Exhibit 99.2
Q2 2017
Management Discussion and Analysis
of Financial Condition and Results of
Operations
For the Three and Six Months Ended December
31, 2016 ("Q2 2017") and December 31, 2015 ("Q2 2016")
(Unaudited)
MANAGEMENT DISCUSSION AND ANALYSIS
The following Management
Discussion & Analysis (“MD&A”) prepared as of February 13, 2017, should be read in conjunction with
DHX Media Ltd.’s (the “Company” or “DHX”) unaudited interim condensed consolidated
financial statements and accompanying notes for the three and six months ended December 31, 2016 and 2015, as well as the Company's
latest annual MD&A ("2016 Annual MD&A") and audited financial statements for the years ended June 30,
2016 and 2015 (as found on www.sedar.com or on DHX's website at www.dhxmedia.com). The unaudited interim condensed consolidated
financial statements and accompanying notes for the three and six months ended December 31, 2016 and 2015 have been prepared in
accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting
Standards Board ("IASB").
DHX is a public company
incorporated under the Canadian Business Corporations Act whose Variable Voting Shares and Common Voting Shares are traded on the
Toronto Stock Exchange (“TSX”), admitted on May 19, 2006, under the symbols DHX.A and DHX.B, respectively. On
June 23, 2015, the Company's Variable Voting Shares commenced trading on the NASDAQ Global Trading Market (the "NASDAQ")
under the symbol DHXM. Additional information relating to the Company can be found on its website at www.dhxmedia.com, on
SEDAR at www.sedar.com or on EDGAR at www.sec.gov/edgar.shtml.
Figures in this MD&A
are shown as millions (for example, $100,000 is shown as $0.10 million) and are approximate and have been rounded to the nearest
ten thousand. Due to this rounding, some individual items, once totalled, may be slightly different than the corresponding total.
Forward Looking Statements
This MD&A and
the documents incorporated by reference herein, if any, contain certain “forward-looking information” and “forward
looking statements” within the meaning of applicable Canadian and United States securities legislation (collectively herein
referred to as “forward-looking statements”), including the “safe harbour” provisions of provincial securities
legislation in Canada, the U.S. Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of
1934, as amended (the, “U.S. Exchange Act”), and Section 27A of the U.S. Securities Act of 1933, as amended
(the “U.S. Securities Act”). These statements relate to future events or future performance and reflect the
Company’s expectations and assumptions regarding the results of operations, performance and business prospects and opportunities
of the Company and its subsidiaries. Forward looking statements are often, but not always, identified by the use of words such
as “may”, “would”, “could”, “will”, “should”, “expect”,
“expects”, “plan”, “intend”, “anticipate”, “believe”, “estimate”,
“predict”, “potential”, “pursue”, “continue”, “seek” or the negative
of these terms or other similar expressions concerning matters that are not historical facts. In particular, statements regarding
the Company or any of its subsidiaries’ growth, objectives, future plans and goals, including those related to future operating
results, economic performance, and the markets and industries in which the Company operates are or involve forward-looking statements.
Specific forward-looking statements in this document include, but are not limited to, statements under the “Outlook”
section and statements with respect to:
| • | the business strategies and strategic priorities of the Company; |
| • | management’s annual financial targets and the future financial and operating performance
of the Company and its subsidiaries; |
| • | the timing for implementation of certain business strategies and other operational activities of the Company; |
| • | the markets and industries, including competitive conditions, in which the Company operates; |
| • | the Company’s production pipeline; |
| • | the rebranding of the television channels of the Company; |
| • | capital expenditures in connection with its construction of its new leased studio in Vancouver; |
| • | the Company’s live tours business; |
| • | the financial impact of its long-term agreement with Mattel, Inc.; and |
| • | the expected impacts of the adoption of the amendment to IAS 38. |
Forward-looking statements
are based on factors and assumptions that management believes are reasonable at the time they are made, but a number of assumptions
may prove to be incorrect, including, but not limited to, assumptions about: (i) the Company’s future operating results,
(ii) the expected pace of expansion of the Company’s operations, (iii) future general economic and market conditions, including
debt and equity capital markets, (iv) the impact of increasing competition on the Company, and (v) changes to the industry and
changes in laws and regulations related to the industry. Although the forward-looking statements contained in this MD&A and
any documents incorporated by reference herein are based on what the Company considers to be reasonable assumptions based on information
currently available to the Company, there can be no assurances that actual events, performance or results will be consistent with
these forward-looking statements and these assumptions may prove to be incorrect.
A number of known
and unknown risks, uncertainties and other factors could cause actual events, performance or results to differ materially from
what is projected in the forward-looking statements, including, but not limited to, general economic and market segment conditions,
competitor activities, product capability and acceptance, international risk and currency exchange rates and technology changes.
In evaluating these forward-looking statements, investors and prospective investors should specifically consider various risks,
uncertainties and other factors which may cause actual events, performance or results to differ materially from any forward-looking
statement.
This is not an exhaustive
list of the factors that may affect any of the Company’s forward-looking statements. Please refer to a discussion of the
above and other risk factors related to the business of the Company and the industry in which it operates that will continue to
apply to the Company, which are discussed in the Company’s Annual Information Form for the year ended June 30, 2016 which
is on file at www.sedar.com and attached as an exhibit to the Company’s annual report on Form 40-F filed with the SEC at
www.sec.gov/edgar.shtml and under the heading “Risk Factors” contained in this MD&A and in the 2016 Annual MD&A.
These forward-looking
statements are made as of the date of this MD&A or, in the case of documents incorporated by reference herein, if any, as of
the date of such documents, and the Company does not intend, and does not assume any obligation, to update or revise them to reflect
new events or circumstances, except in accordance with applicable securities laws. Investors and prospective investors are cautioned
not to place undue reliance on forward-looking statements.
Business of the Company
DHX is a leading independent
creator, producer, distributor, licensor, and broadcaster of kids and family television and film productions. The Company was originally
the result of the combination of The Halifax Film Company Limited (“Halifax Film”) and Decode Entertainment
Inc. (“Decode”) during Fiscal 2006 and at the time of initial public offering. Since that time DHX has grown
organically and through the following significant acquisitions:
| • | Studio B Productions (“Studio B”) on December 4, 2007; |
| • | imX Communications Inc. (“imX”) on July 20, 2008; |
| • | W!ldbrain Entertainment Inc. (“DHX WildBrain”) on September 14, 2010; |
| • | Cookie Jar Entertainment (“DHX Cookie Jar”) on October 22, 2012; |
| • | Ragdoll Worldwide Ltd. (“Ragdoll”) on September 13, 2013; |
| • | Epitome Pictures Inc. (“Epitome”) on April 3, 2014; |
| • | Family Channel (“DHX Television”) on July 31, 2014; |
| • | Certain assets of Echo Bridge Entertainment, LLC and affiliated companies ("Echo Bridge") on November 13,
2014; and |
| • | Nerd Corps Entertainment Inc. ("Nerd Corps") on December 23, 2014. |
The Company produces,
distributes, broadcasts, and exploits the rights for television and film programming. DHX’s primary focus is on children’s,
youth, and family (collectively “Children’s and Family”) productions because of the international sales
potential and longer-term and multiple revenue streams that this genre of programming provides. Children’s and Family programming
travels across cultures more easily than other genres and can therefore be sold into numerous markets, typically has a longer lifespan
than other genres, and can be leveraged for library and distribution revenues and consumer product revenues.
DHX’s content
library includes more than 12,500 half hours of award winning programming. DHX is recognized for brands such as Caillou,
Yo Gabba Gabba!, Inspector Gadget, Teletubbies, In the Night Garden, Johnny Test, Super WHY!,
Degrassi, Make It Pop, and Slugterra. With the acquisition of DHX Television, the Company added broadcasting by acquiring
the Family Channel ("Family Channel"), including its multiplex feed known as Family Jr ("Family Jr"),
the French-language Category B specialty television channel known as Télémagino ("Télémagino"),
and the English-language Category B specialty television channel known as Family CHRGD ("Family CHRGD") (together,
the "Family Channel Business"). DHX’s wholly owned European licensing brand representation agency business,
Copyright Promotions Licensing Group, (“CPLG”), represents numerous entertainment, sport, and design brands.
The Company’s prime-time production slate also includes notable achievements in the comedy genre, including the award-winning
Canadian prime-time comedy series This Hour Has 22 Minutes, which is produced for the CBC and is in its 24th
season. DHX has a global footprint and has offices in Toronto, Los Angeles, Vancouver, Halifax, London, Paris, Barcelona, Milan,
Munich, and Amsterdam, among others.
Revenue Model
The Company earns
revenues primarily from seven categories: 1) proprietary production, which includes Canadian and other rights proprietary programs,
2) distribution (including digital distribution and WildBrain) of its proprietary and third party acquired titles, 3) television
(subscriber, advertising, and digital revenue) through DHX Television's ownership of the Family Channel Business, 4) consumer products
(formerly M&L-owned) for owned brands and music and royalties (including, among others, Teletubbies, Yo Gabba Gabba!,
Caillou, Johnny Test, In the Night Garden, and Twirlywoos), 5) consumer products represented (formerly M&L-represented)
through CPLG, 6) producer and service fees, which includes production services for third parties, and 7) other revenues, which
includes new media and mobile.
The Company is able
to generate revenue from productions by licensing its initial broadcast rights and pre-licensing of broadcast territories for its
programs. Production revenues include the initial broadcast license revenues and any pre-sales or advances included in the initial
financing of the production budget of a film and television program. Once a production is completed and delivered, the program
is included in the Company’s library of film and television programming. Further revenue from exploitation of the program
is included in distribution revenue if it relates to television licenses or digital revenues and in consumer products if it relates
to royalties, consumer products, live tours, and other revenues. The Company also generates revenue from programs in which it retains
Canadian and other limited participation rights and, in certain instances, from production services for productions whose copyright
is owned by third parties.
Proprietary Content Revenue
The Company's Proprietary
Content Revenue is comprised of Proprietary Production, Distribution (including WildBrain), Consumer Products-Owned, New Media
and Other, and Producer and Service Fees. As a result of the adoption of the amendment to IAS 38, the Company will now group Proprietary
Production, Distribution (including WildBrain), Consumer Products-Owned, and New Media and Other into a single Proprietary Content
Revenue for the purpose of providing analysis of revenues.
Production Revenue
The Company derives
proprietary production revenues, which includes other proprietary titles with Canadian and other rights, from the grant of initial
broadcast rights for the initial showing of commissioned productions and pre-licensing of broadcast territories. These fees are
typically collected partially upon commissioning of a production, during production, and finally once a completed production is
delivered for broadcast, and at some point in time after delivery as a holdback (see note 3 of the audited consolidated financial
statements for the years ended June 30, 2016 and 2015 for details on revenue recognition).
Distribution Revenue
The Company is able
to retain or obtain the ownership rights to its proprietary titles and third party produced titles with distribution rights, which
permits the Company to generate further revenues from the distribution of the Company’s productions. In addition to generating
revenues from the sale of initial broadcast rights, the Company is able to concurrently generate revenues from the sale of broadcast
rights in other jurisdictions and on other platforms (such as digital platforms, including, amongst others, YouTube, Amazon, and
home entertainment) for specified periods of time. Revenues from WildBrain, the Company's Multi-Platform Kids' Network, are included
as a sub-category of distribution revenue.
Consumer Products-Owned (formerly
M&L-Owned)
Consumer products
for owned brands and other various licensing royalties includes revenues from DHX’s proprietary brands (among others, Teletubbies,
Yo Gabba Gabba!, Caillou, Johnny Test, In the Night Garden, and Twirlywoos) and revenues earned
on music publishing rights, music retransmission rights, live tour revenues, and other royalties. Consumer products revenues for
owned brands include non-refundable minimum guarantees associated with consumer products deals, a portion of which the Company
recognizes on a straight-line basis over the term of the deal, unless the underlying royalties exceed the minimum guarantee.
Television Revenue
The Company generates
television revenues through DHX Television's ownership of Family Channel, Family Jr, Télémagino, and Family CHRGD.
DHX Television derives revenues primarily through subscription fees earned by charging a monthly subscriber fee to various Canadian
cable and satellite television distributors. Family Channel is now approved to generate advertising revenues; however, the majority
of DHX Television's revenues are expected to continue to be derived from subscriber fees. In addition to linear television, all
four channels have multiplatform applications which allow for their content to be distributed both on-demand and streamed and are
supported by popular and robust websites and apps designed to engage viewers and support their loyalty to the brands. Traffic to
the sites is monetized through advertising and sales sponsorships. Presently, subscriber revenues typically account for 85-95%
of the revenues for DHX Television.
Producer and Service Fee Revenue
Producer and service
fee revenue includes revenue accounted for using the percentage of completion method for production service and corporate overhead
fees earned for producing television shows, feature films, direct to digital movies, and movies of the week for third parties.
Consumer Products-Represented
Consumer products-represented
includes revenues earned from CPLG. CPLG is an agency business based in Europe that earns commissions on consumer products from
representing independently owned brands from film studios and other third parties.
Other Revenue
Other revenue includes
new media revenues earned on interactive games and apps, including mobile smartphones and tablets, and other revenue.
Adoption of Amendment to International
Accounting Standard 38 (“IAS 38”)
As noted in DHX Media’s
audited consolidated financial statements for the years ended June 30, 2016 and 2015 and effective July 1, 2016, the Company has
adopted an amendment to IAS 38 which deals with intangible assets. On a prospective basis, the Company has adopted a declining
balance approach to expensing its investment in film & television programs and acquired & library content, replacing the
film forecast method.
Amongst other potential
impacts, the Company expects the adoption of the amendment to IAS 38 to increase the predictability of the expensing of both its
investment in film & television programs and acquired & library content assets, while also increasing the fluctuations
in percentage gross margins from period to period. The Company does not expect the adoption of the amendment to IAS 38 to
have any material impacts on the operations of the business. The details of Company's accounting policies resulting from the adoption
of the amendment to IAS 38 can be found in note 3 to the Company's unaudited interim condensed consolidated financial statements
for the period ended December 31, 2016.
The analysis herein,
reflects the impact of the adoption of the amendment to IAS 38.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated
financial information set out below for the three and six months ended December 31, 2016 and 2015 has been derived from the Company’s
unaudited interim condensed consolidated financial statements and accompanying notes for the three and six months ended December
31, 2016 and 2015, and can be found at www.sedar.com, DHX’s website at www.dhxmedia.com, or on EDGAR at www.sec.gov/edgar.shtml.
