TIDMMM.
Mood Media Reports Second Quarter 2014 Financial and Operating Results
Integration Activities Positively Impacted Operating Cost Structure
On Track to Achieve Annualized Cost Savings in the Range of $8 to $10 Million
by Year-End 2014 Driven by Efficiency Program Synergies
TORONTO, Aug. 14, 2014 /CNW/ - Mood Media Corporation ("Mood Media" or "the
Company") (ISIN: CA61534J1057) (TSX:MM) (LSE AIM:MM), the world's largest
integrated provider of in-store customer experience solutions, today reported
results for the second quarter of 2014 and updated its strategic and
operational plans.
Recent Highlights
· Achieved second quarter revenues of $120 million and EBITDA of $24.0
million;
· Continued to successfully implement global integration and
consolidation activities; based upon strong results to date, finalizing synergy
target to range of $8 to $10 million in annualized cost savings by year-end
2014;
· Expanded Local Sales organization and delivered new products;
· Reiterated 2014 financial outlook.
"In the second quarter, we continued to relentlessly focus on executing our
strategic plan and further strengthened our platform for long-term sustainable
growth," said Steve Richards, President and CEO of Mood Media. "Over the past
10 months we have worked steadfastly to engender a culture of accountability,
and the entire Mood Media team is focused on improving the efficiency and
consistency of our business. Notably, we are making significant progress on our
strategies surrounding Local Sales, product and solutions development, and
partnership expansion. During the second quarter, we continued to build out our
Local Sales teams in North America and the international markets, launched new
compelling services called Mood Mix and Mood Social Wifi and advanced our
mobile solutions, all of which we expect will contribute to our future growth.
Our cost savings initiatives are also beginning to deliver tangible returns
and, based upon our strong execution to date, we are finalizing our annualized
cost savings expectations to a range of $8 to $10 million by year-end 2014.
"We are gaining important traction with our visuals and mobile services,"
continued Mr. Richards. "In the first half of 2014 we signed our largest U.S.
contracts to date and launched our first large-scale mobile promotion in
conjunction with a major Premier brand. This positive momentum underscores the
strength of our strategy and the results our focused efforts are producing. We
believe we have taken consequential steps forward that will allow Mood Media to
deliver on its full potential for both our clients and stakeholders. While the
complete transformation of Mood Media will be an ongoing effort, we are
energized as we take solid strides toward achieving these goals and targets. We
look forward to continued success as we focus on building a great Company and
realizing the potential we have before us."
Second Quarter Financial Results
The Company reported Q2 revenues of $120 million and EBITDA of $24 million. Net
loss per share from continuing operations was ($0.18) compared with net loss of
($0.05) in the prior-year period. The Company's second quarter revenue and
EBITDA performance was impacted by the sale of its Latin American residential
operation, the revised terms of its affiliate agreement, lower equipment and
recurring sales, and lower performance at Technomedia and BIS. These factors
were partially offset by the benefits of integration and synergy programs that
produced a reduction of $3.5 million in operating expenses in its North
American and International operations for the quarter; however, these operating
expense reductions were partially offset by increases due to the foreign
exchange impact and expenses in the Company's BIS subsidiary.
Other expense totaled $10 million in the quarter compared with $8 million in
the prior year. Other expense in the quarter related to restructuring,
transaction and settlement expenses and was partially offset by gains on sale
of non-core assets. Restructuring expense pertains to the Company's integration
and synergy program. Transaction and settlement expenses relate to the cost of
resolving amounts in connection with past acquisitions.
Key Performance Indicators
2012 Q1.13 Q2.13 Q3.13 Q4.13 2013 Q1.14 Q2.14
Audio sites 427,714 428,835 427,038 428,085 428,095 428,095 423,796 418,513
Visual sites 10,929 11,552 12,115 12,479 12,666 12,666 12,997 13,821
Total sites 438,643 440,387 439,153 440,564 440,761 440,761 436,793 432,334
Audio ARPU $ 49.20 $ 47.19 $ 46.25 $ 45.65 $ 45.62 $ 46.17 $ 45.35 $ 45.17
Visual ARPU $115.39 $ 89.78 $ 83.42 $ 89.21 $ 81.27 $ 84.30 $ 84.59 $ 85.08
Blended ARPU $ 50.45 $ 48.28 $ 47.25 $ 46.87 $ 46.64 $ 47.23 $ 46.50 $ 46.40
Audio gross
additions 47,488 11,599 9,960 9,208 9,765 40,532 10,112 6,981
Visual gross
additions 5,180 1,092 699 497 1,219 3,507 478 996
Total gross
additions 52,668 12,691 10,659 9,705 10,984 44,039 10,590 7,977
Audio monthly
churn 0.8% 0.8% 0.9% 0.6% 0.8% 0.8% 1.1% 1.0%
Visual monthly
churn 0.8% 1.4% 0.4% 0.4% 2.8% 1.3% 0.4% 0.4%
Total monthly
churn 0.8% 0.8% 0.9% 0.6% 0.8% 0.8% 1.1% 0.9%
In the second quarter, the number of total Company-owned sites declined by 1.6%
year-over-year driven by a 2.0% decline in the number of audio sites and a
14.1% increase in the number of visual sites. The number of audio sites
decreased moderately in North America and in its International operation. The
number of visual sites increased in both operations.
Blended ARPU declined by 1.8% year-over-year in the second quarter to $46.40
per month and remained stable compared with the first quarter ARPU of $46.50.
Audio ARPU decreased by 2.3% relative to the prior year to $45.17 while visual
ARPU rose by 2.0% year-over-year to $85.08. Audio ARPU declined in North
America and remained stable in its International operations. Visual ARPU
increased in both North America and in its International operations.
Total monthly churn in the second quarter was 0.9% per month reflecting an
improvement over first quarter churn of 1.1%. Audio churn of 1.0% per month
improved relative to the first quarter in International operations while churn
in North America remained stable. Visual churn remained stable at 0.4%.
Conference Call
As previously announced, the Company will hold a conference call on August 15
at 8:00 a.m. Eastern Time to discuss its results and respond to questions from
the investment community. The call can be accessed by telephone by dialing
416-764-8658, or 1 888-886-7786 for international callers. Listeners are
advised to dial in at least five minutes prior to the call.
This earnings release, which is current as of August 14, 2014, is a summary of
our second quarter results, and should be read in conjunction with our second
quarter 2014 MD&A and Consolidated Financial Statements and Notes thereto and
our other recent filings with securities regulatory authorities in Canada and
the United Kingdom.
The financial information presented herein has been prepared on the basis of
IFRS for interim financial statements and is expressed in United States dollars
unless otherwise stated.
This news release includes certain non-IFRS financial measures. Mood Media uses
these non-IFRS financial measures as supplemental indicators of its operating
performance and financial position. These measures do not have any standardized
meanings prescribed by IFRS and therefore may not be comparable to the
calculation of similar measures used by other companies, and should not be
viewed as alternatives to measures of financial performance calculated in
accordance with IFRS.
In this earnings release, the terms "we", "us", "our", "Mood Media" and "the
Company" refer to Mood Media Corporation and our subsidiaries.
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF LOSS
Unaudited
For the three and six months ended June 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Six months ended
June 30, June 30, June 30, June 30,
Notes 2014 2013 2014 2013
Continuing operations
Revenue 5 $119,881 $126,268 $242,871 $255,355
Expenses
Cost of sales (excludes
depreciation and amortization) 53,346 54,476 110,770 113,163
Operating expenses 42,510 44,134 84,726 88,572
Depreciation and amortization 17,526 16,496 36,040 34,220
Share-based compensation 13 (204) 325 612 688
Other expenses 6 9,974 7,916 9,339 13,810
Foreign exchange loss (gain) on
financing transactions 1,766 (4,178) 760 1,857
Finance costs, net 7 27,794 15,970 41,520 10,494
Loss for the period before taxes (32,831) (8,871) (40,896) (7,449)
Income tax charge (credit) 8 (197) 499 (766) 6,891
Loss for the period from
continuing operations (32,634) (9,370) (40,130) (14,340)
Discontinued operations
Loss after tax from discontinued
operations 15 - (10,984) - (14,736)
Loss for the period (32,634) (20,354) (40,130) (29,076)
Attributable to:
Owners of the parent (32,670) (20,476) (40,173) (29,314)
Non-controlling interests 36 122 43 238
$(32,634) $(20,354) $(40,130) $(29,076)
Net loss per share
Basic and diluted 9 $(0.18) $(0.12) $(0.23) $(0.17)
Basic and diluted from continuing
operations 9 (0.18) (0.05) (0.23) (0.08)
Basic and diluted from
discontinued operations 9 0.00 (0.07) 0.00 (0.09)
About Mood Media Corporation
Mood Media Corporation (TSX:MM / LSE AIM:MM), is one of the world's largest
designers of in-store consumer experiences, including audio, visual,
interactive, scent, voice and advertising solutions. Mood Media's solutions
reach over 150 million consumers each day through more than half a million
subscriber locations in over 40 countries throughout North America, Europe,
Asia and Australia.
Mood Media Corporation's client base includes more than 850 U.S. and
international brands in diverse market sectors that include: retail, from
fashion to financial services; hospitality, from hotels to health spas; and
food retail, including restaurants, bars, quick-serve and fast casual dining.
Our marketing platforms include 77% of the top 100 retailers in the United
States and 97% of the top 50 quick-serve and fast-casual restaurant companies.
For further information about Mood Media, please visit www.moodmedia.com.
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements. The words "believe",
"expect", "anticipate", "estimate", "intend", "may", "will", "would" and
similar expressions and the negative of such expressions are intended to
identify forward-looking statements, although not all forward-looking
statements contain these identifying words. These forward-looking statements
are subject to important assumptions, including without limitation, expected
growth, results of operations, performance, financial condition, strategy and
business prospects and opportunities. While Mood Media considers these factors
and assumptions to be reasonable based on information currently available, they
are inherently subject to significant uncertainties and contingencies and may
prove to be incorrect.
Known and unknown factors could cause actual results to differ materially from
those projected in the forward-looking statements. Such factors include, but
are not limited to: the impact of general market, industry, credit and economic
conditions, currency fluctuations as well as the risk factors identified in
Mood Media's management discussion and analysis dated Aug. 14, 2014 and Mood
Media's annual information form dated March 28, 2014, both of which are
available on www.sedar.com.
Given these uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements. All of the forward-looking statements made in
this press release are qualified by these cautionary statements and other
cautionary statements or factors contained herein, and there can be no
assurance that the actual results or developments will be realized or, even if
substantially realized, that they will have the expected consequences to, or
effects on, Mood Media.
