and
other technologies to continue to conduct its business, failure to
meet covenants under the senior credit facility of the Company, the
ability of the Company to execute on its business strategies and
investment opportunities, the ability of the Company to realize
expected operating cost savings, consumer preferences, market
factors, conditions in the AVOD, entertainment and brands
industries, the ability of the Company to execute on production and
licensing arrangements, and risk factors discussed in materials
filed with applicable securities regulatory authorities from time
to time including matters discussed under "Risk Factors" in the
Company's most recent Annual Information Form and annual Management
Discussion and Analysis. These forward-looking statements are made
as of the date hereof, and the Company assumes no obligation to
update or revise them to reflect new events or circumstances,
except as required by law.
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SOURCE WildBrain Ltd.