Each reader should
read the following information in conjunction with those statements and the related notes.
| | |
Three Months Ended | | |
Three Months Ended | | |
Six Months Ended | | |
Six Months Ended | |
| | |
December
31, 2016 | | |
December
31, 2015 | | |
December
31, 2016 | | |
December
31, 2015 | |
| ($000, except per share data) | |
| | |
| | |
| | |
| |
| Consolidated Statements of Income
and Comprehensive Income Data: | |
| | | |
| | | |
| | | |
| | |
| Revenues | |
| 78,884 | | |
| 81,480 | | |
| 132,718 | | |
| 145,390 | |
| Direct production costs and expense of film and
television produced | |
| (36,866 | ) | |
| (34,952 | ) | |
| (59,516 | ) | |
| (63,201 | ) |
| Expense of book value of acquired libraries | |
| — | | |
| (2,241 | ) | |
| — | | |
| (3,345 | ) |
| Gross margin1 & 2 | |
| 42,018 | | |
| 44,287 | | |
| 73,202 | | |
| 78,844 | |
| Selling, general, and administrative | |
| (19,640 | ) | |
| (18,345 | ) | |
| (37,283 | ) | |
| (35,621 | ) |
| Write-down of certain investment in film and television
programs | |
| (447 | ) | |
| (500 | ) | |
| (447 | ) | |
| (500 | ) |
| Amortization, finance and other expenses, net1 | |
| (14,137 | ) | |
| (10,499 | ) | |
| (25,679 | ) | |
| (18,889 | ) |
| Recovery of (provision for)
income taxes | |
| (2,039 | ) | |
| (3,272 | ) | |
| (2,666 | ) | |
| (4,639 | ) |
| Net income | |
| 5,755 | | |
| 11,671 | | |
| 7,127 | | |
| 19,195 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cumulative translation adjustment | |
| (402 | ) | |
| (2,195 | ) | |
| 954 | | |
| (6,025 | ) |
| Comprehensive income | |
| 5,353 | | |
| 9,476 | | |
| 8,081 | | |
| 13,170 | |
| Basic earnings per common share | |
| 0.04 | | |
| 0.09 | | |
| 0.05 | | |
| 0.15 | |
| Diluted earnings per common share | |
| 0.04 | | |
| 0.09 | | |
| 0.05 | | |
| 0.15 | |
| Weighted average common shares outstanding (expressed
in thousands) | |
| | | |
| | | |
| | | |
| | |
| Basic | |
| 134,068 | | |
| 124,734 | | |
| 133,928 | | |
| 124,361 | |
| Diluted | |
| 135,170 | | |
| 126,508 | | |
| 134,950 | | |
| 126,444 | |
| | |
| | | |
| | | |
| | | |
| | |
| Adjusted net income2
& 3 | |
| 6,347 | | |
| 12,594 | | |
| 8,157 | | |
| 20,915 | |
| Basic adjusted earnings per
common share2 & 3 | |
| 0.05 | | |
| 0.10 | | |
| 0.06 | | |
| 0.17 | |
| Diluted adjusted earnings
per common share2 & 3 | |
| 0.05 | | |
| 0.10 | | |
| 0.06 | | |
| 0.17 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
| As at December 31,
2016 | | |
| As at June 30, 2016 | | |
| | | |
| | |
| Consolidated Balance Sheet Data: | |
| | | |
| | | |
| | | |
| | |
| Cash and cash equivalents | |
| 58,210 | | |
| 80,446 | | |
| | | |
| | |
| Investment in film and television programs | |
| 159,448 | | |
| 239,752 | | |
| | | |
| | |
| Acquired and library content | |
| 83,773 | | |
| — | | |
| | | |
| | |
| Total assets | |
| 896,243 | | |
| 901,183 | | |
| | | |
| | |
| Total liabilities | |
| 552,554 | | |
| 564,348 | | |
| | | |
| | |
| Shareholders' equity | |
| 343,689 | | |
| 336,835 | | |
| | | |
| | |
1For the three and six months
ended December 31, 2016, direct production costs and expense of film and television produced in the table above excludes the amortization
of acquired and library content of $2,526 and $5,827, respectively. For the three and six months ended December 31, 2015, direct
production costs and expense of investment in film and television programs produced in the table above excludes $4,440 and $6,538
for the amortization recorded on the purchase price allocation bump to investment in film. Both items are included in Amortization,
finance and other expenses, net. As a result of the adoption of the amendment to IAS 38 in Q1 2017, the Company's definition of
Gross Margin has changed on a prospective basis, please see "Use of Non-GAAP Financial Measures" section of this MD&A
for further details.
2See “Use of Non-GAAP
Financial Measures” section of this MD&A for further details.
3See "Reconciliation of
Historical Results to Adjusted Net Income" section of this MD&A for the details of Adjusted Net Income. Basic adjusted
earnings per common share is computed by dividing adjusted net income for three and six months ended December 31, 2016 of $6,347
and $8,157, respectively (December 31, 2015-$12,594 and $20,915, respectively) by basic weighted average common shares outstanding
of 134,068 and 133,928, respectively (December 31, 2015-124,734 and 124,361, respectively). Diluted adjusted earnings per common
share is computed by dividing adjusted net income for three and six months ended December 31, 2016 of $6,347 and $8,157, respectively
(December 31, 2015-$12,594 and $20,915) by diluted weighted average common shares outstanding of 135,170 and 134,950, respectively
(December 31, 2015-126,508 and 126,444).
Results for the six months ended December
31, 2016 (“Six Months 2017”) compared to the six months ended December 31, 2015 (“Six Months 2016”)
Revenues
Revenues for Six Months
2017 were $132.72 million, down 9% from $145.39 million for Six Months 2016. The decrease for Six Months 2017 was due to a reduction
in proprietary production revenues, accounting for 29% of the decrease, a reduction in consumer products-represented revenues,
accounting for 26% of the decrease, a decrease in producer and service fee revenues, accounting for 39% of the decrease, a decrease
in DHX Television revenues, accounting for 53% of the decrease, and a decrease in new media revenues, accounting for 8% of the
decrease, offset by higher distribution revenues, representing 35% of the offset and an increase in consumer products-owned revenues,
representing 20% of the offset. Comparatively, Six Months 2017 and Six Months 2016 include the same assets in terms of prior acquisitions;
accordingly, all revenue fluctuations are organic in nature. A detailed review of each source of revenue is included below.
The Company's Proprietary
Content Business is comprised of Proprietary Production, Distribution (including WildBrain), Consumer Products-Owned, and New Media
and Other. As a result of the adoption of the amendment to IAS 38, the Company will now group Proprietary Production, Distribution
(including WildBrain), Consumer Products-Owned, and New Media and Other into a single Proprietary Content Gross Margin for the
purpose of providing analysis of gross margins.
Proprietary content
revenues: The Company's proprietary content revenue for Six Months 2017 was up 3% to $70.51 million from $68.17 million for
Six Months 2016. Management is pleased that its strategic priorities of investment in content is materializing.
Proprietary production
revenues: Proprietary production revenues for Six Months 2017 were $21.18 million, a decrease of 15% compared to $24.81 million
for Six Months 2016. For Six Months 2017, the Company added 88.0 proprietary half-hours to the library, down 23% from 115.0 half-hours
for Six Months 2016, but still on pace to achieve Management's stated goal of adding 150-225 proprietary half-hours annually to
the library. For the Six Months 2017, the Company added 50.0 half-hours of third party produced titles with distribution rights
(Six Months 2016-46.0 half-hours), an increase of 9% and a direct result of the operational synergies associated with owning DHX
Television. See delivery chart below for further details.
The breakdown for
content library deliveries (including proprietary deliveries and deliveries on distribution rights for third party produced titles)
and dollar value subtotals per category for Six Months 2017 and Six Months 2016 was as follows:
| | |
| |
Six Months 2017 | | |
Six Months 2016 | |
| Category and Title | |
Season or Type | |
$ Million | | |
Half-hours | | |
$ Million | | |
Half-hours | |
| Children's and Family: | |
| |
| | | |
| | | |
| | | |
| | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Proprietary | |
| |
| | | |
| | | |
| | | |
| | |
| Chuck's Choice | |
I | |
| | | |
| 5 | | |
| | | |
| — | |
| Cloudy With a Chance of Meatballs: The Series | |
I | |
| | | |
| 2 | | |
| | | |
| — | |
| The Deep | |
I | |
| | | |
| — | | |
| | | |
| 12 | |
| Degrassi | |
XV | |
| | | |
| — | | |
| | | |
| 20 | |
| Degrassi | |
XVI | |
| | | |
| 20 | | |
| | | |
| — | |
| Hank Zipzer's Christmas Catastrophe | |
Movie | |
| | | |
| 3 | | |
| | | |
| — | |
| Hank Zipzer | |
III | |
| | | |
| — | | |
| | | |
| 8 | |
| Inspector Gadget | |
II | |
| | | |
| 10 | | |
| | | |
| — | |
| Kate & Mim-Mim | |
II | |
| | | |
| 11 | | |
| | | |
| — | |
| Make It Pop | |
Special | |
| | | |
| 2 | | |
| | | |
| — | |
| Make It Pop | |
II | |
| | | |
| — | | |
| | | |
| 13 | |
| Slugterra | |
III | |
| | | |
| — | | |
| | | |
| 11 | |
| Space Ranger Roger | |
I | |
| | | |
| 10 | | |
| | | |
| — | |
| Supernoobs | |
I | |
| | | |
| — | | |
| | | |
| 24 | |
| Teletubbies | |
I | |
| | | |
| 15 | | |
| | | |
| 15 | |
| You & Me | |
I | |
| | | |
| — | | |
| | | |
| — | |
| Subtotals | |
| |
$ | 18.99 | | |
| 78 | | |
$ | 22.32 | | |
| 103 | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Third Party Produced Titles with Distribution Rights | |
| |
| | | |
| | | |
| | | |
| | |
| Backstage | |
| |
| | | |
| — | | |
| | | |
| 5 | |
| Fangbone | |
| |
| | | |
| 12 | | |
| | | |
| 2 | |
| Gaming Show | |
| |
| | | |
| — | | |
| | | |
| 6 | |
| Ghost Patrol | |
| |
| | | |
| 2 | | |
| | | |
| — | |
| Kuu Kuu Harajuku | |
| |
| | | |
| 8 | | |
| | | |
| 1 | |
| Messy Goes to Okido | |
| |
| | | |
| — | | |
| | | |
| 12 | |
| Rainbow Ruby | |
| |
| | | |
| 12 | | |
| | | |
| 2 | |
| Super Why! | |
| |
| | | |
| — | | |
| | | |
| 14 | |
| Topsy & Tim | |
| |
| | | |
| — | | |
| | | |
| 2 | |
| We are Savvy | |
| |
| | | |
| 16 | | |
| | | |
| — | |
| Subtotals | |
| |
$ | 0.00 | | |
| 50 | | |
$ | 0.00 | | |
| 44 | |
| Total Children's and Family | |
| |
$ | 18.99 | | |
| 128 | | |
$ | 22.32 | | |
| 147 | |
| Comedy: | |
| |
| | | |
| | | |
| | | |
| | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Proprietary | |
| |
| | | |
| | | |
| | | |
| | |
| This Hour Has 22 Minutes | |
XXIII | |
| | | |
| — | | |
| | | |
| 12 | |
| This Hour Has 22 Minutes | |
XXIV | |
| | | |
| 10 | | |
| | | |
| — | |
| Subtotals | |
| |
$ | 2.19 | | |
| 10 | | |
$ | 2.49 | | |
| 12 | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Third Party Produced Titles with Distribution Rights | |
| |
| | | |
| | | |
| | | |
| | |
| Body Buds | |
| |
| | | |
| — | | |
| | | |
| 1 | |
| Disorderly | |
| |
| | | |
| — | | |
| | | |
| 1 | |
| | |
| |
$ | 0.00 | | |
| — | | |
$ | 0.00 | | |
| 2 | |
| Total Comedy | |
| |
$ | 2.19 | | |
| 10 | | |
$ | 2.49 | | |
| 14 | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Total Proprietary | |
| |
$ | 21.18 | | |
| 88 | | |
$ | 24.81 | | |
| 115 | |
| Total Third Party Produced Titles with Distribution Rights | |
| |
| — | | |
| 50 | | |
| — | | |
| 46 | |
| | |
| |
$ | 21.18 | | |
| 138 | | |
$ | 24.81 | | |
| 161 | |
Distribution revenues:
Management is pleased to report that for Six Months 2017, total distribution revenues were up 14% to $37.09 million, from $32.61
million for Six Months 2016, driven by strong growth in WildBrain. Management is also very pleased to report the gross revenue
from WildBrain for Six Months 2017 was $15.34 million, up 74% versus Six Months 2016 $8.81 million. For Six Months 2017, the Company
closed significant deals, among others previously announced, as follows: ITV, Lagardere Thematiques, Netflix, Turner Broadcasting
Corporation, AMC Networks, iQiyi, Huashi, Shomax BV, Super RTL, and VMe TV.
Consumer products-owned
revenues (including music and royalties): For Six Months 2017, consumer products-owned revenues increased 27% to $11.55 million
(Six Months 2016-$9.06 million). For Six Months 2017, the Company recognized revenues of $4.55 million associated with the combination
of the 2016 Big Ticket Concert tour and the international portion of The Next Step Wild Rhythm Tour, versus $1.23
million in Six Months 2016 for 2015 Big Ticket Concert tour. Excluding the live tour revenues, consumer products-owned revenues
for Six Months 2017 decreased $0.83 million or 11% from Six Months 2016 based generally on timing related to non-refundable minimum
guarantees associated with Teletubbies, In The Night Garden, and Twirlywoos. Management is encouraged and optimistic
based on early feedback from the results for the UK launch of Teletubbies. The Company's planned launch of the Teletubbies
toys into the US and other markets during the second half of Fiscal 2017 remains on track but some of the expectations have been
pushed into Fiscal 2018.
Producer and service
fee revenues: For Six Months 2017, the Company earned $20.84 million for producer and service fee revenues, a decrease of 19%
versus the $25.79 million for Six Months 2016. Management expects progress on a number of service projects to accelerate in the
second half of Fiscal 2017.
New media and rental
revenues: For Six Months 2017, new media revenues decreased 59% to $0.69 million (Six Months 2016-$1.69 million), derived primarily
from games and apps.