Forward-looking statements are given only as at the date hereof and Mood Media
disclaims any obligation to update or revise the forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by applicable laws.
Mood Media Corporation presents EBITDA information as a supplemental figure
because management believes it provides useful information regarding operating
performance. EBITDA is not a recognized measure under International Financial
Reporting Standards ("IFRS"), does not have standardized meaning, and is
unlikely to be comparable to similar measures used by other companies.
Accordingly, investors are cautioned that EBITDA should not be construed as an
alternative to net earnings or (loss) determined in accordance with IFRS as an
indicator of the financial performance of Mood Media or as a measure of Mood
Media's liquidity and cash flows. For a reconciliation of EBITDA to the
Consolidated Statements of Income (Loss), please see Footnote 18 to the Interim
Consolidated Financial Statements which provides Segment Information.
Interim Consolidated Financial Statements
Mood Media Corporation
Unaudited
For the three and six months ended June 30, 2014
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
As at June 30, 2014
In thousands of US dollars, unless otherwise stated
Notes June 30, December 31,
2014 2013
ASSETS
Current assets
Cash $34,315 $22,410
Restricted cash 409 713
Trade and other receivables 89,565 97,974
Income taxes recoverable 1,042 1,418
Inventory 32,334 31,033
Prepaid expenses 14,039 11,924
Deferred costs 8,173 8,198
Total current assets 179,877 173,670
Non-current assets
Deferred costs 8,762 8,623
Property and equipment 47,583 53,318
Other financial assets 11 108 97
Investment in associates 812 724
Intangible assets 293,278 311,261
Goodwill 16 253,491 264,142
Total assets 783,911 811,835
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables 101,784 115,038
Income taxes payable 3,055 3,219
Deferred revenue 19,892 15,432
Other financial liabilities 11 775 1,091
Current portion of long-term debt 10 2,350 2,132
Total current liabilities 127,856 136,912
Non-current liabilities
Deferred revenue 6,502 7,253
Deferred tax liabilities 35,153 38,735
Other financial liabilities 11 3,853 6,638
Long-term debt 10 621,496 597,062
Total liabilities 794,860 786,600
Equity
Share capital 14 326,921 323,318
Contributed surplus 33,591 33,209
Foreign exchange translation reserve 5,617 5,656
Deficit (377,349) (337,176)
Equity attributable to owners of
the parent (11,220) 25,007
Non-controlling interests 271 228
Total equity (10,949) 25,235
Total liabilities and equity $783,911 $811,835
Commitments and contingencies 17
The accompanying notes form part of the interim consolidated financial statements
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF LOSS
Unaudited
For the three and six months ended June 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Six months ended
June 30, June 30, June 30, June 30,
Notes 2014 2013 2014 2013
Continuing operations
Revenue 5 $119,881 $126,268 $242,871 $255,355
Expenses
Cost of sales (excludes
depreciation and amortization) 53,346 54,476 110,770 113,163
Operating expenses 42,510 44,134 84,726 88,572
Depreciation and amortization 17,526 16,496 36,040 34,220
Share-based compensation 13 (204) 325 612 688
Other expenses 6 9,974 7,916 9,339 13,810
Foreign exchange loss (gain) on
financing transactions 1,766 (4,178) 760 1,857
Finance costs, net 7 27,794 15,970 41,520 10,494
Loss for the period before
taxes (32,831) (8,871) (40,896) (7,449)
Income tax charge (credit) 8 (197) 499 (766) 6,891
Loss for the period from
continuing operations (32,634) (9,370) (40,130) (14,340)
Discontinued operations
Loss after tax from
discontinued operations 15 - (10,984) - (14,736)
Loss for the period (32,634) (20,354) (40,130) (29,076)
Attributable to:
Owners of the parent (32,670) (20,476) (40,173) (29,314)
Non-controlling interests 36 122 43 238
$(32,634)$(20,354) $(40,130) $(29,076)
Net loss per share
Basic and diluted 9 $(0.18) $(0.12) $(0.23) $(0.17)
Basic and diluted from
continuing operations 9 (0.18) (0.05) (0.23) (0.08)
Basic and diluted from
discontinued operations 9 0.00 (0.07) 0.00 (0.09)
The accompanying notes form part of the interim consolidated financial statements
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Unaudited
For the three and six months ended June 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Loss for the period $(32,634) $(20,354) $(40,130) $(29,076)
Items that may be reclassified
subsequently to the loss for the
period
Exchange differences on
translation of foreign operations 817 364 (39) (2,615)
Amounts recognized through the
interim consolidated statements of
loss - (1,510) - (1,510)
Other comprehensive income (loss)
for the period, net of tax 817 (1,146) (39) (4,125)
Total comprehensive loss for the
period, net of tax (31,817) (21,500) (40,169) (33,201)
Attributable to:
Owners of the parent (31,853) (21,626) (40,212) (33,437)
Non-controlling interests 36 126 43 236
$(31,817) $(21,500) $(40,169) $(33,201)
The accompanying notes form part of the interim consolidated financial statements
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
For the three and six months ended June 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Six months ended
June 30, June 30, June 30, June 30,
Notes 2014 2013 2014 2013
Operating activities
Loss for the period before taxes
- continuing operations $(32,831) $(8,871) $(40,896) $(7,449)
Loss for the period before taxes
- discontinued operations 15 - (10,984) - (14,736)
(32,831) (19,855) (40,896) (22,185)
Non-cash adjustments to
reconcile loss for the period
before taxes to net cash flows
Depreciation of property and
equipment 6,540 6,039 13,393 14,366
Amortization of intangible
assets and goodwill 10,986 10,435 22,647 20,648
Loss (gain) on disposal of
property and equipment (372) 7,394 (479) 7,394
Share-based compensation 13 (204) 325 612 688
Shares issued in lieu of
severance or consideration 2,527 - 2,588 -
Finance costs, net and foreign
exchange from financing 16,125 13,412 28,845 14,891
Loss on extinguishment of 2011
First Lien Credit Facility 13,435 - 13,435 -
Gain on disposal of Latin
America and DMX Canada assets 6 (2,937) - (6,478) -
Working capital adjustments
Decrease in trade and other
receivables 5,324 9,971 9,013 11,721
Increase in inventory (956) (758) (1,315) (2,646)
Decrease in trade and other
payables (356) (2,880) (14,157) (17,836)
Decrease (increase) in deferred
revenue (4,837) (4,079) 3,697 4,367
12,444 20,004 30,905 31,408
Income taxes paid (1,109) (160) (2,487) (1,376)
Interest received 8 28 19 52
Net cash flows from operating
activities 11,343 19,872 28,437 30,084
Investing activities
Purchase of property and
equipment and intangible assets (8,108) (8,001) (17,671) (15,840)
Acquisition of businesses, net
of cash acquired - (2,347) - (2,347)
Proceeds from disposal of
discontinued operations - 2,000 - 2,000
Proceeds from disposal of Latin
America and DMX Canada assets 9,515 - 19,515 -
Proceeds from disposal of
property, equipment and other
assets 981 97 1,138 97
Net cash flows from (used in)
investing activities 2,388 (8,251) 2,982 (16,090)
Financing activities
Repayment of borrowings (217,952) (533) (218,485) (1,066)
Proceeds from 2014 First Lien
Credit Facility 235,000 - 235,000 -
Proceeds from exercise of share
options 737 - 785 -
Finance lease payments (344) (428) (692) (854)
Cost of 2014 First Lien Credit
Facility (9,205) - (9,205) -
Interest paid (22,884) (22,280) (26,786) (25,913)
Cost of extinguishment of
interest rate swap - (1,578) - (1,578)
Net cash flows used in financing
activities (14,648) (24,819) (19,383) (29,411)
Net increase (decrease) in cash (917) (13,198) 12,036 (15,417)
Net foreign exchange gain (loss) 98 136 (131) (158)
Cash at beginning of period 35,134 43,871 22,410 46,384
Cash at end of period $34,315 $30,809 $34,315 $30,809
The accompanying notes form part of the interim consolidated financial statements
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited
For the six months ended June 30, 2014
In thousands of US dollars, unless otherwise stated
Foreign
Exchange Non-
Share Contributed Translation controlling Total
Notes Capital Surplus Reserve Deficit Total Interests Equity
As at January 1, 2014 $323,318 $33,209 $5,656 $(337,176) $25,007 $228 $25,235
Income (loss) for the
period - - - (40,173) (40,173) 43 (40,130)
Translation of foreign
operations - - (39) - (39) - (39)
Total comprehensive income
(loss) - - (39) (40,173) (40,212) 43 (40,169)
Share-based compensation - 382 - - 382 - 382
Issue of share capital 14 2,818 - - - 2,818 - 2,818
Exercise of share options 14 785 - - - 785 - 785
As at June 30, 2014 $326,921 $33,591 $5,617 $(377,349) $(11,220) $271 $(10,949)
The accompanying notes form part of the interim consolidated financial statements
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited
For the six months ended June 30, 2013
In thousands of US dollars, unless otherwise stated
Foreign
Exchange
Share Contributed Translation Discontinued Non-controlling Total
Notes Capital Surplus Reserve Deficit Operations Total Interests Equity
As at January 1, 2013 $323,318 $30,934 $2,163 $(204,669) $1,510 $153,256 $1,593 $154,849
Income (loss) for the
period - - - (29,314) - (29,314) 238 (29,076)
Translation of foreign
operations - - (2,613) - - (2,613) (2) (2,615)
Discontinued operations - - - - (1,510) (1,510) - (1,510)
Total comprehensive
income (loss) - - (2,613) (29,314) (1,510) (33,437) 236 (33,201)
Share-based
compensation 13 - 688 - - - 688 - 688
As at June 30, 2013 $323,318 $31,622 $(450) $(233,983) $- $120,507 $1,829 $122,336
The accompanying notes form part of the interim consolidated financial statements
Mood Media Corporation
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
For the three and six months ended June 30, 2014
In thousands of US dollars, unless otherwise stated
1. Corporate information
Mood Media Corporation ("Mood Media" or the "Company") is a publicly traded
company on the Toronto Stock Exchange and the London Alternative Investment
Market and is domiciled and incorporated in Canada. The Company's registered
office is located at 199 Bay Street, Toronto, Ontario, Canada.
The Company provides in-store audio, visual and scent marketing solutions to a
range of businesses including specialist retailers, department stores,
supermarkets, financial institutions and fitness clubs, as well as hotels and
restaurants. Proprietary technology and software are used to deploy music from
a compiled music library to client sites. This library comes from a diverse
network of producers including major labels and independent and emerging
artists.