Television revenues:
For Six Months 2017, television revenues were $30.83 million compared to $37.60 million for Six Months 2016, a decrease of
18%. The decline in the subscriber revenues has been as expected and driven by the negotiated lower rates resulting from the Company's
strategic decision to focus the TV slate on our own proprietary content. The decline was also driven by a 37% decrease in advertising
and promotion revenue. The decrease in advertising and promotion is expected to improve as DHX Television recently received approval
from the Canadian Radio Television and Telecommunications Commission ("CRTC") to allow broadcast advertising on
its pay television Family Channel. Approximately 89% or $27.47 million of the television revenues were subscriber revenues, while
advertising, promotion, and digital revenues accounted for a combined 11% or $3.36 million of DHX Television revenues.
Consumer products-represented
revenues: For Six Months 2017, consumer products-represented revenue was $10.54 million, down 24%, as expected, compared to
the Six Months 2016 revenues of $13.83 million, due to a very tough comparative for Six Months 2016 which was driven by a strong
portfolio of represented brands including Despicable Me and Minions, Sesame Street, Dora the Explorer,
The Pink Panther, and Jurassic World. Management expects to build on its strong portfolio of represented brands and
has recently added the BBC and Hatchimals in certain territories.
Gross Margin
As previously noted
herein and as a result of the adoption of the amendment to IAS 38, the Company has adjusted its definition of gross margin, the
details of which are included in the “Use of Non-GAAP Financial Measures” section of this MD&A. The Company
expects, amongst other potential impacts, the adoption of the amendment to IAS 38 will result in increased fluctuations in the
percentage gross margins from period to period. Overall, Management expects the adoption of the amendments to IAS 38 to have
a positive impact on overall gross margins. As a result of the adoption of the amendment to IAS 38, the Company will now group
proprietary production, distribution (including WildBrain), consumer products-owned, and new media & other into a single Proprietary
Content Gross Margin for the purpose of providing analysis of gross margins. The change has been applied prospectively.
Gross margin for Six
Months 2017 was $73.20 million, a decrease in absolute dollars of $5.64 million or 7% compared to $78.84 million for Six Months
2016. The overall gross margin for Six Months 2017 at 55% of revenue was well within Management's previously reported expectations.
At 50%, the proprietary content gross margin was also well within Management's expectations, impacted by seasonally high levels
of proprietary production levels, which triggers higher rates of production cost amortization, higher than expected WildBrain revenues,
and lower than expected live tour gross margins. At 41%, gross margins for producer and service fees was within Management's expectations.
Gross margins for DHX Television, at 62%, were well within Management's expectations, impacted by both lower external content costs
and lower revenues. Gross margin for Six Months 2017 was calculated as revenues of $132.72 million, less direct production costs
and expense of investment in film & television programs of $59.52 million and $nil expense of book value of acquired libraries,
(Six Months 2016-$145.39 million less $63.20 million and less $3.35 million, respectively).
For Six Months 2017,
the margins for each revenue category in absolute dollars and as a margin percentage were as follows: proprietary content business
has a gross margin of $35.13 million or 50%, net producer and service fee revenue margin of $8.52 million or 41%, television margin
was $19.01 million or 62%, and consumer products-represented revenue margin was $10.54 million or 100%.
Operating Expenses (Income)
SG&A
SG&A costs for
Six Months 2017 were up 5% at $37.28 million compared to $35.62 million for Six Months 2016. The increase in SG&A costs in
Six Months 2017 is largely attributable to Management's decision to continue to ramp up WildBrain, the Company's Multi-Platform
Kids' Network, as resources have been added to drive growth. SG&A also includes $2.89 million in non-cash share-based compensation,
down 1% (Six Months 2016-$2.91 million). When adjusted, cash SG&A at $34.39 million (Six Months 2016-$32.71 million) was within
Management's previously reported expectations.
Amortization and Expense of Acquired
Libraries
For Six Months 2017,
amortization was up 4% to $13.71 million (Six Months 2016-$13.21 million). For Six Months 2017, amortization of P&E was $2.26
million compared with $2.19 million for Six Months 2016. For Six Months 2017, amortization of intangible assets was up 25% to $5.62
million primarily due to the amortization of the intangible assets arising from the Company's strategic pacts with Mattel (Six
Months 2016-$4.49 million). For Six Months 2017, amortization includes amortization of acquired and library content of $5.83 million
which is a direct result of the adoption of the amendment to IAS 38, effective July 1, 2016 on a prospective basis. For Six Months
2016, amortization included a portion of the expense of acquired library of $6.54 million. Both the amortization of acquired and
library content for Six Months 2017 of $5.83 million and the expense of acquired libraries for Six Months 2016 of $6.54 million
are excluded from the calculation of Adjusted EBITDA as they relate to a combination of acquired and library titles which have
minimal ongoing cash costs associated with selling, and are viewed as long-term assets.
Development Expenses and Other Charges
and Tangible Benefit Obligation
During Six Months
2017, there was $1.47 million for development expenses and other charges (Six Months 2016-$2.46 million), which was made up of
$0.81 million in severance and other integration costs and $0.66 million related to the previously disclosed rebranding of DHX
Television channels (Six Months 2016-$0.40 million and $2.05 million, respectively).
Write-down of Certain Investments in
Film and Television Programs
During Six Months
2017, there was $0.45 million recorded for write-down of certain investments in film and television programs (Six Months 2016-$0.50
million).
Finance Income (Expense)
For Six Months 2017,
the Company recorded net finance expense of $10.50 million versus $3.22 million net finance expense for Six Months 2016. Six Months
2017 net finance expense consists of $9.15 million for interest on long-term debt and capital leases (Six Months 2016-$8.51 million),
$0.08 million for finance and bank charges, including interest on the revolving line of credit (Six Months 2016-$0.29 million),
changes to the debt premium on the Senior Unsecured Notes of $0.07 million (Six Months 2016-$0.01 million), accretion on the tangible
benefit obligation of $0.40 million (Six Months 2016-$0.46 million), and a foreign exchange loss of $3.20 million (Six Months 2016-$6.65
million foreign exchange gain), offset by interest income of $0.30 million (Six Months 2016-$0.16 million) and a gain on the changes
in the fair value of the embedded derivatives on the Senior Unsecured Notes of $2.10 million (Six Months 2016-a loss of $0.75 million).
Adjusted EBITDA
For Six Months 2017,
Adjusted EBITDA was $38.81 million, down $7.32 million or 16% over $46.13 million for Six Months 2016. Please see the "Use
of Non-GAAP Financial Measures" and "Reconciliation of Historical Results to Adjusted EBITDA" sections of this MD&A
for the definition and detailed calculation of Adjusted EBITDA.
Income Taxes
Income tax for Six
Months 2017 was an expense of $2.67 million (Six Months 2016-$4.64 million tax expense) made up of $3.04 million expense (Six Months
2016-$7.84 million expense) for current income tax and deferred income tax recovery of $0.37 million (Six Months 2016-$3.20 million
recovery).
Net Income (Loss) and Comprehensive
Income (Loss)
For Six Months 2017
net income was $7.13 million ($0.05 basic and diluted earnings per share), compared to net income of $19.20 million ($0.15 basic
and diluted income per share) for Six Months 2016, a decrease of $12.07 million in absolute dollars, which was materially impacted
by foreign exchange loss of $3.20 million for Six Months 2017 compared to a foreign exchange gain of $6.65 million for Six Months
2016. For Six Months 2017, net income adjusted was $8.16 million, or $0.06 adjusted basic and adjusted diluted earnings per share,
adjusted for identified charges totaling $1.03 million (net of $0.44 million tax effect). Net income adjusted is down 61%, again
impacted by the previously referenced foreign exchange loss, as compared to $20.92 million adjusted net income for Six Months 2016
adjusted for identified charges of $1.72 million (net of $0.74 million tax effect) or $0.17 adjusted basic and diluted earnings
per share. Please see the "Use of Non-GAAP Financial Measures" and "Reconciliation of Historical Results to Adjusted
Net Income" sections of this MD&A for the definitions of Adjusted Net Income, Basic Adjusted Net Income Per Common Share,
and Diluted Adjusted Net Income Per Common Share, as well as the detailed calculation of Adjusted Net Income.
Comprehensive income
for Six Months 2017 was $8.08 million, compared to comprehensive income of $13.17 million for Six Months 2016, or a decrease of
$5.09 million in absolute dollars.
SELECTED CONSOLIDATED
QUARTERLY FINANCIAL INFORMATION
The following table
sets out selected consolidated financial information for each of the last eight quarters with the last one being the most recent
quarter ended December 31, 2016. In the opinion of Management, this information has been prepared on the same basis as the
audited consolidated financial statements for the years ended June 30, 2016 and 2015 as filed on www.sedar.com, DHX’s website
at www.dhxmedia.com, and on EDGAR at www.sec.gov/edgar.shtml, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction
with the audited consolidated financial statements and the notes to those statements. The operating results for any quarter
should not be relied upon as an indication of results for any future period.
| | |
Fiscal 20171 | | |
Fiscal 20161 | | |
Fiscal 20151 | |
| | |
Q2 | | |
Q1 | | |
Q4 | | |
Q3 | | |
Q2 | | |
Q1 | | |
Q4 | | |
Q3 | |
| (All numbers are in thousands | |
31-Dec | | |
30-Sep | | |
30-Jun | | |
31-Mar | | |
31-Dec | | |
30-Sep | | |
30-Jun | | |
31-Mar | |
| except per share data) | |
$ | | |
$ | | |
$ | | |
$ | | |
$ | | |
$ | | |
$ | | |
$ | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Revenue | |
| 78,883 | | |
| 53,834 | | |
| 75,332 | | |
| 84,095 | | |
| 81,480 | | |
| 63,910 | | |
| 71,170 | | |
| 85,582 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Gross Margin2 | |
| 42,017 | | |
| 31,184 | | |
| 43,966 | | |
| 50,512 | | |
| 44,287 | | |
| 34,557 | | |
| 37,666 | | |
| 44,793 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Adjusted EBITDA2 & 3 | |
| 23,979 | | |
| 14,831 | | |
| 24,822 | | |
| 32,736 | | |
| 27,759 | | |
| 18,372 | | |
| 22,810 | | |
| 29,803 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net Income (Loss)2 & 4 | |
| 5,755 | | |
| 1,372 | | |
| (1,746 | ) | |
| 10,219 | | |
| 11,671 | | |
| 7,524 | | |
| 3,696 | | |
| 18,031 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Adjusted Net Income | |
| 6,347 | | |
| 1,810 | | |
| 489 | | |
| 11,384 | | |
| 12,594 | | |
| 8,321 | | |
| 5,006 | | |
| 18,031 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Comprehensive Income (Loss) | |
| 5,353 | | |
| 2,728 | | |
| (4,329 | ) | |
| 6,896 | | |
| 9,476 | | |
| 3,694 | | |
| 6,014 | | |
| 13,771 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Weighted average common shares outstanding (expressed in thousands) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic | |
| 134,068 | | |
| 133,788 | | |
| 130,685 | | |
| 125,218 | | |
| 124,734 | | |
| 123,987 | | |
| 123,459 | | |
| 123,207 | |
| Diluted | |
| 135,170 | | |
| 134,730 | | |
| 130,685 | | |
| 126,218 | | |
| 126,508 | | |
| 126,290 | | |
| 126,147 | | |
| 126,098 | |
| Diluted for Adjusted Net Income2 | |
| 135,170 | | |
| 134,730 | | |
| 131,598 | | |
| 126,218 | | |
| 126,508 | | |
| 126,290 | | |
| 126,147 | | |
| 126,098 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic Earnings (Loss) Per Common Share | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| 0.04 | | |
| 0.01 | | |
| (0.01 | ) | |
| 0.08 | | |
| 0.09 | | |
| 0.06 | | |
| 0.03 | | |
| 0.15 | |
| Diluted Earnings (Loss) Per Common Share | |
| 0.04 | | |
| 0.01 | | |
| (0.01 | ) | |
| 0.08 | | |
| 0.09 | | |
| 0.06 | | |
| 0.03 | | |
| 0.14 | |
| Adjusted Basic Earnings Per Common Share4 | |
| 0.05 | | |
| 0.01 | | |
| 0.00 | | |
| 0.09 | | |
| 0.10 | | |
| 0.07 | | |
| 0.04 | | |
| 0.15 | |
| Adjusted Diluted Earnings Per Common Share4 | |
| 0.05 | | |
| 0.01 | | |
| 0.00 | | |
| 0.09 | | |
| 0.10 | | |
| 0.07 | | |
| 0.04 | | |
| 0.14 | |
1The financial information for
Q2 2017, Q1 2017, Q4 2016, Q3 2016, Q2 2016, Q1 2016, Q4 2015, and Q3 2015 includes the full results for all of the Company’s
operations.
2See “Use
of Non-GAAP Financial Measures” section of this MD&A for further details.
3Adjusted EBITDA is calculated
as outlined in the “Use of Non-GAAP Financial Measures” and “Reconciliation of Historical Results to Adjusted
EBITDA” sections of this MD&A as management believes the adjusted figures to be a more meaningful indicator of operating
performance. A detailed reconciliation of Adjusted EBITDA for each period can be found in the "Reconciliation of Historical
Results to Adjusted EBITDA" section of the MD&A for each respective period.
4Basic adjusted and diluted
adjusted earnings per share has been calculated by dividing Adjusted Net Income by the number of weighted average basic and diluted
common shares outstanding for each quarter. Adjusted Net Income is calculated as outlined in the “Use of Non-GAAP Financial
Measures” and “Reconciliation of Historical Results to Adjusted Net Income” sections of this MD&A as management
believes the adjusted figures to be a more meaningful indicator of operating performance. A detailed reconciliation of Adjusted
Net Income for each period can be found in the "Reconciliation of Historical Results to Adjusted Net Income" section
of the MD&A for each respective period.
Results for the three months ended December
31, 2016 (“Q2 2017”) compared to the three months ended December 31, 2015 (“Q2 2016”)
Revenues
Revenues for Q2 2017
were $78.88 million, down 3% from $81.49 million for Q2 2016. In absolute dollars, the decrease in Q2 2017 was due largely to expected
declines, in line with quarterly targets, but at the high end of quarterly expectations, in DHX Television, consumer products-represented
revenues, proprietary production and producer and service fees, offset by increases in distribution and consumer products-owned.
Comparatively, Q2 2017 and Q2 2016 include the same assets in terms of prior acquisitions; accordingly, all revenue fluctuations
in comparing Q2 2017 to Q2 2016 are organic. A detailed review of each source of revenue is included below.