2. Statement of compliance
These interim consolidated financial statements have been prepared in
accordance with IAS 34 Interim Financial Reporting, as issued by the
International Accounting Standards Board ("IASB") and using the same accounting
policies and methods as were used for the Company's annual financial statements
and notes for the year ended December 31, 2013. These interim consolidated
financial statements do not include all of the information and disclosures
required by International Financial Reporting Standards ("IFRS") for annual
financial statements. Accordingly, these interim consolidated financial
statements should be read in conjunction with the Company's annual financial
statements as at and for the year ended December 31, 2013 and the accompanying
notes.
All amounts are expressed in US dollars (unless otherwise specified), rounded
to the nearest thousand.
These interim consolidated financial statements of the Company were approved by
the Audit Committee and authorized for issue on August 14, 2014.
3. Summary of estimates, judgments and assumptions
The preparation of the Company's interim consolidated financial statements
requires management to make estimates, judgments and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses and the
disclosure of contingent assets and liabilities at the date of the interim
consolidated financial statements. However, uncertainty about these estimates,
judgments and assumptions could result in outcomes that require a material
adjustment to the carrying amount of the asset or liability affected in future
periods.
There has been no substantial change in the Company's critical accounting
estimates since the publication of the annual consolidated financial statements
as at and for the year ended December 31, 2013.
4. Summary of significant accounting policies
New standards, interpretations and amendments adopted
The Company adopted the following standards on January 1, 2014:
Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities
The amendments in IAS 32 clarify certain items regarding offsetting financial
assets and financial liabilities. The amendments are to be applied
retrospectively and will be effective for periods commencing on or after
January 1, 2014 with earlier application permitted. The amendment has had no
impact on the Company's financial presentation or performance.
Amendments to IAS 36, Impairment of Assets
These narrow-scope amendments to IAS 36 address the disclosure of information
about the recoverable amount of impaired assets if that amount is based on fair
value less costs of disposal. The amendments are to be applied retrospectively
for periods beginning on or after January 1, 2014. Earlier application is
permitted for periods when the entity has already applied IFRS 13. The standard
has had no impact on the Company's financial position or performance.
IFRIC Interpretation 21, Levies
The interpretation clarifies that an entity recognizes a liability for a levy
when the activity that triggers payment, as identified by the relevant
legislation, occurs. It also clarifies that a levy liability is accrued
progressively only if the activity that triggers payment occurs over a period
of time, in accordance with the relevant legislation. For a levy that is
triggered upon reaching a minimum threshold, the interpretation clarifies that
no liability should be recognized before the specified minimum threshold is
reached. The standard has had no impact on the Company's financial position or
performance.
New standards, interpretations and amendments thereof not yet effective
Standards issued but not yet effective up to the date of issuance of the
Company's interim consolidated financial statements are listed below. This
listing of standards and interpretations issued are those that the Company
reasonably expects to have an impact on disclosures, financial position or
performance when applied at a future date.
The Company intends to adopt these standards when they become effective.
IFRS 9, Financial Instruments: Classification and Measurement
IFRS 9, as issued, reflects the first phase of the IASB's work on the
replacement of IAS 39 and applies to the classification and measurement of
financial assets and financial liabilities as defined in IAS 39. The effective
date for this standard is for reporting periods beginning on or after January
1, 2018 with earlier application permitted. The Company will continue to assess
any impact on the classification and measurement of the Company's financial
assets, as well as any impact on the classification and measurement of
financial liabilities.
IFRS 15, Revenue from Contracts with Customers
On May 28, 2014, the IASB issued IFRS 15, which outlines a single comprehensive
model for entities to use in accounting for revenue from customers. The
standard outlines the principles an entity must apply to measure and recognize
revenue relating to contracts with customers. The core principle is that an
entity will recognize revenue when it transfers promised goods or services to
customers at an amount that reflects the consideration to which the entity
expects to be entitled in exchange for transferring goods or services.
IFRS 15 also significantly expands the current disclosure requirements about
revenue recognition. The effective date for this standard is for reporting
periods beginning on or after January 1, 2017 with earlier application
permitted. The Company has commenced a review process to assess any impact on
its current revenue recognition policies and reporting processes.
5. Revenue
The composition of revenue is as follows:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Rendering of services $83,839 $89,163 $168,155 $178,553
Sale of goods 35,157 36,146 73,115 74,861
Royalties 885 959 1,601 1,941
$119,881 $126,268 $242,871 $255,355
6. Other expenses
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Transaction costs (i) $971 $4,248 $1,401 $7,278
Restructuring and integration
costs (ii) 7,833 3,668 10,309 6,532
Settlements and resolutions
(iii) 4,226 - 4,226 -
Net gain on disposal of (3,056) - (6,597) -
certain assets (iv)
$9,974 $7,916 $9,339 $13,810
(i) Transaction costs incurred during the three and six months ended June 30,
2014 and June 30, 2013 primarily relate to the Company's strategic and
operational review as well as costs associated with prior acquisitions.
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Legal and professional fees $ - $ 1,439 $- $2,562
Consultant fees 971 1,106 1,401 2,197
Other transaction costs (a) - 1,703 - 2,519
$971 $4,248 $1,401 $7,278
(a) Other transaction costs in the comparative period include recognition of
Technomedia earn-out, which has been accounted for as compensation, travel
related to the strategic and operational review, in addition to miscellaneous
expenses incurred during and after the Company's acquisitions.
(ii) Restructuring and integration costs consist of severance costs,
information technology integration, relocation expenses, real estate
consolidation, rebranding and other integration and transition activities.
These restructuring and integration activities are a result of integrating
various businesses, primarily Muzak, DMX and Mood International.
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Severance costs $ 881 $ 2,030 $1,504 $4,427
Other integration costs (a) 6,952 1,638 8,805 2,105
$7,833 $3,668 $10,309 $6,532
(a) Other integration costs include charges for various real estate
consolidations and $3,100 for an onerous contract.
(iii) During the three months ended June 30, 2014, the Company negotiated and
finalized settlements including other liabilities and legal matters related to
DMX and Muzak.
(iv) The Company recognized gains from various sales and disposals of assets
during the six months ended June 30, 2014. The primary gains recognized from
these sales and disposals include the sale of its residential Latin America
music operations on January 10, 2014 and its DMX Canadian commercial account
portfolio on June 27, 2014. The initial gain recognized on each transaction was
$3,541 and $2,937, respectively, and is partially contingent on the achievement
of certain future key indicators.
7. Finance costs, net
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Interest expense $13,516 $ 13,227 $26,787 $26,027
Change in fair value of
financial instruments (i) 181 2,619 (860) (1,216)
Change in fair value of
deferred and contingent
consideration (ii) - (1,026) - (16,510)
Cost of extinguishment of
2011 First Lien Credit
Facility (iii) 13,435 - 13,435 -
Other finance costs, net
(iv) 662 1,150 2,158 2,193
$27,794 $15,970 $41,520 $10,494
(i) Change in fair value of financial instruments consists of:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Cross-currency interest rate
swap (a) $ - $ 448 $- $(699)
Interest rate floor under
2011 First Lien Credit
Facility (b) - (2,301) (584) (3,039)
Interest rate floor under
2014 First Lien Credit
Facility (b) (265) - (265) -
Interest rate cap (c) - 1 - 6
Prepayment option on 9.25% 446 4,471 (11) 2,516
Notes (d)
$181 $2,619 $(860) $(1,216)
(a) The Company entered into a cross-currency interest rate swap on June 4,
2010, which matured on June 4, 2013. The cross-currency interest rate swap had
a historical notional amount of $32,375 that converted euros into US dollars at
a foreign exchange rate of 1.2350 and converted floating interest to a fixed
rate of 8.312%. The change in the fair value during the three and six months
ended June 30, 2013 has been recognized within finance costs, net in the
interim consolidated statements of loss.
(b) In connection with the extinguishment of the Company's 2011 First Lien
Credit Facilities (as defined in note 10) on May 1, 2014, the Company
extinguished the liability related to the 2011 interest rate floor embedded
derivative and recognized a 2014 interest rate floor in accordance with the
terms of the new 2014 First Lien Credit Facilities.
The 2014 First Lien credit agreement includes an arrangement whereby LIBOR
would have a minimum floor of 1.00%. However, at the time of entering this
credit agreement, LIBOR was 0.22%. Under IFRS, the 2014 interest rate floor is
considered an embedded derivative and was ascribed a fair value at the date of
issuance of $3,852. At each subsequent reporting period , any change in fair
value is included within finance costs, net in the interim consolidated
statements of loss. The net credit of $265 for the three months ended June 30,
2014 was the result of the change in fair value from inception of the 2014
interest rate floor through June 30, 2014.
(c) In accordance with the Company's 2011 First Lien Credit Facilities, the
Company entered into an arrangement where the Company capped LIBOR at 3.5% for
50% of the Credit Facility. Any changes in fair value in the interest rate cap
are recorded as finance costs, net in the interim consolidated statements of
loss. The interest rate cap is a separate agreement that was not extinguished
at the time of the Company's refinancing of the 2014 First Lien Credit
Facilities.
(d) The Company has the right to prepay the 9.25% Senior Unsecured Notes early,
but will incur a penalty depending on the date of settlement. The prepayment
option has been treated as an embedded derivative financial instrument under
IFRS. On initial recognition, the prepayment option was ascribed a fair value
of $3,200 and is recorded within other financial assets in the interim
consolidated statements of financial position (note 10). On initial
recognition, the carrying value of the Notes was increased by the same amount,
which is amortized over the term of the Notes.
The prepayment option is fair valued at each reporting date and any change in
the fair value is recognized within finance costs, net in the interim
consolidated statements of loss.
(ii) Change in fair value of deferred and contingent consideration consists of:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
ICI deferred consideration $- $ 179 $- $352
Muzak contingent
consideration (a) - (1,205) - (16,862)
$- $(1,026) $- $(16,510)
(a) As part of the consideration for the acquisition of Muzak, a maximum of
$30,000 cash may be paid in the three years following closing in the event that
the Company achieves minimum earnings before interest, tax, depreciation, and
adjustments ("EBITDA") targets. The Company records this potential contingent
consideration at the established fair value at each reporting period end. Fair
value is established using the probability of expected outcomes.
(iii) On May 1, 2014, the Company refinanced its credit facilities. The new
facilities have more favorable financial covenants as well as provisions which
permit the Company to use net asset sales proceeds, within defined limits, to
repay unsecured debt. In connection with the refinancing, the payoff and
settlement of the 2011 Credit Facilities was accounted for as an extinguishment
as the terms and the lenders of the two credit facilities were substantially
different. Therefore, the unamortized costs related to the 2011 Credit
Facilities and the 2011 interest rate floor were accelerated and recognized as
part of the loss on the extinguishment (note 10). The Company recognized a
total loss on extinguishment of the 2011 First Lien Credit Facilities of
$13,435.
Cost of extinguishment of the 2011 First Lien Credit Facility consists of:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Accelerated discount for deferred
financing costs $6,074 $- 6,074 $-
Non-cash discount for the 2011
interest rate floor 3,636 - 3,636 -
Early extinguishment fee 2,074 - 2,074 -
Other expenses incurred on
extinguishment (a) 7,133 - 7,133 -
Extinguishment of 2011 interest rate
floor (5,482) - (5,482) -
$13,435 $- $13,435 $-
(a) Other expenses incurred on extinguishment include legal fees, credit rating
fees and fees to Credit Suisse acting as an agent. The early extinguishment
fee of $2,074 and other expenses incurred on extinguishment of $7,133 were cash
payments related to the extinguishment of the 2011 First Lien Credit
Facilities.
(iv) Other finance costs, net consist of:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Accretion interest on convertible
debentures $ 462 $392 $1,195 $781
Accretion of the 2011 First Lien
Credit Facilities - 300 376 600
Accretion of the 9.25% Senior
Unsecured Notes 276 275 552 550
Accretion of debt related to the
2011 interest rate floor - 223 221 445
Accretion of debt related to the
2014 interest rate floor 129 - 129 -
Amortization of the debt premium
arising from the prepayment option (99) (99) (198) (218)
Other (a) (106) 59 (117) 35
$662 $1,150 $2,158 $2,193
(a) The remaining credit represents interest income and share of profits from
associates.
8. Income taxes
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Current tax expense
Current taxes on income for the $1,567 $1,655 $2,683 $2,451
period
Total current taxes 1,567 1,655 2,683 2,451
Deferred tax expense
Origination and reversal of
temporary differences (1,764) (1,156) (3,449) 4,440
Total deferred tax charge (credit) (1,764) (1,156) (3,449) 4,440
Total income tax charge (credit) $(197) $499 $(766) $6,891
9. Loss per share
Basic and diluted loss per share ("EPS") amounts have been determined by
dividing loss for the period by the weighted average number of common shares
outstanding throughout the period.
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Weighted and diluted average
common shares (000's) 178,927 171,640 174,406 171,640
Total operations
Basic EPS $(0.18) $(0.12) $(0.23) $(0.17)
Diluted EPS (0.18) (0.12) (0.23) (0.17)
Continuing operations
Basic EPS $(0.18) $(0.05) $(0.23) $(0.08)
Diluted EPS (0.18) (0.05) (0.23) (0.08)
Discontinued operations
Basic EPS $(0.00) $(0.07) $(0.00) $(0.09)
Diluted EPS (0.00) (0.07) (0.00) (0.09)
Convertible debentures, share options and warrants have not been included in
the calculation of diluted EPS because they are anti-dilutive for the periods
presented.
10. Loans and borrowings
Prescribed June 30, December 31,
interest rate 2014 2013
Due in less than one year:
2011 First Lien Credit Facility (iv) 7.00 % $- $2,132
2014 First Lien Credit facility (iv) 7.00 % 2,350 -
2,350 2,132
Due in more than one year:
9.25% Senior Unsecured Notes (i) 9.25% 350,000 350,000
Unamortized discount - financing costs
(ii) (7,069) (7,618)
Unamortized premium - prepayment option
(iii) 2,505 2,703
345,436 345,085
2011 First Lien Credit Facility (iv) 7.00-7.75% - 215,765
Unamortized discount - financing costs - (6,455)
(v)
Unamortized discount - 2011 interest
rate floor (vi) - (3,858)
- 205,452
2014 First Lien Credit Facility (iv) 7.00% 232,063 -
Unamortized discount - financing costs
(v) - -
Unamortized discount - 2014 interest
rate floor (vi) (3,723) -
228,340 -
10% Unsecured convertible debentures
(vii) 10.00% 47,720 46,525
621,496 597,062
Total loans and borrowings $623,846 $599,194
9.25% Senior Unsecured Notes
(i) On October 19, 2012, the Company closed its offering of $350,000 aggregate
principal amount of 9.25% Senior Unsecured Notes (the "Notes") by way of a
private placement. The Notes are guaranteed by all of Mood Media's existing
U.S. subsidiaries (other than Mood Media Entertainment Inc.). The guarantee is
an unsecured obligation. The Notes are due on October 15, 2020 and bear
interest at an annual rate of 9.25%. The effective interest rate on the Notes
is 9.46%.
(ii) The total costs associated with the Notes of $8,942 were recorded as
finance costs and deducted from the Notes. The Notes will be accreted back to
their principal amount over the term of the Notes. The accretion expense is
included within finance costs, net in the interim consolidated statements of
loss (note 7).
(iii) The Notes contain an option to repay the entire amount prior to October
15, 2020 at a set prepayment fee. This prepayment option has been treated as an
embedded derivative financial instrument in the interim consolidated statements
of financial position and at inception was valued at $3,200 (October 19, 2012).
The prepayment option is measured at fair value at each reporting date and
included in other financial assets (note 11), with any change recorded within
finance costs, net in the interim consolidated statements of loss (note 7).
The amortization of the debt premium arising from the prepayment option is
included in finance costs, net (note 7).
2011 and 2014 First Lien Credit Facilities
(iv) On May 6, 2011, the Company entered into credit facilities with Credit
Suisse Securities AG ("Credit Suisse"), as agent, consisting of a $20,000
five-year First Lien Revolving Credit Facility, a $355,000 7-year First Lien
Term Loan (collectively, the 2011 First Lien Credit Facilities)and a $100,000
7.5-year Second Lien Term Loan.
The 2011 First Lien Credit Facilities Term Loan was repayable at $533 per
quarter, with the remainder repayable on May 6, 2018. Interest on the 2011
First Lien Credit Facilities Term Loan accrued at a rate of adjusted LIBOR plus
5.50% per annum or the alternate base rate plus 4.50% per annum, as applicable.
The effective interest rate on the 2011 First Lien Credit Facilities was 7.74%.
In October 2012, the Company used the net proceeds of the $350,000 9.25% Notes
to repay $140,000 of its 2011 First Lien Term Loan and the Second Lien Term
Loan in its entirety.
On May 1, 2014, the Company completed the extinguishment of its 2011 First Lien
Credit Facilities. The Company then entered into a new credit agreement with
Credit Suisse, as agent, consisting of a $15,000 5-year Senior Secured
Revolving Credit Facility and a $235,000 Senior Secured
5-year Term Loan (collectively, the 2014 First Lien Credit Facilities). The
terms and the lenders of the 2011 and 2014 credit facilities were substantially
different.
The 2014 First Lien Term Loan is repayable at $588 per quarter, with the
remainder repayable on May 1, 2019. Interest on the 2014 First Lien Term Loan
accrues at a rate of adjusted LIBOR plus 1% per annum or the alternate base
rate plus 6% per annum, as applicable. The effective interest rate on the 2014
First Lien Credit Facilities is 7.33%. During the three months ended June 30,
2014, repayments of $588 were made on the 2014 First Lien Term Loan (three
months ended June 30, 2013 - $533) and during the six months ended June 30,
2014, repayments of $1,121 were made on the 2014 First Lien Term Loan and the
2011 First Lien Term Loan (six months ended June 30, 2013 - $1,066).
Credit Suisse, on behalf of the lenders under the 2014 First Lien Credit
Facilities, has security over substantially all of the properties and assets
based in the United States. As of June 30, 2014, the Company had available
$11,810 under the new Revolving Credit Facility and outstanding letters of
credit of $3,190. The 2014 First Lien Credit Facilities are subject to the
maintenance of financial covenants and the Company was in compliance with its
covenants as at June 30, 2014.
The Company utilized proceeds from the 2014 First Lien Credit Facilities to
repay the 2011 First Lien Credit Facilities, which consisted of $10,000 under
the 2011 First Lien Revolving Credit Facility and $207,364 under the 2011 First
Lien Term Loan. In connection with the repayment, the Company accelerated the
recognition of unamortized discount related to deferred financing costs and the
2011 interest rate floor of $9,710 relating to the 2011 First Lien Credit
Facilities. The payoff and settlement of the 2011 Credit Facilities was
accounted for as an extinguishment and the unamortized costs related to the
2011 Credit Facilities were recognized as part of the loss on the
extinguishment. The Company recognized a total loss on extinguishment of the
2011 First Lien Credit Facilities of $13,435 (note 7).
On August 2, 2011, in accordance with the terms of the Company's 2011 First
Lien Credit Facilities agreement, the Company purchased an interest rate cap
for $619, which matures on August 4, 2014. The interest rate cap is measured at
fair value at each reporting date and included in other financial assets (note
11), with any change recorded within finance costs, net in the interim
consolidated statements of loss (note 7).
(v) The total costs associated with the 2011 First Lien Credit Facilities of
$18,786, which include the fee for the 2013 amendment, were recorded as finance
costs and were accreted over the term of the 2011 First Lien Credit Facilities
using the effective interest rate method. In connection with the repayment of
the 2011 First Lien Credit Facilities, the Company accelerated the recognition
of unamortized discount related to deferred financing costs and the 2011
interest rate floor of $9,710 relating to the 2011 First Lien Credit
Facilities.
Accretion expenses associated with the 2011 First Lien Credit Facilities are
included within finance costs, net in the interim consolidated statements of
loss (note 7).
(vi) The 2011 First Lien Credit Facilities contained an interest rate floor,
which was an embedded derivative. This non-cash liability was recorded within
other financial liabilities in the interim consolidated statements of financial
position. On initial recognition, the 2011 interest rate floor was ascribed a
fair value of $13,234. The carrying value of the debt was reduced by the same
amount, which was accreted over the term of the debt. The 2011 interest rate
floor was measured at fair value at each reporting date and included in other
financial liabilities (note 11).
In connection with the extinguishment of the Company's 2011 First Lien Credit
Facilities on May 1, 2014, the Company extinguished the liability related to
the 2011 interest rate floor and recognized a new interest rate floor in
accordance with the terms of the 2014 First Lien Credit Facilities. This
non-cash liability is recorded within other financial liabilities in the
interim consolidated statements of financial position. On initial recognition,
the 2014 interest rate floor was ascribed a fair value of $3,852. The carrying
value of the new debt was reduced by the same amount, which will be accreted
over the term of the debt. The 2014 interest rate floor is measured at fair
value at each reporting date and included in other financial liabilities (note
11).