The Company's Proprietary
Content Business is comprised of Proprietary Production, Distribution (including WildBrain), Consumer Products-Owned, and New Media
and Other. As a result of the adoption of the amendment to IAS 38, the Company will now group Proprietary Production, Distribution
(including WildBrain), Consumer Products-Owned, and New Media and Other into a single Proprietary Content Gross Margin for the
purpose of providing analysis of gross margins.
Proprietary content
revenues: The Company's proprietary content revenue for Q2 2017 was up 10% to $48.42 million from $44.09 million for Q2 2016.
Management is pleased that its strategic priorities of investment in content is materializing.
Proprietary production
revenues: Proprietary production revenues for Q2 2017 were $17.68 million, a decrease of 15% compared to $20.71 million for
Q2 2016. For Q2 2017, the Company added 53.0 proprietary half-hours to the library down 30% versus 76.0 proprietary half-hours
for Q2 2016. For Q2 2017, the Company added 23.0 half-hours of third party produced titles with distribution rights (Q2 2016 -
16.0 half-hours), an increase of 44%, and an example of the operational synergies associated with owning DHX Television. Management
was pleased as the proprietary production revenue was near the top-end of previously reported quarterly expectations. See delivery
chart below for further details.
The breakdown for
content library deliveries (including proprietary deliveries and deliveries on Distribution rights for third party produced titles)
and dollar value subtotals per category for Q2 2017 and Q2 2016 was as follows:
| | |
| |
Q2 2017 | | |
Q2 2016 | |
| Category and Title | |
Season or Type | |
$ Million | | |
Half-hours | | |
$ Million | | |
Half-hours | |
| Children's and Family: | |
| |
| | |
| | |
| | |
| |
| | |
| |
| | |
| | |
| | |
| |
| Proprietary | |
| |
| | |
| | |
| | |
| |
| Chuck's Choice | |
I | |
| | | |
| 5 | | |
| | | |
| — | |
| Cloudy With a Chance of Meatballs: The Series | |
I | |
| | | |
| 1 | | |
| | | |
| — | |
| The Deep | |
I | |
| | | |
| — | | |
| | | |
| 6 | |
| Degrassi | |
XV | |
| | | |
| — | | |
| | | |
| 20 | |
| Degrassi | |
XVI | |
| | | |
| 20 | | |
| | | |
| — | |
| Hank Zipzer's Christmas Catastrophe | |
Movie | |
| | | |
| 3 | | |
| | | |
| — | |
| Hank Zipzer | |
III | |
| | | |
| — | | |
| | | |
| 8 | |
| Inspector Gadget | |
II | |
| | | |
| 8 | | |
| | | |
| — | |
| Kate & Mim-Mim | |
II | |
| | | |
| 4 | | |
| | | |
| — | |
| Make it Pop! | |
II | |
| | | |
| — | | |
| | | |
| 13 | |
| Slugterra | |
III | |
| | | |
| — | | |
| | | |
| 5 | |
| Space Ranger Roger | |
I | |
| | | |
| 2 | | |
| | | |
| — | |
| Supernoobs | |
I | |
| | | |
| — | | |
| | | |
| 12 | |
| Subtotals | |
| |
$ | 15.49 | | |
| 43 | | |
$ | 18.22 | | |
| 64 | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Third Party Produced Titles with Distribution Rights | |
| |
| | | |
| | | |
| | | |
| | |
| Backstage | |
| |
| | | |
| — | | |
| | | |
| 5 | |
| Fangbone | |
| |
| | | |
| 7 | | |
| | | |
| 2 | |
| Ghost Patrol | |
| |
| | | |
| 2 | | |
| | | |
| — | |
| Kuu Kuu Harajuku | |
| |
| | | |
| — | | |
| | | |
| 1 | |
| Messy Goes to Okido | |
| |
| | | |
| — | | |
| | | |
| 6 | |
| Rainbow Ruby | |
| |
| | | |
| 6 | | |
| | | |
| 2 | |
| We are Savvy | |
| |
| | | |
| 8 | | |
| | | |
| — | |
| Subtotals | |
| |
$ | 0.00 | | |
| 23 | | |
$ | 0.00 | | |
| 16 | |
| Total Children's and Family | |
| |
$ | 15.49 | | |
| 66 | | |
$ | 18.22 | | |
| 80 | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Comedy: | |
| |
| | | |
| | | |
| | | |
| | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Proprietary | |
| |
| | | |
| | | |
| | | |
| | |
| This Hour Has 22 Minutes | |
XXIII | |
| | | |
| — | | |
| | | |
| 12 | |
| This Hour Has 22 Minutes | |
XXIV | |
| | | |
| 10 | | |
| | | |
| — | |
| Total Comedy | |
| |
$ | 2.19 | | |
| 10 | | |
$ | 2.49 | | |
| 12 | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Total Proprietary | |
| |
$ | 17.68 | | |
| 53 | | |
$ | 20.71 | | |
| 76 | |
| Total Third Party Produced Titles with Distribution Rights | |
| |
| — | | |
| 23 | | |
| — | | |
| 16 | |
| | |
| |
$ | 17.68 | | |
| 76 | | |
$ | 20.71 | | |
| 92 | |
Distribution and
WildBrain revenues: Total distribution revenues were up 21% to $22.41 million, from $18.58 million for Q2 2016, driven by very
strong growth in WildBrain. For Q2 2017, distribution revenues excluding WildBrain were generally in line with the previous year's
quarter at $12.97 million, down slightly by $0.32 million (Q2 2016-$13.29 million), as the Company experienced consistent demand
for content from competing SVOD and other players. For Q2 2017, amongst other key distribution deals for both linear and digital
platforms, the Company closed significant deals with AMC Networks, iQiyi, Huashi, Shomax BV, Super RTL, and VMe TV. Management
is very pleased to report that revenues from WildBrain were $9.44 million for Q2 2017, reflecting 78% growth versus Q2 2016 revenues
of $5.29 million. Distribution revenues excluding WildBrain were at the top-end of the Management's previously reported quarterly
expectations.
Consumer products-owned
revenues (formerly M&L-owned) (including music and royalties): For Q2 2017, the consumer products-owned revenues were $7.89
million, up 82% as compared to $4.34 million for Q2 2016. For Q2 2017, consumer products-owned revenues included $3.90 million
from the international portion of The Next Step Wild Rhythm tour, compared to Q2 2016, when the Company had no live tour
revenue. Excluding the live tour revenues, consumer products-owned revenues for Q2 2017 were $3.99 million compared to $4.34 million
for Q2 2016, a decrease of (8)%, as the Company continued to recognize revenues related to non-refundable minimum guarantees associated
with Teletubbies, In The Night Garden, and Twirlywoos. Management expects consumer products-owned revenues from Teletubbies
to continue to ramp up in late Fiscal 2017 and into Fiscal 2018 as Teletubbies toys are rolled out in the US and other markets.
Consumer products-owned revenues were well above the high-end of Management's quarterly expectations, generally driven by higher
than expected live tour revenues. This did, however, create some margin pressure as live tour revenues have materially lower gross
margins than royalty based consumer products revenue.
Producer and service
fee revenues: For Q2 2017, the Company earned $10.42 million of producer and service fee revenues, a decrease of 9% versus
the $11.49 million from Q2 2016, which were at the lower-end of Management's previously reported quarterly expectations. Management
expects progress to accelerate for the remainder of Fiscal 2017 on a number of key service projects.
New media revenues:
For Q2 2017, new media revenues were down $0.01 million or 3% to $0.45 million (Q2 2016-$0.46 million) based primarily on apps
and games.
Television revenues:
For Q2 2017, DHX Television revenues were down 18% to $15.39 million from $18.78 million from Q2 2016, and were near the low-end
of Management's quarterly expectations. The decline in the subscriber revenues was expected and has been driven by the negotiated
lower rates resulting from the Company's strategic decision to focus the majority of the TV slate on our own proprietary content.
The decline was also driven by lower than expected promotion and advertising revenue as the Company has just been begun to step
up its efforts in this regard after recently getting approval from the CRTC to allow broadcast advertising for the Family Channel.
Approximately 88% or $13.53 million of the television revenues were subscriber revenues, while advertising, promotion, and digital
revenues accounted for a combined 12% or $1.87 million of the total television revenues.
Consumer products-represented
revenues (formerly M&L-represented): For Q2 2017, consumer products-represented revenues were, as expected, down $2.48
million, or 35%, to $4.64 million compared to Q2 2016 at $7.12 million, however were at the top-end of Management's previously
reported quarterly expectations. Consumer products-represented revenues were driven mainly by the continued strong performance
of our represented brands Despicable Me and Minions, Sesame Street, Dora the Explorer, The Pink
Panther, and Jurassic World. The Q2 2016 results benefited significantly from the 2016 holiday season strength of Despicable
Me and Minions brands.
Gross Margin
As previously noted
herein and as a result of the adoption of the amendment to IAS 38, the Company has adjusted its definition of gross margin, the
details of which are included in the “Use of Non-GAAP Financial Measures” section of this MD&A. The Company
expects, amongst other potential impacts, the adoption of the amendment to IAS 38 will result in increased fluctuations in the
percentage gross margins from period to period. Overall, Management expects the adoption of the amendments to IAS 38 to have
a positive impact on overall gross margins. As a result of the adoption of the amendment to IAS 38, the Company will now group
proprietary production, distribution (including WildBrain), consumer products-owned, and new media & other into a single Proprietary
Content Gross Margin for the purpose of providing analysis of gross margins. The change has been applied prospectively.
Gross margin for Q2
2017 was $42.02 million, a decrease in absolute dollars of $2.27 million or 5% compared to $44.29 million for Q2 2016. The overall
gross margin for Q2 2017 at 53% of revenue was near the mid-point of Management's revised previously reported quarterly expectations.
At 49%, proprietary content margins were near the mid-point of Management's expectations and slightly lower than other quarters,
driven by seasonally high proprietary production deliveries, which trigger higher production cost amortization, and higher than
expected live tour revenues, which carry lower gross margins. At 40%, gross margins for producer and service fees were near the
mid-point of Management's expectations. Gross margins for DHX Television, at 61%, were well within Management's expectations, impacted
by both lower external content costs and lower revenues when compared to Q2 2016. Gross margin for Q2 2017, including DHX Television,
was calculated as revenues of $78.88 million, less direct production costs and expense of investment in film & television programs
of $36.87 million and $nil expense of book value of acquired libraries, (Q2 2016-$81.48 million less $34.95 million and less $2.24
million, respectively).
For Q2 2017, the margins
for each revenue category in absolute dollars and as a margin percentage were as follows: the proprietary content business had
a gross margin of $23.76 million or 49%, net producer and service fee revenue margin of $4.18 million or 40%, television margin
was $9.44 million or 61%, and consumer products-represented revenue margin was $4.64 million or 100%.
Operating Expenses (Income)
SG&A
SG&A costs for
Q2 2017 increased 7% to $19.64 million compared to $18.35 million for Q2 2016. SG&A includes $1.60 million (Q2 2016-$1.82 million)
in non-cash share-based compensation. When adjusted, cash SG&A at $18.04 million was at the high-end of Management's previously
reported quarterly expectations, driven by both increased SG&A costs at WildBrain and increased corporate development activities
as Management continues to pursue acquisition opportunities.
Amortization
For Q2 2017, amortization
was down 17% to $6.59 million (Q2 2016-$7.90 million). For Q2 2017, amortization of P&E was $1.27 million compared with $1.17
million for Q2 2016. Amortization of intangible assets was up 22% to $2.79 million versus$2.29 million for Q2 2016, primarily due
to the amortization of the intangible assets arising from the Company's strategic pacts with Mattel. For Q2 2017, amortization
includes amortization of acquired and library content of $2.53 million, which is a direct result of the adoption of the amendment
to IAS 38, effective July 1, 2016 on a prospective basis. For Q2 2016, amortization included a portion of the expense of acquired
library of $4.44 million. Both the amortization of acquired and library content for Q2 2017 of $2.53 million and the expense of
acquired libraries for Q2 2016 of $4.44 million are excluded from the calculation of Adjusted EBITDA as they relate to a combination
of acquired and library titles which have minimal ongoing cash costs associated with selling, and are viewed as long-term assets.
Development Expenses and Other Charges
and Tangible Benefit Obligation
During Q2 2017, there
was $0.85 million recorded for development expenses and other charges (Q2 2016-$1.32 million), of which $0.14 million related to
costs associated with the rebranding of DHX Television and $0.71 million related to severance costs (Q2 2016-$1.32 million and
$nil, respectively).
Write-down of Certain Investments in
Film and Television Programs
During Q2 2017, there
was $0.45 million recorded for write-down of certain investments in film and television programs (Q2 2016-$0.50 million).
Finance Income (Expense)
For Q2 2017, the Company
recorded net finance expense of $6.70 million versus $1.27 million net finance expense for Q2 2016. Contributing materially to
the increase in net finance expense was a net foreign exchange loss of $2.17 million in Q2 2017, versus a net foreign exchange
gain of $2.55 million in Q2 2016. Additionally, Q2 2017 net finance expense consists of $4.71 million for interest costs on long-term
debt and capital leases (Q2 2016-$4.22 million), $0.05 million for finance and bank charges including interest on the revolving
line of credit (Q2 2016-$0.20 million), accretion on the tangible benefit obligation of $0.21 million (Q2 2016-$0.23 million),
and amortization of debt premiums of $0.01 million (Q2 2016-$0.01 million), offset by finance income of $0.12 million (Q2 2016-$0.08
million) and a gain on the changes in the fair value of the embedded derivatives on the Senior Unsecured Notes of $0.33 million
(Q2 2016-a gain of $0.75 million).
Adjusted EBITDA
For Q2 2017, Adjusted
EBITDA was $23.98 million, down $3.78 million or 14% over $27.76 million for Q2 2016. Please see the "Use of Non-GAAP Financial
Measures" and "Reconciliation of Historical Results to Adjusted EBITDA" sections of this MD&A for the definition
and detailed calculation of Adjusted EBITDA.
Income Taxes
Income tax for Q2
2017 was an expense of $2.04 million (Q2 2016-$3.27 million tax expense) made up of $2.50 million expense (Q2 2016-$3.99 million
expense) for current income tax and deferred income tax recovery of $0.46 million (Q2 2016-$0.72 million recovery).