The change in fair value and the accretion of debt related to the 2011 and 2014
interest rate floors are included within finance costs, net in the interim
consolidated statements of loss (note 7).
Convertible debentures
(vii) The Company has issued three series of convertible debentures: the New
Debentures, the Consideration Debentures and the Convertible Debentures
(collectively, the Mood Convertible Debentures). Interest accrues on the Mood
Convertible Debentures at the respective interest rate and it is payable
semi-annually. The Mood Convertible Debentures are convertible at any time at
the option of the holders into common shares at the respective conversion
price.
New Consideration Convertible
Debentures Debentures Debentures
Date of issuance October 1, 2010 May 6, 201 May 27, 2011
Maturity date October 31, 2015 October 31, 2015 October 31, 2015
Interest rate 10% 10% 10%
Conversion price $2.43 $2.43 $2.80
The Mood Convertible Debentures have characteristics of both debt and equity.
Accordingly, on issuance, fair value was ascribed to the debt component and to
the equity component. Fair value was determined by reference to similar debt
instruments and market transactions of the Mood Convertible Debentures.
New Consideration Convertible
Debentures Debentures Debentures Total
Debt component $28,112 $4,602 $12,085 $44,799
Equity component 4,656 398 1,246 6,300
Discount on issuance - - 169 169
Principal at issuance $32,768 $5,000 $13,500 $51,268
The Convertible Debentures were issued for a subscription price of $0.9875 per
$1 principal amount. A deferred tax liability of $658 was recorded on the
equity component of the Convertible Debentures issued in 2011; the
corresponding entry was a reduction to contributed surplus.
Costs associated with the issuance of the Mood Convertible Debentures have been
recorded as finance costs and are recognized over the term of the related
facilities. These costs have been prorated against the debt and equity
components.
New Consideration Convertible
Debentures Debentures Debentures Total
Principal at issuance $32,768 $5,000 $13,500 $51,268
2011 Conversions 646 - - 646
2012 Conversions - 356 - 356
Principal as at June 30, 2014 $32,122 $4,644 $13,500 $50,266
Reconciliation of carrying value and outstanding principal as at June 30, 2014
New Consideration Convertible
Debentures Debentures Debentures Total
Carrying value as at December
31, 2013 $29,236 $4,490 $12,799 $46,525
Accretion interest for the
period 980 42 173 1,195
Carrying value as at June 30,
2014 30,216 4,532 12,972 47,720
Unamortized balance 1,906 112 528 2,546
Principal outstanding as at
June 30, 2014 $32,122 $4,644 $13,500 $50,266
The unamortized balance for the New Debentures includes unamortized financing
costs as at June 30, 2014 of $518 (December 31, 2013 - $725).
Accretion interest is included within finance costs, net in the interim
consolidated statement of loss (note 7).
11. Other financial assets and financial liabilities
Other financial assets
June 30, December 31,
2014 2013
Prepayment option $108 $97
Total other financial assets $108 $97
Due in more than one year $108 $97
Total other financial assets $108 $97
Other financial liabilities
June 30, December 31,
2014 2013
Finance leases $1,042 $1,663
2011 Interest rate floor - 6,066
2014 Interest rate floor 3,586 -
Total other financial liabilities $4,628 $7,729
Due in less than one year $775 $1,091
Due in more than one year 3,853 6,638
Total other financial liabilities $4,628 $7,729
With the exception of the 2014 interest rate floor in connection with the 2014
refinancing of the Company's 2011 First Lien Credit Facility (as discussed in
note 10), there have been no significant changes to the terms of the other
financial assets and liabilities as stated in the underlying agreements as at
June 30, 2014 since the publication of the annual consolidated financial
statements as at and for the year ended December 31, 2013.
The change in the fair value of the other financial assets and liabilities that
are carried at fair value is included within finance costs, net in the interim
consolidated statements of loss (note 7).
12. Financial instruments
Risk management
The Company is exposed to a variety of financial risks including market risk
(comprising currency risk and interest rate risk), liquidity risk and credit
risk. The Company's overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse
effects on the Company's financial performance. The Company's policies and
processes for managing these risks have not changed since the publication of
the annual consolidated financial statements as at and for the year ended
December 31, 2013.
Fair value of financial instruments
The book values of the Company's financial assets and financial liabilities
approximate the fair values of such items as at June 30, 2014, with the
exception of the convertible debentures and the 9.25% Senior Unsecured Notes.
The June 30, 2014 book value of the convertible debentures outstanding was
$47,720 (December 31, 2013 - $46,525) and the fair value was $45,235 (December
31, 2013 - $43,670). The June 30, 2014 book value of the 9.25% Senior
Unsecured Notes was $345,436 (December 31, 2013 - $345,085) and the fair value
was $316,096 (December 31, 2013 - $309,056).
The following tables present information about the Company's financial assets
and liabilities measured at fair value on a recurring basis and indicates the
fair value hierarchy of the valuation techniques used to determine such fair
values.
Fair value as at June 30, 2014
Level 1
Quoted prices Level 2
in active Significant Level 3
markets for other Significant
identical observable unobservable
Description Total assets inputs inputs
2014 First Lien Interest
rate floor $(3,586) $- $(3,586) $-
Prepayment option 108 - 108 -
Fair value as at December 31, 2013
Level 1
Quoted
prices in Level 2
active Significant Level 3
markets for other Significant
identical observable unobservable
Description Total assets inputs inputs
2011 First Lien Interest
rate floor $(6,066) $- $(6,066) $-
Prepayment option 97 - 97 -
During the three and six months ended June 30, 2014, there were no transfers
between Level 1 and Level 2 fair value measurements, and no transfers into and
out of Level 3 fair value measurements. No transfers between any levels of the
fair value hierarchy took place in the equivalent comparative year. There were
also no changes in the purpose of any financial asset/liability that
subsequently resulted in a different classification of that asset/liability.
13. Share-based compensation
Equity-settled share options
The Company has a share option plan (the "Plan") for its employees, directors
and consultants, whereby share options may be granted subject to certain terms
and conditions. The issuance of share options is determined by the Board of
Directors of the Company. The aggregate number of shares of the Company that
may be issued under the Plan is limited to 10% of the number of issued and
outstanding common shares at the time. The exercise price of share options must
not be less than the fair market value of the common shares on the date that
the option is granted. On May 13, 2014, the Company received approval for its
2014 option plan, in accordance with the Toronto Stock Exchange ("TSX") rules
requiring reapproval of option plans every three years. Two changes were made
to the former option plan. Share options issued under the 2014 option plan vest
at the rate of 33.3% on each of the three subsequent anniversaries of the grant
date and are subject to the recipient remaining employed with the Company.
Share options issued under the 2011 option plan vest at the rate of 25% on each
of the four subsequent anniversaries of the grant date and are also subject to
the recipient remaining employed with the Company. Under the 2014 option plan,
all of the vested share options must be exercised no later than 5 years after
the grant date. Under the 2011 option plan, all the vested share options must
be exercised no later than 10 years after the grant date. With the adoption of
the Company's 2014 share option plan, no further grants of options were made
pursuant to the former option plans. Options previously granted under former
plans will continue to vest. The Company uses the Black-Scholes option pricing
model to determine the fair value of options issued.
On May 12, 2014, 2,005,000 share options were granted with an exercise price of
CDN$0.60 (US$0.55). On March 10, 2014, 925,000 share options were granted with
an exercise price of CDN$0.88 (US$0.79). There were no share options granted
during the three months and six months ended June 30, 2013.
The expense recognized for the three months ended June 30, 2014 relating to
equity-settled share and option transactions for employees was a credit of $204
and a charge of $612 for the six months ended June 30, 2014 (three months ended
June 30, 2013 was a charge of $325 and six months ended June 30, 2013 was a
charge of $688).
Changes in the number of options, with their weighted average exercise prices
for the six months ended
June 30, 2014 and 2013, are summarized below:
June 30, June 30,
2014 2013
Weighted Weighted
average average
exercise exercise
Number price Number price
Outstanding at beginning 18,818,300 $1.58 15,590,800 $1.92
of period
Granted during the period 2,930,000 0.63 - -
Exercised during the (3,500,000) 0.21 - -
period
Forfeited/expired during
the period (1,138,750) 2.06 (337,500) 2.81
Outstanding at end of 17,109,550 1.67 15,253,300 1.90
period
Exercisable at end of 8,138,300 $2.32 10,129,550 $1.48
period
The following information relates to share options that were outstanding as at
June 30, 2014:
Weighted average
remaining
Number of contractual Weighted average
Range of exercise prices options life (years) exercise price
$0.00-$0.30 100,000 4 $0.21
$0.31-$1.50 9,563,300 7 0.72
$1.51-$2.50 640,000 6 1.73
$2.51-$3.50 6,806,250 7 3.01
17,109,550 7 1.67
Warrants
The following warrants were outstanding as at June 30, 2014:
Number Exercise price Expiry date
Muzak acquisition warrants 4,407,543 $3.50 May 2016
Warrants are recorded at the time of the grant for an amount based on the
Black-Scholes option pricing model, which is affected by the Company's share
price, as well as assumptions regarding a number of subjective variables.
14. Shareholders' equity
Share capital
Share capital represents the number of common shares outstanding.
As at June 30, 2014, an unlimited number of common shares with no par value
were authorized.
Changes to share capital were as follows:
Number of
Shares Amount
Balance as at January 1, 2013 and December 171,639,563 $323,318
31, 2013
Balance as at January 1, 2014 171,639,563 $323,318
Common shares issued, net of issue costs 4,527,556 2,818
Options exercised 3,500,000 785
Balance as at June 30, 2014 179,667,119 $326,921
During March 2014, the Company entered into agreements with two former
employees to issue a total of 367,440 common shares pursuant to their severance
agreements. During April 2014, the Company negotiated a total issuance of
4,160,116 common shares in full satisfaction of the remaining obligations under
a consulting agreement for the integration of DMX.
Deficit
Deficit represents the accumulated loss of the Company attributable to the
shareholders to date.
15. Discontinued operations
During March 2012, the Company decided to dispose of the assets of Mood Media
Entertainment ("MME"). On May 31, 2013, the Company sold substantially all of
the assets of MME for proceeds of $2,000. As part of the disposition, the
Company is exiting any residual activities. The Company is currently finalizing
the costs of exit and the closing working capital accounts.
The results of MME are as follows:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Revenue $- $3,573 $- $10,117
Expenses - 7,163 - 16,675
Operating loss - (3,590) - (6,558)
Loss on sale 7,394 7,394
Impairment - - - 784
Loss before and after taxes
from discontinued operations $- $(10,984) $- $(14,736)
During the six months ended June 30, 2013, the Company impaired property and
equipment of $784.