Net Income and Comprehensive Income
For Q2 2017 net income
was $5.76 million ($0.04 basic and diluted earnings per share), compared to net income of $11.67 million ($0.09 basic and $0.09
diluted earnings per share) for Q2 2016, or a decrease of $5.91 million, or 51%. The net income for Q2 2017 was materially impacted
by a foreign exchange loss of $2.17 million versus a foreign exchange gain of $2.55 million for Q2 2016. The foreign exchange loss
for Q2 2017 was primarily driven by the impact of exchange rate fluctuations on foreign currency denominated receivables and payables,
a significant portion of which are comprised of intercompany balances. For Q2 2017, net income adjusted was $6.35 million or $0.05
adjusted basic and adjusted diluted earnings per share, adjusted for identified charges of $0.59 million (net of $0.25 million
tax effect), as compared to $12.59 million adjusted net income for Q2 2016 adjusted for identified charges of $0.92 million (net
of $0.40 million tax effect) or $0.10 adjusted basic and adjusted diluted earnings per share. Please see the "Use of Non-GAAP
Financial Measures" and "Reconciliation of Historical Results to Adjusted Net Income" sections of this MD&A
for the definitions of Adjusted Net Income, Basic Adjusted Net Income Per Common Share, and Diluted Adjusted Net Income Per Common
Share, as well as the detailed calculation of Adjusted Net Income.
Comprehensive income
for Q2 2017 was $5.35 million, compared to comprehensive income of $9.48 million for Q2 2016, or a decrease of $4.12 million, or
44%.
| Liquidity and Capital Resources | |
December 31, | | |
June 30, | | |
| | |
| |
| | |
2016 | | |
2016 | | |
| | |
| |
| | |
$ | | |
$ | | |
| | |
| |
| | |
| | |
| | |
| |
| Key Balance Sheet Amounts and Ratios: | |
| | | |
| | | |
| | | |
| | |
| Cash and cash equivalents | |
| 58,210 | | |
| 80,446 | | |
| | | |
| | |
| Long-term assets | |
| 473,602 | | |
| 388,914 | | |
| | | |
| | |
| Working capital | |
| 165,879 | | |
| 252,650 | | |
| | | |
| | |
| Long-term and other liabilities | |
| 295,792 | | |
| 304,729 | | |
| | | |
| | |
| Working capital ratio (1) | |
| 1.65 | | |
| 1.97 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three Months Ended | | |
Three Months Ended | | |
Six Months Ended | | |
Six Months Ended | |
| | |
December 31, 2016 | | |
December 31, 2015 | | |
December 31, 2016 | | |
December 31, 2015 | |
| | |
$ | | |
$ | | |
$ | | |
$ | |
| Cash Inflows (Outflows) by Activity: | |
| | | |
| | | |
| | | |
| | |
| Operating activities | |
| (2,477 | ) | |
| (19,112 | ) | |
| (7,491 | ) | |
| (31,367 | ) |
| Financing activities | |
| (4,167 | ) | |
| 69,029 | | |
| (4,322 | ) | |
| 64,217 | |
| Investing activities | |
| (6,575 | ) | |
| (15,137 | ) | |
| (10,651 | ) | |
| (16,026 | ) |
| Effect of foreign exchange rate changes on cash | |
| 66 | | |
| 271 | | |
| 228 | | |
| 830 | |
| Net cash inflows (outflows) | |
| (13,153 | ) | |
| 35,051 | | |
| (22,236 | ) | |
| 17,654 | |
| | |
| | | |
| | | |
| | | |
| | |
| Adjusted Operating Activities (2) | |
| 633 | | |
| 6,970 | | |
| (1,729 | ) | |
| (6,736 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| (1) | Working capital ratio is current assets divided by current liabilities. |
| (2) | See “Use of Non-GAAP Financial Measures” section of this MD&A for a definition
of Adjusted Operating Activities. Adjusted Operating Activities includes changes in bank indebtedness which Management believes
relate to operations. Cash inflows from Adjusted Operating Activities are calculated as follows: |
| | |
Three Months Ended | | |
Three Months Ended | | |
Six Months Ended | | |
Six Months Ended | |
| | |
December 31, 2016 | | |
December 31, 2015 | | |
December 31, 2016 | | |
December 31, 2015 | |
| Operating activities | |
| (2,477 | ) | |
| (19,112 | ) | |
| (7,491 | ) | |
| (31,367 | ) |
| Proceeds from (repayment of) bank indebtedness | |
| 4,390 | | |
| 4,673 | | |
| 8,641 | | |
| 9,173 | |
| Proceeds from (repayment of) interim production financing | |
| (1,280 | ) | |
| 21,409 | | |
| (2,879 | ) | |
| 15,458 | |
| Decrease in restricted cash | |
| — | | |
| — | | |
| — | | |
| — | |
| Exclude effect of capital transaction on bank indebtedness | |
| — | | |
| — | | |
| — | | |
| — | |
| Exclude funds drawn to acquire Nerd Corps | |
| — | | |
| — | | |
| — | | |
| — | |
| Acquisition costs, net of estimated taxes | |
| — | | |
| — | | |
| — | | |
| — | |
| Adjusted Operating Activities | |
| 633 | | |
| 6,970 | | |
| (1,729 | ) | |
| (6,736 | ) |
Changes in Cash
Cash at December 31,
2016 was $58.21 million, as compared to $71.36 million and $80.45 million at September 30, 2016 and June 30, 2016, respectively.
For six months ended
December 31, 2016, cash flows used in operating activities were $7.49 million. Cash flows from operating activities were impacted
by net income of $7.13 million and adding back non-cash items of amortization of P&E, intangible assets, acquired and library
content, unrealized foreign exchange loss, finance fee expenses, write-down of certain investment in film and television programs,
amortization of debt premium, tangible benefit related accretion expense, share-based compensation, of $2.26 million, $5.62 million,
$5.83 million, $5.11 million, $0.80 million, $0.45 million, $0.07 million, $0.40 million, and $2.89 million, respectively. Cash
flows used in operating activities were for $2.10 million movement in fair value of the embedded derivatives, $0.37 million for
deferred income tax recovery, and $14.68 million for net change in non-cash balances related to operations, which includes an outflow
of $3.00 million in tangible benefit obligation payments made during the period, and $20.89 million for net change investment in
film and television programs.
The net cash outflow from operations
for Six Months 2017 has been directly impacted by the following:
| • | The Company continuing with an aggressive production slate at a time when demand for content
is robust, specifically, the Company’s productions in progress was $31.4 million at December 31, 2016 (refer to note 5 to
the unaudited interim condensed consolidated financial statements for the period ended December 31, 2016), compared to $25.1 million
at June 30 2016. Productions in progress, are investments in productions in progress, but not yet delivered, including, but
not limited to Teletubbies - season 2, Cloudy With a Chance of Meatballs - season 1, Inspector Gadget - season
2, Supernoobs - season 2, Chuck’s Choice - season 1, Massive Monster Mayhem - season 1, and This
Hour Has 22 Minutes - season 24. The majority of these proprietary productions are expected to be delivered during the
remainder of Fiscal 2017 and early Fiscal 2018. |
| • | The Company seasonally acquiring additionally third party content for DHX Television in advance
of the fall 2016 season, which accounted for a net outflow of approximately $1.5 million, an expected reversal of approximately
$4.5 million from September 30, 2016. |
| • | The Company used cash of $3.0 million to satisfy its tangible benefit obligation, representing
the full amount of its expected annual expenditure for Fiscal 2017. |
As previously indicated,
the Company has a robust proprietary production pipeline planned for Fiscal 2017, and accordingly, expects to make a net investment
in film and television programs of an estimated $15-25 million for Fiscal 2017, and a smaller, temporary investment of working
capital into production, as production activities ramp in the first half of the Fiscal 2017, and further expects that trend to
partially reverse during the second half of Fiscal 2017.
The Company expects
to continue to benefit from its advantageous proprietary production funding model, but the production of content requires capital.
Typically, approximately 60 - 80% of proprietary production revenue is collected within 12 months of delivery. The majority of
proprietary production costs are incurred during production, while cost reductions (i.e. government assistance) are received within
6 - 18 months of delivery, accordingly, proprietary production requires working capital. A description of the Company’s advantageous
proprietary production funding model is further described on page 13 of the Company’s Annual Information Form for the year
ended June 30, 2016.
For six months ended
December 31, 2016, cash flows used in financing activities were $4.32 million. Cash flows used in financing activities resulted
from dividends paid of $4.33 million, repayments on long term debt of $5.97 million, and repayments of interim production financing
of $2.88 million. Cash flows from financing activities were provided by employee share purchase plan and options proceeds of $0.21
million and proceeds from incremental bank indebtedness of $8.64 million.
For six months ended
December 31, 2016, cash flows used in investing activities were $8.72 million for acquisitions of P&E, including costs associated
with the new Vancouver studio, and $1.93 million for acquisition of and cost of generating intangible assets.
Working Capital
Working capital (“Working
Capital”) represents the Company’s current assets less current liabilities. Working Capital decreased by $86.77
million as at December 31, 2016 versus June 30, 2016, impacted by a transfer of $94.74 million which is a result of the Company’s
adoption of the amendment to IAS 38. Upon adoption of the amendment to IAS 38, the Company transferred $94.74 million of
investments in film and television programs previously treated as a current inventory asset to a long term intangible asset on
the balance sheet. This transfer of assets upon adoption of the amendment to IAS 38 has absolutely no impact on the operations
or liquidity position of the Company.
Based on the Company’s
current revenue expectations for Fiscal 2017, which are based on contracted and expected production, distribution, consumer products,
broadcasting, and other revenue, the Company believes cash generated from operations and will be sufficient to satisfy Working
Capital needs for at least the next twelve months. Management believes the current Working Capital totalling $165.88 million is
sufficient to execute its current and future business plans.
Senior Unsecured Notes
On December 2, 2014,
the Company completed an issuance (the “Initial Issuance”), via private placement, of senior unsecured notes
("Senior Unsecured Notes") due on December 2, 2021, with an aggregate principal amount of $175,000, at a price
of $1,000 per $1,000 of principal. The Senior Unsecured Notes bear interest at a rate of 5.875% per annum, payable semi-annually
in arrears on June 2 and December 2 of each year until maturity. The first interest payment was paid on June 2, 2015. The Senior
Unsecured Notes are guaranteed by the Company and certain of its subsidiaries and are unsecured obligation. The net proceeds of
$169,760 from the Initial Issuance of the Senior Unsecured Notes were used to repay debt under the Company's senior secured credit
agreement (the "Amended Senior Secured Credit Agreement"), with $18,000 being repaid on the revolving facility
(the "Amended Revolving Facility") and $151,760 being repaid on the term facility (the "Amended Term Facility").
On May 13, 2016, the
Company completed a subsequent issuance (the “Additional Issuance”), via private placement, of the Senior Unsecured
Notes due on December 2, 2021, with an aggregate principal amount of $50,000 at a price of $975 per $1,000 of principal. The net
proceeds of $47,016 from the Additional Issuance of the Senior Unsecured Notes were used to pay debt under the Company's Amended
Term Facility.
As at December 31,
2016, the outstanding principal amount due on the Senior Unsecured Notes was $225,000 (June 30, 2016 - $225,000).
The Senior Unsecured
Notes contain embedded derivatives (the “Embedded Derivatives”). The Senior Unsecured Notes contain a redemption
option (the "Redemption Option") whereby the Company can redeem all or part of the Senior Unsecured Notes. The
Senior Unsecured Notes also contain a put option (the “Put Option”) whereby the lender can redeem all or part
of the Senior Unsecured Notes upon a change of control of the Company. The Embedded Derivatives are required to be accounted for
as separate embedded derivative financial instruments. On initial recognition, the Embedded Derivatives are recorded at their estimated
fair values and grouped with the Senior Unsecured Notes. The Embedded Derivatives are adjusted to their estimated fair values at
each reporting date and any change in fair value is recorded within finance income/expense in the consolidated statement of income.
On initial recognition, the carrying value of the Senior Unsecured Notes was reduced by the net fair value of the Embedded Derivatives,
and is amortized over the term of the Senior Unsecured Notes.
The Senior Unsecured
Notes contain non-financial covenants and customary events of default clauses. As of December 31, 2016, the Company was in compliance
with the covenants under the Senior Unsecured Notes.
Amended and Restricted Senior Credit
Facilities
Concurrently with
the closing of the acquisition of DHX Television, the Company entered into the Amended Senior Secured Credit Agreement with a syndicate
of lenders, which amended the terms of the existing credit facilities. The Amended Senior Secured Credit Agreement originally provided
for the Amended Revolving Facility of up to $30,000 and the Amended Term Facility of up to $235,000, maturing on July 31, 2019.
The Amended Revolving
Facility may be drawn down by way of either $CDN bankers acceptances, $CDN prime, $USD base rate, $USD LIBOR, €EUR LIBOR and/or
£GBP LIBOR advances (the "Drawdown Rate") and bears interest at a floating rate ranging from the Drawdown
Rate +1.25% to +4.50%. The Amended Term Facility may be drawn down by way of the Drawdown Rate and bears interest at a floating
rate ranging from the Drawdown Rate +1.25% to +4.50%. The Amended Term Facility is repayable in annual amortization payments (expressed
as a percentage of the initial principal amount of the Amended Term Facility) of 10% annually, payable in equal quarterly installments
on the last day of each quarter, which commenced in Q2 2015, with the remaining amount due on maturity.
All amounts borrowed
pursuant to the Amended Senior Secured Credit Agreement are guaranteed by the Company and certain of its subsidiaries (the "Guarantors"),
with certain of the Company’s subsidiaries providing a first priority security interest in respect of all of their capital
stock in favour of the syndicate of lenders, as well as all present and after acquired real and personal property of the Company
and the Guarantors.
Effective November
13, 2014 and commensurate with the closing of the Company’s acquisition of the Echo Bridge assets, the Amended Term Facility
was amended to include an additional principal amount of US$12,000, also maturing on July 31, 2019.
During Fiscal 2015
and in conjunction with the Initial Issuance of the Senior Unsecured Notes, the Company made a principal repayment on the Amended
Term Facility of $151,760 and, accordingly, recognized a debt extinguishment charge of $3,913, being a portion of the previously
unamortized debt issue costs at the time of repayment.
Effective December
23, 2014 and commensurate with the closing of the Company’s acquisition of Nerd Corps, the Amended Term Facility was amended
to include an additional principal amount of $20,000, also maturing on July 31, 2019.
Effective December
31, 2015, the Amended Term Facility was amended to include additional principal amounts of $20,000 and US $20,000.