The net cash flows incurred by MME are as follows:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Operating activities $- $(3,930) $- $(4,431)
Investing activities - 2,000 - 1,216
Net cash outflow $- $(1,930) $- $(3,215)
MME is no longer disclosed as a separate reportable segment in note 18.
16. Goodwill
June 30, December 31,
2014 2013
Cost, beginning of period $344,560 $336,400
Goodwill arising on acquisitions - 2,347
Sale of operations (10,129) -
Net exchange differences (522) 5,813
Cost, end of the period 333,909 344,560
Accumulated impairment losses, beginning of
period (80,418) (5,418)
Impairment loss in the period - (75,000)
Accumulated impairment losses, end of period (80,418) (80,418)
Net book value, end of the period $253,491 $264,142
The decrease in goodwill from the sale of operations of $10,129 relates to the
Company's sale of assets for its residential Latin America music operations
completed on January 10, 2014 in the amount of $6,011 and its DMX Canadian
commercial account portfolio on June 27, 2014 in the amount of $4,118.
On October 19, 2012, Muzak, a subsidiary of the Company, acquired certain
assets and liabilities of Independent Communications Inc. ("ICI"), one of its
largest franchisees. ICI offers a range of in-store audio, visual and scent
solutions and operates in the mid-Atlantic region of the United States.
On December 24, 2012, the Company acquired 100% of the issued and outstanding
shares of the following private entities: Technomedia NY, LLC; Technomedia
Solutions, LLC; ServiceNET Exp, LLC; and Convergence, LLC (collectively,
Technomedia). Technomedia provides advanced media and technology innovations
for multiple industries, including retail, hospitality, theme parks, performing
arts, museums, special venue and education.
During the three months ended June 30, 2013, goodwill arising on acquisitions
of $2,347 relate to working capital adjustments in ICI of $1,822 and
Technomedia of $525.
Management identified indicators for impairment as at September 30, 2013. As a
result, the Company recognized an impairment charge of $75,000.
17. Commitments and contingencies
Operating leases
Future minimum rental payments under non-cancellable operating leases are as
follows:
June 30, December 31,
2014 2013
Within one year $16,402 $16,470
After one year but not more than five years 32,780 33,840
More than five years 2,766 3,652
$51,948 $53,962
Finance leases
The Company has finance leases for various items of equipment. These leases
have terms of renewal but no purchase options and escalation clauses. Renewals
are at the option of the specific entity that holds the lease. Future minimum
lease payments under finance leases, together with the present value of the net
minimum lease payments, are as follows:
June 30, 2014 December 31, 2013
Minimum Present Minimum Present
payments value ayments value
Within one year $1,003 $939 $1,468 $1,374
After one year but not more than
five years 267 125 573 268
Total minimum lease payments 1,270 1,064 2,041 1,642
Less amounts representing
finance charges (228) (228) (378) (378)
Present value of minimum lease
payments $1,042 $836 $1,663 $1,264
Contingencies
From time to time, the Company encounters disputes and is sometimes subject to
claims from third parties in relation to its normal course of operations. The
Company generally believes such claims to be without merit and will consult
with its legal counsel to vigorously defend its position. The aggregate
provision for various claims as at June 30, 2014 was immaterial.
PFH litigation
In August 2008, the Company received notification that PFH Investments Limited
("PFH") had filed a complaint with the Ontario Superior Court of Justice
against the Company and certain officers under Section 238 of the Canada
Business Corporations Act ("CBCA") alleging that the Company, when negotiating
amendments to convertible debentures first issued to PFH in 2006, withheld data
related to the issuance of share options at a strike price of $0.30 per share,
such conversion price to which PFH was then entitled. In addition to damages of
$35,000 and among other things, PFH is seeking a declaration that the
amendments to the original debenture agreement are void and that the original
debenture be reinstated. The Company believes it acted properly and in
accordance with the original and amended debenture agreements when it fully
repaid the debenture in the amount of $1,620 on June 19, 2008 and has responded
accordingly. On July 2, 2009, the Company extended a confidential settlement
offer to PFH. Among the various proposed obligations of the parties under the
offer, pursuant thereto, but subject to regulatory approval, the Company would
have issued to PFH 3,333,333, shares at $0.30 per share. This offer has since
expired. Mood Media continues to consult with legal counsel and intends to
continue to vigorously defend the claim, which it believes to be without merit.
18. Segment information
The Company reports its continuing operations in three reportable segments:
"In-store media - International", "In-store media - North America" based on the
significant business activity of the Company and its subsidiaries, and "Other"
for the purposes of reconciliation to the Company's financial statements.
The Company's chief operating decision maker monitors the operating result of
these business units separately for the purposes of assessing performance and
allocating resources.
In-store media
The Company provides multi-sensory in-store media and marketing solutions to a
wide range of customer-facing businesses in the retail, financial services,
hospitality, restaurant and leisure industries internationally. Revenue is
derived predominantly from the provision of audio, visual, messaging and
maintenance services and the sale and lease of proprietary and non-proprietary
equipment.
In-store media - North America
The Company's In-store media North America's operations are based in the United
States and Canada.
In-store media - International
The Company's In-store media International's operations are based in Europe,
Asia and Australia.
Other
The Company's other segment includes the Company's corporate activities and
Technomedia, which do not fit in the two segments described above.
Segment information, three months ended June 30, 2014
In-store In-store
media North media Consolidated
America International Other Group
Revenue $66,223 $45,109 $8,549 $119,881
Expenses
Cost of sales 28,278 18,691 6,377 53,346
Operating expenses 17,672 21,433 3,405 42,510
Segment profit (loss) (i) $20,273 $4,985 $(1,233) $24,025
Segment information, three months ended June 30, 2013
In-store In-store
media North media Consolidated
America International Other Group
Revenue $72,068 $43,907 $10,293 $126,268
Expenses
Cost of sales 30,583 16,746 7,147 54,476
Operating expenses 20,692 20,637 2,805 44,134
Segment profit (i) $20,793 $6,524 $341 $27,658
Segment information, six months ended June 30, 2014
In-store In-store
media North media Consolidated
America International Other Group
Revenue $132,995 $92,858 $17,018 $242,871
Expenses
Cost of sales 58,671 39,555 12,544 110,770
Operating expenses 35,005 42,930 6,791 84,726
Segment profit (loss) (i) $39,319 $10,373 $(2,317) $47,375
Segment information, six months ended June 30, 2013
In-store In-store
media North media Consolidated
America International Other Group
Revenue $144,608 $89,957 $20,790 $255,355
Expenses
Cost of sales 61,693 36,426 15,044 113,163
Operating expenses 40,640 41,105 6,827 88,572
Segment profit (loss) (i) $42,275 $12,426 $(1,081) $53,620
Reconciliation of segment profit to Consolidated Group loss for the period
before taxes from continuing operations
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Segment profit (i) $24,025 $27,658 $47,375 $53,620
Depreciation and amortization 17,526 16,496 36,040 34,220
Share-based compensation (204) 325 612 688
Other expenses 9,974 7,916 9,339 13,810
Foreign exchange loss (gain)
on financing transactions 1,766 (4,178) 760 1,857
Finance costs, net 27,794 15,970 41,520 10,494
Loss for the period before
taxes from continuing
operations $(32,831) $(8,871)$(40,896) $(7,449)
Geographical areas
(i) Segment profit is management's additional GAAP metric internally
referred to as Adjusted EBITDA and is prepared on a consistent basis. Adjusted
EBITDA is considered by executive management as one of the key drivers for the
purpose of making decisions about performance assessment and resource
allocation of each operating segment.
Revenue is derived from the following geographic areas based on where the
customer is located:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
U.S. $72,582 $ 78,483 $145,452 $155,317
Canada 1,405 1,458 2,689 2,882
Netherlands 14,040 12,102 29,245 27,169
Other international 31,854 34,225 65,485 69,987
Total revenue $119,881 $126,268 $242,871 $255,355
Non-current assets
Non-current assets are derived from the following geographic areas based on the
location of the individual subsidiaries of the Company:
June 30, December 31,
2014 2013
U.S. $416,426 $435,174
Canada - 7,689
International 187,608 195,302
Total non-current assets $604,034 $638,165
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations, dated August 14, 2014 of Mood Media Corporation ("Mood
Media" or the "Company") should be read together with the attached unaudited
interim consolidated financial statements and related notes for the three and
six months ended June 30, 2014, the unaudited interim consolidated financial
statements and the related notes for the three and six months ended June 30,
2013, and the Company's annual information form (the "AIF"). Additional
information related to the Company, including the Company's AIF, can be found
on SEDAR at www.sedar.com . Please also refer to the risk factors identified
in the Company's AIF. The fiscal year of the Company ends on December 31. The
Company's reporting currency is the US dollar and, unless otherwise noted, all
amounts (including in the narrative) are in thousands of US dollars except for
shares and per-share amounts. Per share amounts are calculated using the
weighted average number of shares outstanding for the period ended June 30,
2014.
This discussion contains forward-looking statements. Please see
"Forward-Looking Statements" for a discussion of the risks, uncertainties and
assumptions relating to these statements.
As used in this management's discussion and analysis of financial condition and
results of operation, the terms the "Company", "we", "us", "our" or other similar
terms refer to Mood Media and its consolidated subsidiaries.
Overview
We are a leading global provider of in-store audio, visual and scent media and
marketing solutions in North America and Europe to more than 500,000 commercial
locations across a broad range of industries including retail, food retail,
financial services and hospitality. We benefit from economies of scope and
scale, generating revenue from multiple product and service offerings across 41
countries. Our acquisitive growth history has allowed us to substantially
broaden our geographic footprint and significantly strengthen our product and
service offerings. Our strategy of combining audio, visual and scent media has
helped our clients enhance their branding, drive impulse purchases of their
products and improve the shopping experience for their customers. The breadth
and depth of our customizable offerings and the quality of our customer service
has helped make us the preferred media and marketing solutions provider to more
than 850 North American and international brands. We are viewed as an
established distribution network by music producers, performance rights
organizations and third-party advertisers.
By law the public performance of music in a commercial environment requires
specific-use permissions from the relevant copyright owners. Each country has
its own legal system and may have specific copyright rules making global and
pan-European compliance a complex undertaking. Furthermore, penalties for
infringement vary from country to country and can be significant for commercial
enterprises that do not comply with the relevant rules. We have worldwide
experience and extensive knowledge of the various licensing systems throughout
the world. As a music content provider we understand licensing requirements and
provide support to our customers to obtain the relevant licenses.