During Fiscal 2016
and in conjunction with the Additional Issuance of the Senior Unsecured Notes, the Company made a principal repayment on the Amended
Term Facility of $47,016 and, accordingly recognized, a debt extinguishment charge of $1,364, being a portion of the previously
unamortized debt issue costs at the time of the principal repayment.
As at December 31,
2016, the Amended Term Facility is fully drawn, and the amount payable in US dollars was US$28,925 (June 30, 2016 - US$30,998);
the remainder of the Amended Term Facility is payable in Canadian dollars.
Pursuant to the Amended
Senior Secured Credit Agreement, the Company must maintain its Leverage Ratio at less than 3.50 times.
Production Financing Agreement
On August 5, 2014,
the Company entered into an agreement with CIBC Commercial Banking to provide a $20.00 million demand revolving loan, available
by way of an unlimited number of individual loans (the “Segment Loans”) made to finance production expenses related
to eligible productions (the “Eligible Productions”). The Segment Loans may be drawn down in either Canadian dollars
or US dollars and bear interest of $CDN prime plus 0.75% or $USD base rate plus 0.75%, respectively. Each Segment Loan is secured
by the tangible and intangible assets of each Eligible Production, assignment and direction of production financing contracts and
tax credits and a subordinated, unsecured guarantee from DHX Media Ltd. At December 31, 2016, the Company had $7.6 million available
on this facility.
Capital Management
The Company’s
objectives when managing capital are to provide an adequate return to shareholders, safeguard its assets, maintain a competitive
cost structure and continue as a going concern in order to pursue the development, production, distribution, and licensing of its
film and television properties, and broadcast operations.
To facilitate the
management of its capital structure, the Company prepares annual expenditure operating budgets that are updated as necessary depending
on various factors such as material acquisitions and including industry conditions and operating cash flow. The annual and updated
budgets are reviewed by the Board of Directors.
The Company monitors
capital using a number of financial ratios, specifically, as at December 31, 2016, pursuant to the amended Senior Secured
Credit Agreement, including but not limited to:
| • | Leverage Ratio, defined as net funded debt (the total of all obligations for borrowed money which bear interest or imputed
interest, net of all non-production related cash, excluding interim production financing, all capital lease obligations, and any
contingent liabilities) (“Net Funded Debt”) to consolidated adjusted EBITDA (rolling consolidated adjusted
EBITDA (pro-forma last 12 months) less foreign exchange gains or losses on intercompany debt, production-related EBITDA and certain
acquisition costs); and |
| • | The Fixed Charge Ratio, defined as consolidated adjusted EBITDA less current income taxes and unfunded capital expenditures
to fixed charges (consolidated interest expense and scheduled principal payments on Funded Debt). |
The following table
illustrates the financial ratios calculated on a rolling twelve-month basis as at:
| |
|
Measure targets |
|
December 31, 2016 |
| Leverage Ratio |
|
< 3.5x |
|
2.84 |
| Fixed Charge Ratio |
|
> 1.5x |
|
2.42 |
As of December 31,
2016, the Company is in compliance with these ratios.
| Contractual Obligations5 | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| As of December 31, 2016 | |
| | |
| | |
| | |
| | |
| |
Payments Due by Period (All amounts are in thousands) | |
Total | | |
Fiscal 2017 | | |
Fiscal 2018-
2019 | | |
Fiscal 2020-
2021 | | |
After Fiscal
2022 | |
| | |
$ | | |
$ | | |
$ | | |
$ | | |
$ | |
| | |
| | |
| | |
| | |
| | |
| |
| Bank indebtedness | |
| 8,641 | | |
| 8,641 | | |
| — | | |
| — | | |
| — | |
| Capital lease for equipment (principal and interest)(1) | |
| 4,765 | | |
| 1,650 | | |
| 2,859 | | |
| 256 | | |
| — | |
| Other liabilities (not discounted)(2) | |
| 9,894 | | |
| — | | |
| 4,947 | | |
| 4,947 | | |
| — | |
| Long-term debt payments (principal and interest) (3) | |
| 361,511 | | |
| 12,543 | | |
| 49,535 | | |
| 68,820 | | |
| 230,613 | |
| Operating leases (4) | |
| 70,030 | | |
| 5,018 | | |
| 18,237 | | |
| 13,637 | | |
| 33,138 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total Contractual Obligations | |
| 454,841 | | |
| 27,852 | | |
| 75,578 | | |
| 87,660 | | |
| 263,751 | |
| (1) | Pursuant to finance leases for video editing, leaseholds, and other office and production equipment, the obligations bear implied
interest ranging from 4.0% to 9.8% and mature from January 2017 to February 2019. Principal balances are included in note 7 to
the unaudited interim condensed consolidated financial statements for the six months ended December 31, 2016. |
| (2) | Other liabilities include the tangible benefit obligation per DHX Television acquisition and other contractual liabilities,
and excludes an amount of $9.62 million included in accounts payable and accrued liabilities. |
| (3) | See note 7(c) to the unaudited interim condensed consolidated financial statements for six months ended December 31, 2016 for
details. |
| (4) | Pursuant to operating leases. See note 13 to the unaudited interim condensed consolidated financial statements for the six
months ended December 31, 2016 for details. |
| (5) | In addition to the totals above, the Company has interim production financing owing in the amount of $89.12 million (see note
7b to the unaudited interim condensed consolidated financial statements for the six months ended December 31, 2016 for further
details). The Company also has entered into various contracts to buy broadcast rights with future commitments totalling $33.5 million. |
Outlook
The Company’s
December 31, 2016 balance sheet remains strong with approximately $58.2 million in cash on hand. Management continues to focus
on its core strengths of developing, producing, distributing its 12,500 half-hour library, and licensing the best possible quality
Children’s and Family programs with the goal of increasing cash flows from operations and profitability through existing
production, television, and distribution streams and emerging distribution including digital, music and consumer products opportunities.
DHX Media's strategy
has been to capitalize on the growing demand for children and family content in today's on-demand environment with the goal of
delivering profitable growth through multiple revenue streams. Our strategy continues to be guided by the three core imperatives
of: (1) creating engaging kids' content; (2) distributing our content worldwide across all media platforms, and now specifically
WildBrain; and (3) leveraging high-profile global brands with increased merchandising and licensing and other ancillary potential.
Consistent with these
imperatives, Management is reiterating the following initiatives for fiscal 2017:
| Strategic Priorities |
|
F2017 |
| Expand content library |
|
Add approximately 150-225 half-hours of proprietary titles organically and through acquisition of third party titles. |
| Grow global distribution |
|
Target distribution revenue (excluding WildBrain) growth of 2-5%. |
| |
|
Grow views and watch times on WildBrain’s network and revised revenue growth of 75-100%. |
| Build out new brands |
|
Rollout new Teletubbies series and consumer product programs into new territories. |
| |
|
Continue to add new distribution and merchandise and licensing deals for Teletubbies. |
| |
|
Advance development and production of new brands with consumer products potential. |
Management’s Annual Financial
Targets
Management targets
the mid-point of the ranges that follow. The low-end represents contractual likely sales or management's conservative estimates
for each revenue stream. For example, for production revenue, proprietary shows currently in production and contracted would fall
in the low-end of the range and only be subject to delivery or scheduling risk. For distribution and consumer products-owned, Management's
low-end estimate is based on the Company's existing experience in executing and closing licensing deals and its ability to pull
a reasonable amount of the potential sales through the pipeline. The high-end represents the likely upper boundary of additional
possible licensing deals not yet contracted. Management's Annual Financial Targets included in this section has been prepared by,
and is the responsibility of, the Company's Management. PricewaterhouseCoopers LLP has neither examined, compiled, nor performed
any procedures with respect to Management's Annual Financial Targets; and accordingly, PricewaterhouseCoopers LLP does not express
an opinion or any other form of assurance with respect to this financial information.
Management's revised
annual 2017 outlook is produced below:
Revenues
For Fiscal
2017, DHX Media expects the following revised targeted ranges:
| • | For proprietary production revenue: $41.5-46.5 million. Management expects quarterly revenue pacing
to be approximately 8%, 40%, 22%, and 30% for Q1 to Q4, respectively. Quarterly pacings are an estimate and may fluctuate. Management
has revised downward as two live action shows previously planned are now expected to be completed in Fiscal 2018. |
| • | For distribution revenues, digital and traditional distribution revenue, and WildBrain: $66-69
million and $32-38 million, respectively. Management expects quarterly revenue pacing to be approximately 13%, 19%, 26%, and 42%
for distribution and approximately 17%, 27%, 23% and 33% for WildBrain, for Q1 to Q4, respectively. Quarterly pacings are an estimate
and may fluctuate. Revised upward based on strong initial quarters ahead of expectations. |
| • | For consumer products-owned (formerly M&L-owned), including music, royalty, and live tour revenue:
$25.5-28.5 million. Management expects quarterly revenue pacing to be approximately 14%, 29%, 22%, and 35% for Q1 to Q4, respectively.
Quarterly pacings are an estimate and may fluctuate. Revised, based on current schedule for Teletubbies launch in US and
other markets have been pushed into Fiscal 2018. |
| • | For other revenue, including new media: $1.5 million. |
| • | For producer and service fee revenues: $53.5-57.5 million. Management expects quarterly pacing
to be approximately 19%, 19%, 26% and 36% for Q1 to Q4, respectively. Quarterly pacings are an estimate and may fluctuate. Revised
to reflect the current slate. |
| • | For consumer products-represented (formerly M&L-represented): $21-24 million. Management expects
quarterly revenue pacing to be approximately 26%, 21%, 20%, and 33% for Q1 to Q4, respectively. Quarterly pacings are an estimate
and may fluctuate. Revised slightly upwards for better than expected trend from across the portfolio. |
| • | For DHX Television: $59.5-64.5 million: Management expects quarterly revenue pacing to be approximately
25%, 25%, 24%, and 26% for Q1 to Q4, respectively. Quarterly pacings are an estimate and may fluctuate. Revised for current expectations
for promotion and advertising based on slower than originally expected advertising launch on the Family Channel Business. |
Gross Margins
As a result of the adoption of the amendment
to IAS 38 and as noted above, Management expects increased fluctuations in percentage gross margins from period to period. Management
has set the following revised target ranges for gross margins across its various revenue categories:
Proprietary Content, including proprietary
production, distribution, WildBrain, consumer products-owned (formerly M&L-owned) and new media: Gross margins are expected
to fluctuate from period to period, mainly as a result of the timing of deliveries, seasonality and product mix. The expected annual
range for gross margins is 50-57% for the Proprietary Content group, with specific ranges of 50-63% and 51-64% for Q3 and Q4, respectively.
Production Service: The expected annual
range is 40-45% with the expected quarterly range of 35-50%.
DHX Television: The expected annual range
is 60-65% with the expected quarterly range of 55-70%.
Consumer products-represented: Both the
expected annual and quarterly range is 100%.
Operating Expenses (Income)
For the remainder
of Fiscal 2017, DHX expects normalized quarterly cash SG&A to range from $16-17 million, including all operations as we continue
to ramp up in both distribution and consumer products to take advantage of emerging growth opportunities in digital platforms and
new territories. Resources will also continue to be added to grow WildBrain, the Company's multi-platform kids' network. Management
expects this investment will pay off in the years to come with continued digital territory expansion, increased consumer products
revenues from owned properties, and increased AVOD revenues. In addition, and largely as the fall television launch, DHX expects
to invest an additional $1 million in marketing and sales efforts to complete the rebranding strategy for DHX Television.
For Fiscal 2017, amortization
for all categories, including amortization of acquired and library content, and development expense when considered together are
expected to be in the range of $27-34 million. For Fiscal 2017, non-cash share-based compensation and other expenses (including
acquisition costs) are expected to be in the following ranges respectively: $5-6 million and $1.5-2.5 million. For Fiscal 2017,
cash finance expense is expected to range from $16-19 million.
As previously disclosed,
in Fiscal 2015, the Company recorded a non-recurring expense for the tangible benefit obligation related to the acquisition of
DHX Television of $14.2 million. During Fiscal 2017, the Company expects to use cash of $2.5-3.5 million to satisfy the tangible
benefit obligation.
The Company announced
that it will commence the construction of a 75,000 square foot leased studio in Vancouver. The studio will combine the Company's
existing 2D and CGI animation studios in Vancouver and is expected to result in significant operating efficiencies. The Company
is also in the midst of relocating its DHX Brands and CPLG office in London, England. For Fiscal 2017, the Company expects to incur
total capital expenditures of $13-15 million, and further expects capital expenditures to revert back to an annual range of $4-6
million beyond Fiscal 2017.
As noted, results
of operations for any period are dependent on the number and timing of film and television programs delivered and the licensing
deals contracted; accordingly, period results may vary.
Recent Transactions
DHX Media/Mattel Strategic Pacts
During Fiscal 2016,
the Company entered into a long-term co-production and license agreement with Mattel, Inc. ("Mattel") whereby
DHX and Mattel will jointly fund, co-develop, and co-produce various forms of new content for certain Mattel properties, including
Bob the Builder®, Fireman Sam®, Little People®, and Polly
Pocket®. DHX Studios will work with Mattel to develop and produce the new content, while DHX Distribution will
manage the global distribution of both the existing and new content, while Mattel will take the lead on global brand management
and consumer products. Management expects the Mattel agreement to be accretive to results for Fiscal 2017 and beyond.
On April 19, 2016,
the Company announced it had expanded its relationship with Mattel, Inc. by entering into a long-term licensing agreement for certain
rights to the Rainbow Magic publishing property from Mattel. The licensing agreement establishes a framework for DHX to
produce and distribute a range of new, multi-platform content inspired by the Rainbow Magic publishing property, while Mattel
will oversee global brand management and global toy rights. Rainbow Magic is a much-loved publishing property that has captured
the attention of young readers around the world since 2003. With hundreds of titles published to date, Rainbow Magic has
reached millions of readers worldwide in more than 30 languages. Rainbow Magic follows the exciting adventures of two young
girls, Rachel and Kirsty, and their magical friends in Fairyland. Rainbow Magic is currently published by Orchard and Scholastic
in Europe and the USA respectively.
DHX Media/DreamWorks Co-Production
and Licensing Deals
During Fiscal 2016,
the Company entered into a 5 year agreement with DreamWorks Animation ("DreamWorks") to co-produce 130 episodes
of original animated children's content at DHX Studios, which will air in Canada on DHX Television's suite of channels. In addition
to the co-production activities, DHX Television has licensed more than 1,000 half-hours of programming from DreamWorks, including
Hail King Julien, The Mr. Peabody & Sherman Show, Dragons: Race to the Edge, The Croods, and others.