In-store audio, visual and scent media and marketing solutions create a
communication channel between our clients' brand and their customers at the
point-of-purchase. By enhancing the brand experience of our clients' consumers
and establishing an emotional connection between our clients and their
consumers, these products and services can have an impact on consumer
purchasing decisions. We tailor both our media's content and delivery by
scheduling specific content to be delivered at a specific time in order to
target a specific audience. Our media is broadcast through customizable
technology systems, supported by ongoing maintenance and technical support and
integrated into our clients' existing IT infrastructure. The tailored content
we deliver eliminates the need for our clients to select their own, often
repetitive, background media.
In addition to designing and selling a variety of media forms for use in
commercial environments, the Company is employing a strategy of deploying a
series of revenue enhancement measures and integrating the businesses it has
acquired into a cohesive unit that can serve premier brands across multiple
geographies, as well as, serving local businesses with effective solutions.
Our revenue enhancement measures include development of local sales channels,
creation of new and compelling technology services and solutions, cross selling
visual solutions to audio customers, and cross selling flagship visual systems
solutions with in-store visual and audio services. The Company began a
comprehensive integration program that will generate approximately $9 million
in annualized savings from "Wave 1", which are initiatives implemented in the
fourth quarter of 2013; and an additional $8 - $10 million in annualized
savings from 2014 initiatives (Wave 2 and 3). These activities are focused on
streamlining and simplifying the Company's infrastructure and processes on a
global basis with associated benefits to its cost structure.
Our common shares are listed on the Toronto Stock Exchange ("TSX") and the
AIM Market of the London Stock Exchange ("AIM") under the trading symbol
"MM" and our 10% convertible unsecured subordinated debentures are listed on
the TSX under the trading symbol "MM.DB.U."
Sale of residential Latin America music operations
On January 10, 2014, the Company completed the sale of assets related to its
residential Latin America music operations to independent affiliate Stingray
Digital ("Stingray"). The assets were held by a subsidiary of DMX Holdings Inc.
("DMX") and consisted primarily of customer contracts and residential
receivables. Under the terms of the agreement, Mood Media received an initial
cash payment of $10,000 and extinguished a liability for royalties owed by Mood
of $1,400. Upon the residential Latin American operations' achievement of
certain key performance indicators, Stingray will pay Mood Media an additional
amount of up to $4,900. As a result of the transaction, the Company recorded
an initial gain on sale of $3,541 including the estimated fair value of the
contingent consideration and reduced goodwill by $6,011 and intangible assets
by $1,341 to account for the goodwill and intangible assets associated with the
disposed assets. The Company believes the transaction further advances its
strategy to simplify its portfolio, integrate and streamline its operations.
Sale of DMX Canada commercial accounts
On June 27, 2014, the Company completed the sale of a portfolio of commercial
accounts related to its Canadian music operations also to Stingray. The assets
were held by a subsidiary of DMX. Under the terms of the agreement, Mood Media
received an initial cash payment of $9,515. Stingray will pay Mood Media an
additional amount of up to $1,679, which is contingent on the achievement of
certain future key indicators. As a result of the transaction, the Company
recorded an initial gain on sale of $2,937 including the estimated fair value
of the contingent consideration and reduced goodwill by $4,118 and intangible
assets by $1,937 to account for the goodwill and intangible assets associated
with the disposed assets. The Company also believes the transaction further
advances its strategy to simplify its portfolio, integrate and streamline its
operations.
Refinancing of 2011 First Lien Credit Facilities
On May 1, 2014, the Company refinanced its credit facilities with Credit
Suisse, as agent. The new facilities consist of a $15,000 5-year Senior
Secured Revolving Credit Facility and a $235,000 Senior Secured 5-year Term
Loan (collectively, the 2014 First Lien Credit Facilities). Interest on the
Senior Secured 5-year Term Loan accrues at a rate of adjusted LIBOR plus 6.00%
per annum with a LIBOR floor of 1%. The new First Lien Term Loan is repayable
at a rate 1% of the initial principal per annum at the rate of $588 per
quarter. The new facilities have more favorable financial covenants as well as
provisions which permit the Company to use net asset sales proceeds, within
defined limits, to repay its Senior Unsecured Notes or its Subordinated
Debentures. In connection with the refinancing, the Company extinguished the
liability under the 2011 First Lien Credit Facilities and recognized a loss on
extinguishment of $13,435 related to the write-off of deferred financing
expenses and other unamortized costs related to the 2011 First Lien Credit
Facilities and the fees and costs related to the 2014 First Lien Credit
Facilities.
Rebranding
During early 2013 we officially launched a rebranding effort to better
communicate our position as the global leader in Experience Design and
integrate our portfolio companies - Muzak, DMX and Mood Media - into a single
global brand, Mood. This ongoing effort rebranding will enable Mood to provide
a more powerful, integrated suite of experiential marketing solutions to meet
the needs of our diverse clientele.
Board of Directors Committee and Management Changes
In September and October 2013, we implemented several changes to the senior
management team, which included the appointment of Steve Richards as the
President and Chief Executive Officer of Mood Media Corporation and Ken Eissing
as the Chief Operating Officer for Mood North America. Mr. Steve Richards was
also appointed to the Board of Directors of the Company. In January 2014,
Thomas L. Garrett, Jr. was appointed as Executive Vice President and Chief
Financial Officer of Mood Media Corporation and Claude Nahon as President for
Mood International. In March 2014, Ken Eissing was appointed President for Mood
North America.
Effective January 1, 2014, Kevin Dalton was appointed to the Board of Directors
and in February 2014, Mr. Dalton was appointed Lead Director of the Board. In
addition, in January 2014 Gary Shenk and David Richards were appointed to the
Board of Directors, with Lorne Abony and Justin Beckett stepping down.
Additionally, on May 13, 2014, Richard Kronengold, Richard Warren and Ross
Levin were appointed to the Board of Directors, with Anatoli Plotkine and
Richard Weil stepping down.
In February 2014, the Board of Directors reconstituted its Compensation and
Governance Committee appointing Mr. Kevin Dalton (Chair), Mr. David Richards
and Mr. Harvey Solursh as members of this committee. In March 2014, effective
immediately following the release of the Company's audited consolidated
financial statements for the year ended December 31, 2013, the Board of
Directors reconstituted its Audit Committee appointing Mr. Harvey Solursh
(Chair), Mr. David Richards and Mr. Gary Shenk as members of this committee.
On May 13, 2014 when Mr. Levin was appointed to the Board of Directors, he was
also appointed to be a member of the Compensation and Governance Committee.
Summary of Quarterly Results
The following table presents a summary of our unaudited operating results on a
quarterly basis. The financial information is presented in accordance with
International Financial Reporting Standards ("IFRS"). The quarterly results
have been prepared to show the results for Mood Entertainment classified as a
discontinued operation.
(Loss) income for the period attributable
to owners of the parent
Revenue Basic and diluted EPS
Continuing Continuing Discontinued Continuing Discontinued
Period operations operations operations Total operations operations
Q2-2014(7) $119,881 $(32,670) $- $(32,670) $(0.18) $-
Q1-2014(6) 122,990 (7,503) - (7,503) (0.04) (0.04)
Q4-2013 132,253 (12,625) 68 (12,557) (0.07) (0.00)
Q3-2013(5) 125,662 (85,944) (1,751) (85,695) (0.50) (0.01)
Q2-2013(4) 126,268 (9,492) (10,984) (20,476) (0.05) (0.07)
Q1-2013 129,087 (5,086) (3,752) (8,838) (0.03) (0.02)
Q4-2012(2,3) 131,946 (14,088) (13,203) (27,291) (0.08) (0.08)
Q3-2012(1) 119,951 (5,967) (4,848) (10,815) (0.03) (0.03)
1. The significant increase in revenue is the result of the BIS
acquisition in May 2012.
2. The significant increase in revenue is primarily attributable to the
acquisition of ICI in October 2012.
3. The significant loss for the period attributable to the owners of the
parent is the result of the costs associated with the raising of the unsecured
notes and subsequent repayment of part of the 2011 First Lien Credit Facilities
and restructuring and integration costs incurred in the period.
4. The significant loss for the period attributable to owners of the
parent is due to the recognition of the loss on sale of the discontinued
operation.
5. The significant loss for the period attributable to owners of the
parent is due to the impairment of goodwill in the period.
6. The reduction in loss is primarily attributable to the gain on sale of the
residential Latin American music operations in addition to the Company
realizing some of the effects of Wave 1 cost reduction efforts implemented
at the end of 2013.
7. The increase in loss for the period to owners of the parent is
primarily attributable to the loss on extinguishment of the 2011 First Lien
Credit Facilities, the fees and costs associated with the 2014 First Lien
Credit Facilities required to be recognized as current period expense, and the
negotiated and finalized settlements including other liabilities and legal
matters related to DMX and Muzak.
Selected Financial Information
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF LOSS
Unaudited
For the three and six months ended June 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2014 2013 2014 2013
Continuing operations
Revenue $119,881 $126,268 $242,871 $255,355
Expenses:
Cost of sales (excludes
depreciation and amortization) 53,346 54,476 110,770 113,163
Operating expenses 42,510 44,134 84,726 88,572
Depreciation and amortization 17,526 16,496 36,040 34,220
Share-based compensation (204) 325 612 688
Other expenses 9,974 7,916 9,339 13,810
Foreign exchange loss (gain)
on financing transactions 1,766 (4,178) 760 1,857
Finance costs, net 27,794 15,970 41,520 10,494
Loss for the period before taxes (32,831) (8,871) (40,896) (7,449)
Income tax charge (credit) (197) 499 (766) 6,891
Loss for the period from
continuing operations (32,634) (9,370) (40,130) (14,340)
Discontinued operations
Loss after tax from discontinued
operations - (10,984) - (14,736)
Loss for the period (32,634) (20,354) (40,130) (29,076)
Attributable to:
Owners of the parent (32,670) (20,476) (40,173) (29,314)
Non-controlling interests 36 122 43 238
$(32,634) $(20,354) $(40,130) $(29,076)
Net loss per share:
Basic and diluted $(0.18) $(0.12) $(0.23) $(0.17)
Basic and diluted from
continuing operations (0.18) (0.05) (0.23) (0.08)
Basic and diluted from
discontinued operations 0.00 (0.07) 0.00 (0.09)
June 30, December 31,
2014 2013
Total assets $783,911 $811,835
Total non-current liabilities 667,004 649,688
Operating Results
Three months ended June 30, 2014 compared with the three months ended June 30,
2013
Revenue from continuing operations
We report our continuing operations as three reportable segments, "In-Store
Media North America", "In-Store Media International" and "Other" for the
purposes of reconciliation to the Company's financial statements.