DHX Television also licensed 300 half-hours of teen content for exclusive broadcast in Canada on Family Channel and includes SVOD
and mobile rights. These co-production and licensing agreements help to further build out DHX Television's compelling content slate.
DHX Media/Iconix Brand Group co-Production
and Licensing Deals
During Fiscal 2016,
the Company announced it had entered into a long-term agreement to co-develop and co-produce a new animated series based on Strawberry
Shortcake. The new content will be produced and distributed globally by DHX, while Iconix will handle the worldwide merchandising
and licensing for the brand, with both DHX and Iconix participating in all revenue streams. Additionally, and in a separate agreement,
DHX became the exclusive global distributor for the Strawberry Shortcake back catalogue, adding 108 half-hours to DHX's
distribution library.
Seasonality
Results of operations
for any period are dependent on the number and timing of film and television programs delivered, which cannot be predicted with
certainty. Consequently, the Company’s results from operations may fluctuate materially from period-to-period and the results
of any one period are not necessarily indicative of results for future periods. Cash flows may also fluctuate and are not necessarily
closely correlated with revenue recognition. During the initial broadcast of the rights the Company is somewhat reliant on the
broadcaster’s budget and financing cycles and at times the license period gets delayed and commences at a later date than
originally projected.
The Company’s
film and television revenues vary significantly from quarter to quarter driven by contracted deliveries with the primary broadcasters.
Although with the Company’s continued diversification of its revenue mix, particularly in the strengthening of the distribution
revenue stream, some of the quarterly unevenness is improving slightly and becoming more predictable. Distribution revenues are
contract and demand driven and can fluctuate significantly from period-to-period.
Critical Accounting Estimates
The preparation of
the financial statements in conformity with IFRS requires Management to make estimates, judgments, and assumptions that Management
believes are reasonable based upon the information available. These estimates, judgments, and assumptions affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting year or period. Actual results can differ from those estimates (refer to
page 2 of this MD&A for more information regarding forward-looking information). For a discussion of all of the Company’s
accounting policies, refer to note 3 of the audited consolidated financial statements for the years ended June 30, 2016 and 2015
on www.sedar.com or DHX’s website at www.dhxmedia.com or on EDGAR at www.sec.gov/edgar.shtml.
Please see section entitled "Adoption
of Amendment to International Accounting Standard 38 ("IAS 38") of this MD&A for additional details.
Financial Instruments and
Risk Management
The Company’s
financial instruments consist of cash and cash equivalents, amounts receivable, long-term amounts receivable, bank indebtedness
(when drawn), interim production financing, accounts payable and accrued liabilities, long-term debt and obligations under finance
leases, and the other liabilities. The Company, through its financial assets and liabilities, has exposure to the following risks
from its use of financial instruments: credit risk, interest rate risk, liquidity risk, and currency risk. Management monitors
risk levels and reviews risk management activities as they determine to be necessary.
Credit Risk
Credit risk arises
from cash and cash equivalents, as well as credit exposure to customers, including outstanding receivables. The Company manages
credit risk for cash and cash equivalents by ensuring that the counterparties are banks, governments and government agencies with
high credit ratings. The maximum exposure to credit risk for cash and equivalents, amounts receivable, and long-term amounts receivable,
approximates the amount recorded on the consolidated balance sheet.
The balance of trade
amounts receivable and long-term amounts receivable are mainly with Canadian broadcasters and large international broadcasters
and distribution companies. Management manages credit risk by regularly reviewing aged accounts receivables and appropriate credit
analysis. The Company has booked an allowance for doubtful accounts of approximately 8% against the gross amounts for certain trade
amounts receivable and management believes that the net amount of trade amounts receivable is fully collectible.
In assessing credit
risk, management includes in its assessment the long-term receivables and considers what impact the long-term nature of the receivable
has on credit risk. For certain arrangements with licensees, the Company is considered the agent, and only reports the revenue
net of the licensor’s share. When the Company bills a third party in full where it is an agent for the licensor, the Company
records an offsetting amount in accounts payable that is only payable to a licensee when the amount is collected from the third
party. This reduces the risk, as the Company is only exposed to the amounts receivable related to the revenue it records.
Interest Rate Risk
The Company is exposed
to interest rate risk arising from fluctuations in interest rates as its interim production financing, certain long-term debt,
and a portion of cash and cash equivalents bear interest at floating rates. A 1% fluctuation would have an approximate $1.00-2.00
million effect on annual net income before income taxes.
Liquidity Risk
The Company manages
liquidity by forecasting and monitoring operating cash flows and through the use of finance leases and revolving credit facilities.
As at December 31, 2016 the Company had cash and cash equivalents on hand of $58.21 million (June 30, 2016 - $80.45 million).
Results of operations
for any period are dependent on the number and timing of film and television programs delivered, which cannot be predicted with
certainty. Consequently, the Company’s results from operations may fluctuate materially from period-to-period and the results
of any one period are not necessarily indicative of results for future periods. Cash flows may also fluctuate and are not necessarily
closely correlated with revenue recognition. During the initial broadcast of the rights, the Company is somewhat reliant on the
broadcaster’s budget and financing cycles and at times the license period gets delayed and commences at a later date than
originally projected.
The Company’s
film and television revenues vary significantly from quarter to quarter driven by contracted deliveries with the primary broadcasters.
Although with the Company’s recent diversification of its revenue mix, particularly in the strengthening of the distribution
revenue stream and addition of the broadcasting revenue stream, some of the quarterly unevenness is improving slightly and becoming
more predictable. Distribution revenues are contract and demand driven and can fluctuate significantly from year to year. The Company
maintains appropriate cash balances and has access to financing facilities to manage fluctuating cash flows.
The Company obtains
interim production financing to provide funds until such time as the federal and provincial film tax credits are collected. Upon
collection of the film tax credits, the related interim production financing is repaid.
Currency Risk
The Company’s
activities involve holding foreign currencies and incurring production costs and earning revenues denominated in foreign currencies.
These activities result in exposure to fluctuations in foreign currency exchange rates. The Company periodically enters into foreign
exchange purchase contracts to manage its foreign exchange risk on USD, GBP and Euro denominated contracts. At December 31, 2016,
the Company revalued its financial instruments denominated in a foreign currencies at the prevailing exchange rates. While inherently
difficult to estimate, Management estimates 1% change in the USD, GBP or Euro exchange rate would have an approximate $0.5-1.5
million annual effect on net income and comprehensive income.
Risk Assessment
The Company is exposed
to a number of specific and general risks that could affect the Company that each reader should carefully consider. Additional
risks and uncertainties not presently known to the Company or that the Company does not currently anticipate will be material,
may impair the Company’s business operations and its operating results and as a result could materially impact its business,
results of operations, prospects, and financial condition. The specific and general risks include, but are not limited to the following:
risks related to the nature of the entertainment industry, risks related to television and film industries, risks related to doing
business internationally, loss of Canadian status, competition, limited ability to exploit film and television content library,
protecting and defending against intellectual property claims, fluctuating results of operations, raising additional capital, concentration
risk, reliance on key personnel, market share price fluctuations, risks associated with acquisitions and joint ventures, potential
for budget overruns and other production risks, management estimates in revenues and earnings, stoppage of incentive programs,
financial risks resulting from the Company’s capital requirements, government incentive program, change in regulatory environment,
litigation, technological change, labour relations, and exchanges rates.
For further details
see “Risk Factors” contained in the Company’s 2016 Annual MD&A and the Company's most recent Annual Information
Form, filed September 28, 2016, on www.sedar.com, DHX’s website at www.dhxmedia.com, or on EDGAR at www.sec.gov/edgar.shtml.
Disclosure Controls and Procedures and Internal Control over
Financial Reporting
The Company’s
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have designed or caused
to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that material information
is gathered and reported to senior management to permit timely decisions regarding public disclosure and to provide reasonable
assurance that the information required to be disclosed in reports that are filed or submitted under Canadian securities legislation
is recorded, processed, summarized, and reported within the time period specified in those rules.
The CEO and the CFO
have also designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.
In its annual filings
dated September 28, 2016, the CEO and the CFO, after evaluating the effectiveness of the Company’s disclosure controls and
procedures, and internal control over financial reporting, concluded that as at June 30, 2016, both the Company’s disclosure
controls and procedures, and internal control over financial reporting were operating effectively. It should be noted that a control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues, including instances of fraud, if any, have been detected.
There were no changes
in internal controls over financial reporting during the six months ended December 31, 2016 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Use of Non-GAAP Financial Measures
In addition to the
results reported in accordance with IFRS or GAAP as issued by the International Accounting Standards Board, the Company uses various
non-GAAP financial measures, which are not recognized under IFRS or GAAP, as supplemental indicators of our operating performance
and financial position. These non-GAAP financial measures are provided to enhance the user’s understanding of our historical
and current financial performance and our prospects for the future. Management believes that these measures provide useful information
in that they exclude amounts that are not indicative of our core operating results and ongoing operations and provide a more consistent
basis for comparison between periods. The following discussion explains the Company’s use of certain non-GAAP financial measures,
which are Adjusted EBITDA, Adjusted Net Income, Basic Adjusted Net Income Per Common Share, Diluted Adjusted Net Income Per Common
Share, Gross Margin, and Adjusted Operating Activities.
“Adjusted
EBITDA” means, commensurate with the adoption of the amendment to IAS 38 in Q1 2017, earnings (loss) before interest,
taxes, amortization of property & equipment and intangible assets, amortization of acquired and library content, share-based
compensation expense, finance expense (income), development expense, impairment of certain investments in film and television programs,
and also includes adjustments for other identified charges, as specified in the accompanying tables. Prior to Q1 2017, Adjusted
EBITDA was defined as earnings (loss) before interest, taxes, amortization, share-based compensation expense, finance expense (income),
development expense, impairment of certain investments in film and television programs, and also includes adjustments for other
identified charges, as specified in the accompanying tables. Amortization previously included amortization of property & equipment,
expense of acquired libraries, and intangible assets. This change in definition has been applied prospectively, and while conceptually
similar, the calculation of Adjusted EBITDA differs from prior periods as a result of the adoption of the amendment to IAS 38.
Adjusted EBITDA is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP; accordingly,
Adjusted EBITDA may not be comparable to similar measures presented by other issuers. Management believes Adjusted EBITDA to be
a meaningful indicator of operating performance that provides useful information to investors regarding our financial condition
and results of operation. The most comparable GAAP measure is earnings before income taxes.
“Adjusted
Net Income” is a non-GAAP financial measure which adjusts net income (loss) for identified charges, net of tax effect.
Adjusted Net Income is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP;
accordingly, Adjusted Net Income may not be comparable to similar measures presented by other issuers. Management believes Adjusted
Net Income to be a meaningful indicator of operating performance that provides useful information to investors regarding our financial
condition and results of operation. The most comparable GAAP measure is earnings before income taxes.
"Basic Adjusted
Net Income Per Common Share" and "Diluted Adjusted Net Income Per Common Share" are calculated by dividing
Adjusted Net Income by Basic weighted average common shares outstanding and diluted weighted average common shares outstanding,
respectively.
“Gross Margin”
means, commensurate with the adoption of the amendment to IAS 38 in Q1 2017, revenue less direct production costs and new media
costs, expense of film and television programs, and expense of film and broadcasting rights for broadcasting (per the financial
statements). Prior to Q1 2017, Gross Margin was defined as revenue less direct production costs and new media costs, expense of
film and television programs, expense of film and broadcasting rights for broadcasting, expense of acquired library (per the financial
statements), and plus the portion of the expense of acquired library that relates to the amortization of the purchase accounting
bump to fair value for all acquired libraries as detailed in footnote 3 of the accompanying Reconciliation of Historical Results
of Adjusted EBITDA. This change in definition has been applied prospectively, and while conceptually similar, the calculation of
Gross Margin differs from prior periods as a result of the adoption of the amendment to IAS 38. Gross Margin is not an earnings
measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP; accordingly, Gross Margin may not be comparable
to similar measures presented by other issuers. The most comparable GAAP measure is earnings before income taxes.
“Adjusted
Operating Activities” is a non-GAAP financial measure of cash inflows and outflows from operating activities adjusted
for increases and decreases in interim production financing, bank indebtedness, excluding specifically identified financing and
investing activities, changes in restricted cash, and identified charges, net of tax, as in Management’s opinion, these are
also an integral part of determining cash flows from operations. Adjusted Operating Activities is one of the key cash flow measurement
tools used by Management in assessing cash flow performance. The most comparable GAAP measure is cash flows from operating activities.
Reconciliations of historical results to both Adjusted EBITDA
and Adjusted Net Income are presented on the following pages.
Reconciliation of Historical Results to Adjusted EBITDA
Adjusted EBITDA is not a recognized earnings
measure under GAAP and does not have standardized meanings prescribed by GAAP; accordingly, Adjusted EBITDA may not be comparable
to similar measures presented by other companies or issuers. Investors are cautioned that Adjusted EBITDA should not be construed
as an alternative to net income or loss determined in accordance with GAAP as an indicator of the Company’s performance or
to cash flows from operating, investing, and financing activities as a measure of liquidity and cash flows. The following table
reconciles net income, Adjusted EBITDA, and Gross Margin, based on the unaudited interim condensed consolidated financial statements
for the three and six months ended December 31, 2016 and 2015 of the Company found on www.sedar.com, www.dhxmedia.com, or on EDGAR
at www.sec.gov/edgar.shtml. For further description see “Use of Non-GAAP Financial Measures” elsewhere in this MD&A.
The operating results for any period
should not be relied upon as an indication of results for any future period.
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Six Months | | |
Six Months | |
| | |
Q2 20171 | | |
Q1 20171 | | |
Q4 - 20161 | | |
Q3 - 20161 | | |
Q2 - 20161 | | |
Q1 - 20161 | | |
Q4 - 20151 | | |
Q3 - 20151 | | |
20171 | | |
20161 | |
| | |
($000) | | |
($000) | | |
($000) | | |
($000) | | |
($000) | | |
($000) | | |
($000) | | |
($000) | | |
($000) | | |
($000) | |
| Net income (loss) for the period | |
| 5,755 | | |
| 1,372 | | |
| (1,746 | ) | |
| 10,219 | | |
| 11,671 | | |
| 7,524 | | |
| 3,696 | | |
| 18,031 | | |
| 6,794 | | |
| 19,195 | |
| Provision for (recovery of) income taxes | |
| 2,039 | | |
| 627 | | |
| (274 | ) | |
| 756 | | |
| 3,272 | | |
| 1,367 | | |
| (566 | ) | |
| 6,666 | | |
| 2,946 | | |
| 4,639 | |
| Interest expense, net2 | |
| 4,639 | | |
| 4,292 | | |
| 5,290 | | |
| 5,380 | | |
| 4,343 | | |
| 4,304 | | |
| 4,968 | | |
| 4,280 | | |
| 8,931 | | |
| 8,647 | |
| Amortization3 | |
| 4,059 | | |
| 3,825 | | |
| 7,878 | | |
| 6,315 | | |
| 7,897 | | |
| 5,314 | | |
| 5,967 | | |
| 7,028 | | |
| 7,884 | | |
| 13,211 | |
| Amortization of acquired and library content4 | |
| 2,526 | | |
| 3,301 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,827 | | |
| — | |
| Share-based compensation expense | |
| 1,601 | | |
| 1,290 | | |
| 1,545 | | |
| 1,528 | | |
| 1,817 | | |
| 1,091 | | |
| 1,165 | | |
| 1,378 | | |
| 2,891 | | |
| 2,908 | |
| Finance expense (excluding interest), net2 | |
| 2,067 | | |
| (502 | ) | |
| 9,501 | | |
| 6,421 | | |
| (3,057 | ) | |
| (2,367 | ) | |
| 4,229 | | |
| (8,904 | ) | |
| 1,565 | | |
| (5,424 | ) |
| Acquisition costs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 150 | | |
| — | | |
| — | | |
| — | |
| Write-down of certain investment in film and television | |
| 447 | | |
| — | | |
| 800 | | |
| 450 | | |
| 500 | | |
| — | | |
| 1,282 | | |
| 517 | | |
| 500 | | |
| 500 | |
| Development and other expense5 | |
| 846 | | |
| 626 | | |
| 1,828 | | |
| 1,667 | | |
| 1,316 | | |
| 1,139 | | |
| 1,919 | | |
| 807 | | |
| 1,472 | | |
| 2,455 | |
| Adjusted EBITDA1 | |
| 23,979 | | |
| 14,831 | | |
| 24,822 | | |
| 32,736 | | |
| 27,759 | | |
| 18,372 | | |
| 22,810 | | |
| 29,803 | | |
| 38,810 | | |
| 46,131 | |
| Selling, general and administrative, net of
share-based compensation expense | |
| 18,039 | | |
| 16,353 | | |
| 19,144 | | |
| 17,776 | | |
| 16,528 | | |
| 16,185 | | |
| 14,856 | | |
| 14,990 | | |
| 34,392 | | |
| 32,713 | |
| Gross Margin1 | |
| 42,018 | | |
| 31,184 | | |
| 43,966 | | |
| 50,512 | | |
| 44,287 | | |
| 34,557 | | |
| 37,666 | | |
| 44,793 | | |
| 73,202 | | |
| 78,844 | |
1See “Use of Non-GAAP
Financial Measures” section of this MD&A for further details.
2Finance expense per the financial
statements has been split between its interest and non-interest components.
3Amortization is made up of
amortization of P&E and intangibles and for the periods prior to Q1 2017 the portion of expense of acquired library that relates
to the amortization of the purchase accounting bump to fair value for all acquired libraries. These adjustments were as follows:
Q2 2017-$4.06 million and $nil, respectively; Q1 2017-$3.83 million and $nil, respectively; Q4 2016-$3.91 million and $3.97 million,
respectively; Q3 2016-$3.94 million and $2.38 million, respectively; Q2 2016-$3.46 million and $4.44 million, respectively; Q1
2016-$3.22 million and $2.10 million, respectively; (Q4 2015-$3.18 million and $2.80 million, respectively; and Q3 2015-$3.43 million
and $3.59 million, respectively).
4Commensurate with the adoption
of the amendment to IAS 38 in Q1 2017, amortization of acquired and library content has been included in the calculation of Adjusted
EBITDA on a prospective basis.
5Development and other expenses
for Q1 2017 tie directly to the financial statements and includes costs related to the rebranding of DHX television of $0.14 million,
severance and integration costs of $0.71 million, lease termination costs of $nil, development costs and costs of acquisitions
not completed of $nil, and costs related to a withdrawn equity offering of $nil (Q1 2017-$0.52 million, $0.11 million, $nil, $nil,
and $nil, respectively; Q4 2016 - $nil, $0.38 million, $nil, $1.45 million, $nil, respectively; Q3 2016 - $1.30 million, $0.37
million, $nil, $nil and $nil, respectively; Q2 2016 - $1.32 million, $nil, $nil, $nil, and $nil, respectively; Q1 2016 - $0.74
million, $0.40 million, $nil, $nil, and $nil, respectively; Q4 2015 - $nil, $1.14 million, $nil, $0.28 million and $0.50 million,
respectively; and Q3 2015 - $nil, $nil, $nil, $0.81 million, and $nil, and respectively).
Reconciliation of Historical Results
to Adjusted Net Income
Adjusted Net Income is not a recognized
earnings measure under GAAP and does not have standardized meanings prescribed by GAAP. Accordingly, Adjusted Net Income may not
be comparable to similar measures presented by other companies or issuers. Investors are cautioned that Adjusted Net Income should
not be construed as an alternative to net income or loss determined in accordance with GAAP as an indicator or the Company's performance
or to cash flows from operating, investing, and financing activities as a measure of liquidity and cash flows. The following table
reconciles net income to adjusted net Income and on the Company's consolidated financial statements found on www.sedar.com, www.dhxmedia.com,
or on EDGAR at www.sec.gov/edgar.shtml. For further description see "Use of Non-GAAP Financial Measures" elsewhere in
the MD&A.
The operating results for any period
should not be relied upon as an indication of results for any future period.
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Six
Months | | |
Six
Months | |
| | |
Q2
20171 | | |
Q1
20171 | | |
Q4
- 20161 | | |
Q3
- 20161 | | |
Q2
- 20161 | | |
Q1
- 20161 | | |
Q4
- 20151 | | |
Q3
- 20151 | | |
20171 | | |
20161 | |
| | |
(000) | | |
(000) | | |
(000) | | |
(000) | | |
(000) | | |
(000) | | |
(000) | | |
(000) | | |
(000) | | |
(000) | |
| Net income (loss)
for the period | |
| 5,755 | | |
| 1,372 | | |
| (1,746 | ) | |
| 10,219 | | |
| 11,671 | | |
| 7,524 | | |
| 3,696 | | |
| 18,031 | | |
| 7,127 | | |
| 19,195 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Acquisition costs, net of estimated
tax effect | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 129 | | |
| — | | |
| — | | |
| — | |
| TV Rebranding costs, net of estimated
tax effect2 | |
| 98 | | |
| 362 | | |
| — | | |
| 906 | | |
| 923 | | |
| 516 | | |
| — | | |
| — | | |
| 460 | | |
| 1,439 | |
| Severance costs, lease termination
and other, net of estimated tax effect2 | |
| 494 | | |
| 76 | | |
| 265 | | |
| 259 | | |
| — | | |
| 281 | | |
| 821 | | |
| — | | |
| 570 | | |
| 281 | |
| Proposed equity offering costs,
net of estimated tax effect2 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 360 | | |
| — | | |
| — | | |
| — | |
| Development expenses and acquisition
costs not completed2 | |
| — | | |
| — | | |
| 1,015 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Debt extinguishment
charge | |
| — | | |
| — | | |
| 955 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Adjusted
net income1 | |
| 6,347 | | |
| 1,810 | | |
| 489 | | |
| 11,384 | | |
| 12,594 | | |
| 8,321 | | |
| 5,006 | | |
| 18,031 | | |
| 8,157 | | |
| 20,915 | |
1See "Use of Non-GAAP Financial Measures"
section of this MD&A for further details.
2Included in Development expenses and other.
DHX MEDIA LTD.
Q2 2017
Supplemental Information
I. Summary of securities issued and
options granted during the six months ended December 31, 2016 (expressed in thousands of Canadian dollars, except for shares and
amounts per share)
| a. | Summary of securities issued |
| Common Shares | |
Number of Common | | |
Value | |
| | |
Shares | | |
$ | |
| Balance at June 30, 2016 | |
| 133,774,729 | | |
| 302,828 | |
| | |
| | | |
| | |
| Shares issued as part of employee share purchase plan | |
| 7,028 | | |
| 50 | |
| Options exercised | |
| 10,000 | | |
| 46 | |
| | |
| | | |
| | |
| Balance at September 30, 2016 | |
| 133,791,757 | | |
| 302,924 | |
| | |
| | | |
| | |
| Shares issued as part of employee share purchase plan | |
| 7,752 | | |
| 53 | |
| Options exercised | |
| 50,000 | | |
| 103 | |
| Dividends reinvested | |
| 75,708 | | |
| 492 | |
| | |
| | | |
| | |
| Balance at December 31, 2016 | |
| 133,925,217 | | |
| 303,572 | |
| Options | |
Number of Options | | |
Weighted-average
exercise price | |
| | |
| | |
| |
| Balance at June 30, 2016 | |
| 7,137,125 | | |
$ | 6.93 | |
| Options exercised | |
| (10,000 | ) | |
$ | 3.31 | |
| | |
| | | |
| | |
| Balance at September 30, 2016 | |
| 7,127,125 | | |
$ | 6.94 | |
| | |
| | | |
| | |
| Options exercised | |
| (50,000 | ) | |
$ | 1.42 | |
| Options granted | |
| 1,342,400 | | |
$ | 7.02 | |
| | |
| | | |
| | |
| Balance at December 31, 2016 | |
| 8,419,525 | | |
$ | 6.98 | |
| Performance Share Units ("PSUs) | |
Number of PSUs | | |
Weighted-average share price at grant date
$ | |
| | |
| | |
| |
| Balance at June 30, 2016 and September 30, 2016 | |
| — | | |
| — | |
| PSUs granted | |
| 452,992 | | |
$ | 7.02 | |
| | |
| | | |
| | |
| Balance at December 31, 2016 | |
| 452,992 | | |
$ | 7.02 | |
| b. | Summary of securities as at the end of the reporting
period |
| 1. | Authorized share capital |
100,000,000 Preferred Variable
Voting Shares ("PVVS"), redeemable at the option of the Company at any time at a millionth of a cent per share,
no entitlement to dividends, voting
Unlimited Common Voting Shares without nominal or
par value
Unlimited Variable Voting Shares without nominal or
par value
Unlimited Non-Voting Shares without nominal or par
value
| 2. | Shares outstanding and recorded value |
133,925,217 common shares at
a recorded value of 303,572, comprised of 108,442,506 common voting shares and 25,482,711 variable voting shares and nil non-voting
shares;
100,000,000 preferred variable
voting shares at a recorded value of $nil.
| i. | Preferred Variable Voting Shares |
On November 12, 2014, the PVVS
were transferred by the Company’s Executive Chairman, to the Company’s Chief Executive Officer, in accordance with
the terms of a shareholders agreement among the Company and holder of the PVVS (the “PVVS Shareholder Agreement”).
On the date of such transfer, the Company’s Chief Executive Officer entered into the PVVS Shareholder Agreement with the
Company, pursuant to which the Company’s Chief Executive Officer (i) agreed not to transfer the PVVS, in whole or in
part, except with the prior written approval of the Board, (ii) granted to the Company the unilateral right to compel the
transfer of the PVVS, at any time and from time to time, in whole or in part, to a person designated by the Board and (iii) granted
to DHX a power of attorney to effect any transfers contemplated by the PVVS Shareholder Agreement. The Board will not approve
or compel a transfer without first obtaining the approval of the TSX and the PVVS Shareholder Agreement cannot be amended, waived
or terminated unless approved by the TSX.
On September 30, 2014, the Company’s
shareholders approved a reorganization of the Company’s share capital structure (the “Share Capital Reorganization”)
to address the Canadian ownership requirements of DHX Television. The Share Capital Reorganization was affected on October 9, 2014
and resulted in, among other things, the creation of three new classes of shares: Common Voting Shares, Variable Voting Shares
and Non-Voting Shares.
On October 9, 2014, each outstanding
Common Share of the Company that was not owned and controlled by a Canadian for the purposes of the Broadcasting Act (Canada) (the
“Broadcasting Act”) was converted into one Variable Voting Share and each outstanding Common Share that was owned and
controlled by a Canadian for the purposes of the Broadcasting Act was converted into one Common Voting Share. Each Common Voting
Share carries one vote per share on all matters. Each Variable Voting Share carries one vote per share unless the number of Variable
Voting Shares outstanding exceeds 33 1/3% of the total number of Variable Voting Shares and Common Voting Shares outstanding, in
which case the voting rights per share of the Variable Voting Shares are reduced so that the total number of votes associated with
the outstanding Variable Voting Shares equals 33 1/3% of the total votes associated with the outstanding Variable Voting Shares
and Common Voting Shares combined. The economic rights of each Variable Voting Share, each Common Voting Share, and each Non-Voting
Share are the same. All of the unissued Common Shares of the Company were cancelled on the completion of the Share Capital Reorganization.
The Variable Voting Shares and Common Voting Shares are listed on the Toronto Stock Exchange under the ticker symbols DHX.A and
DHX.B, respectively. On June 23, 2015, the Variable Voting Shares were listed on the NASDAQ under the ticker symbol DHXM.
See note 12(d) of the audited
consolidated financial statements for the year ended June 30, 2016.
| II. | Directors and officers as at December 31, 2016 |
| Directors |
|
| Elizabeth Beale (2) (4) |
Director |
| David Colville (2) (3) |
Director |
| Michael Donovan (1) |
Executive Chairman, Director |
| Deborah Drisdell (1) (3) |
Director |
| Dana Landry |
CEO, Director |
| Geoffrey Machum, QC (4) |
Chair of Corporate Governance and Nominations Committee, Director |
| Robert Sobey (3) |
Chair of the Human Resources and Compensation Committee, Director |
| Catherine Tait (1) |
Director |
| Donald Wright (2) (3) (4) |
Lead Director of DHX, Chair of the Audit Committee |
| (1) | Member of the Production Financing Committee |
| (2) | Member of the Audit Committee |
| (3) | Member of the Human Resources and Compensation Committee |
| (4) | Member of the Corporate Governance and Nominations Committee |
| Officers |
|
| Michael Donovan |
Executive Chairman |
| Dana Landry |
CEO |
| Keith Abriel |
CFO |
| Steven DeNure |
President and COO |
| Mark Gosine |
EVP, Legal Affairs, Secretary and General Counsel |
| David Regan |
EVP, Strategy and Corporate Development |