Revenue from continuing operations for the three months ended June 30, 2014 and
June 30, 2013 were as follows:
Three months ended
June 30, 2014 June 30, 2013 Variance % Change
In-Store Media North America $66,223 $72,068 $(5,845) (8.1 %)
In-Store Media International 45,109 43,907 1,202 2.7%
Other 8,549 10,293 (1,744) (16.9%)
Total Consolidated Group $119,881 $126,268 $(6,387) (5.1 %)
Revenue is primarily derived from recurring monthly subscription fees for
providing customized and tailored music, visual displays and messages through
contracts ranging from 3-5 years. Revenue is also derived from equipment and
installation fees.
In-store Media North America revenue decreased by $5,845 for the three months
ended June 30, 2014 compared to the three months ended June 30, 2013, primarily
as a result of a decrease in recurring monthly revenue and a reduction in
revenue derived from equipment and installation fees. In addition, the
decrease is attributable to a decrease in revenues of $1.1M for the three
months ended June 30, 2013 for the sale of our residential Latin America music
operations sold on January 10, 2014 that are no longer included in our
consolidated revenue numbers for the three months ended June 30, 2014.
In-Store Media International revenue increased by $1,202 for the three months
ended June 30, 2014 compared to the three months ended June 30, 2013, primarily
driven by the impact of foreign exchange rates as the Euro has strengthened
versus the US Dollar. On a like for like currency basis, the In-Store Media
International revenues for the three months ended June 30, 2014 have decreased
by $1,070 due to a reduction in recurring revenues.
The revenue from other segments decreased by $1,744 due to a decrease in
equipment revenue and timing of project based revenue in Technomedia.
Cost of sales from continuing operations
Cost of sales were $53,346 for the three months ended June 30, 2014, a decrease
of $1,130 compared to $54,476 for the three months ended June 30, 2013. Cost of
sales as a percentage of revenue for the three months ended June 30, 2014 was
44.5%, compared with 43.1% for the three months ended June 30, 2013. The
increase of 140 basis points in cost of sales as a percentage of revenue is
primarily due to an increase in music royalty costs.
Operating expenses from continuing operations
Operating expenses were $42,510 for the three months ended June 30, 2014, a
decrease of $1,624 compared with $44,134 for the three months ended June 30,
2013. The decrease is primarily the result of the Company realizing the effects
of the Wave 1 cost reduction efforts implemented at the end of 2013. The Wave
1 business efficiency and integration synergy program focused on streamlining
the Company's operating infrastructure resulting from acquisition activity to
create efficiencies, enhance profitability and position the Company to capture
opportunities for growth across Local Audio, Visual Solutions and Mobile
Services. The Company expects these improvements to deliver nearly $9 million
in annual cost savings in fiscal year 2014. Additionally, the Company has
already completed a significant portion of its plans for Waves 2 and 3 that are
expected to deliver substantial annualized savings in the range of $8 to $10
million. Wave 2 initiatives were completed during the six months period ended
June 30, 2014 and Wave 3 initiatives will be completed by December 31, 2014.
Depreciation and amortization from continuing operations
Depreciation and amortization was $17,526 for the three months ended June 30,
2014, an increase of $1,030, compared with $16,496 for the three months ended
June 30, 2013. The increase is primarily due to additional capital expenditures
added throughout the remainder of 2013 that would result in a larger
depreciable base for the three months ended June 30, 2014. The additional
capital expenditures are part of our Wave 1 business efficiency and integration
synergy program.
Share-based compensation from continuing operations
Share-based compensation expense was credit of $204 for the three months ended
June 30, 2014, a decrease of $529 compared with $325 for the three months ended
June 30, 2013. The decrease is due to share forfeitures and cancellations
during the period.
Other expenses (income) from continuing operations
Other expenses were $9,974 for the three months ended June 30, 2014 compared to
an expense of $7,916 for the three months ended June 30, 2013. The increase in
costs is primarily due to integration costs for various real estate
consolidations, $3,100 for an onerous contract charge incurred in the three
months ended June 30, 2014 and finalized settlements including other
liabilities and legal matters related to prior acquisitions of $4,226.
Partially offsetting these increases in other expenses is the inclusion of an
initial gain on sale of $2,937 for the Company's DMX Canadian commercial
accounts portfolio that is partially contingent on the achievement of certain
future key indicators. An additional offset is the decrease in transaction
costs of $3,277 predominantly due to prior year strategic and operational
review costs.
Financing costs, net from continuing operations
Financing costs, net were $27,794 for the three months ended June 30, 2014
compared with $15,970 for the three months ended June 30, 2013. The increase
is primarily due to the cost of extinguishment of the 2011 First Lien Credit
Facilities of $13,435 and the recognition of the fees and expenses of the 2014
First Lien Credit Facilities which must be recognized as current period
expense.
Income tax from continuing operations
There was an income tax credit of $197 for the three months ended June 30, 2014
compared to a charge of $499 for the three months ended June 30, 2013. The
change has arisen primarily as a result of a reduction in the deferred tax
liabilities and further recognition of deferred tax assets in the three months
ended June 30, 2014.
Loss after tax from discontinued operations
The loss after tax from discontinued operations was nil for the three months
ended June 30, 2014, a decrease of $10,984 compared to a loss of $10,984 for
the three months ended June 30, 2013 that was a result of accruing costs
related to exiting the Mood Entertainment operations in 2013.
Non-controlling interest from continuing operations
A charge of $36 representing the element of profit of subsidiaries where the
Company does not own 100% of the share capital has been taken in the three
months ended June 30, 2014 compared to a charge of $122 in the three months
ended June 30, 2013.
Six months ended June 30, 2014 compared with the six months ended June 30, 2013
Revenue from continuing operations
We report our continuing operations as three reportable segments, "In-Store
Media North America", "In-Store Media International" and "Other" for the
purposes of reconciliation to the Company's financial statements.
Revenue from continuing operations for the six months ended June 30, 2014 and
June 30, 2013 were as follows:
Six months ended
June 30, 2014 June 30, 2013 Variance % Change
In-Store Media North America $132,995 $144,608 $(11,613) (8.0%)
In-Store Media International 92,858 89,957 2,901 3.2%
Other 17,018 20,790 (3,772) (18.1%)
Total Consolidated Group $242,871 $255,355 $(12,484) (4.9%)
In-store Media North America revenue decreased by $11,613 for the six months
ended June 30, 2014 compared to the six months ended June 30, 2013, primarily
as a result of a decrease in recurring monthly revenue of approximately $5,400
(which includes a $2.1M decrease in revenues for the six months ended June 30,
2013 for the sale of our residential Latin America music operations sold on
January 10, 2014 that are no longer included in our consolidated revenue
numbers for the six months ended June 30, 2014) and a reduction of
approximately $5,300 in revenue derived from equipment and installation fees.
In-Store Media International revenue increased by $2,901 for the six months
ended June 30, 2014 compared to the six months ended June 30, 2013, primarily
driven by the impact of foreign exchange rates as the Euro has strengthened
versus the US Dollar. On a like for like currency basis, the In-Store Media
International revenues for the six months ended June 30, 2014 have decreased by
$1,200. This is primarily due to a reduction in recurring revenues however it
is offset by a $996 increase in BIS revenues.
The revenue from other segments decreased by $3,772 due to timing of project
based revenue in Technomedia and a reduction in equipment revenue as a result
of a decrease in the scope of a contract.
Cost of sales from continuing operations
Cost of sales were $110,770 for the six months ended June 30, 2014, a decrease
of $2,393 compared to $113,163 for the six months ended June 30, 2013. Cost of
sales as a percentage of revenue for the six months ended June 30, 2014 was
45.6%, compared with 44.3% for the six months ended June 30, 2013. Included in
the comparative period is one time credit relating to music royalties, which if
adjusted for, would result in a cost of sales as a percentage of revenue of
44.6% for the six months ended June 30, 2013. The remaining balance of the
increase in 2014 cost of sales is primarily related to an increase in music
royalty costs.
Operating expenses from continuing operations
Operating expenses were $84,726 for the six months ended June 30, 2014, a
decrease of $3,846 compared with $88,572 for the six months ended June 30,
2013. The decrease is primarily the result of the Company realizing the effects
of the Wave 1 cost reduction efforts implemented at the end of 2013. The Wave
1 business efficiency and integration synergy program focused on streamlining
the Company's operating infrastructure resulting from acquisition activity to
create efficiencies, enhance profitability and position the Company to capture
opportunities for growth across Local Audio, Visual Solutions and Mobile
Services. The Company expects these improvements to deliver nearly $9 million
in annual cost savings in fiscal year 2014. Additionally, the Company has
already completed a significant portion of its plans for Waves 2 and 3 that are
expected to deliver substantial annualized savings in the range of $8 to $10
million. Wave 2 initiatives were completed during the six months period ended
June 30, 2014 and Wave 3 initiatives will be completed by December 31, 2014.
Depreciation and amortization from continuing operations
Depreciation and amortization was $36,040 for the six months ended June 30,
2014, an increase of $1,820 compared with $34,220 for the six months ended June
30, 2013. The increase is primarily due to additional capital expenditures
added throughout Q4 2013 and Q1 2014 that would result in a larger depreciable
base for the six months ended June 30, 2014 compared to the prior year. A
significant portion of the additional capital expenditures are part of our
Waves 1 and 2 business efficiency and integration synergy program.
Share-based compensation from continuing operations
Share-based compensation expense was $612 for the six months ended June 30,
2014, a decrease of $76 compared with $688 for the six months ended June 30,
2013. The decrease is due to share forfeitures and cancellations.
Other expenses (income) from continuing operations
Other expenses were $9,339 for the six months ended June 30, 2014 compared to
an expense of $13,810 for the six months ended June 30, 2013. The decrease in
costs are primarily due to the inclusion of an initial gain on sale of $3,541
and $2,937 for the Company's residential Latin America music operations and DMX
Canadian commercial accounts portfolio, respectively, that is partially
contingent on the achievement of certain future key indicators. Additionally,
the year over year comparison is further affected by a decrease in transaction
costs of $5,877 predominantly due to prior year strategic and operational
review costs. These reductions in other expenses were offset by an increase in
integration costs for various real estate consolidations and $3,100 for an
onerous contract charge incurred in the six months ended June 30, 2014.
Furthermore, the Company negotiated and finalized settlements including other
liabilities and legal matters related to prior acquisitions, which offset the
reduction in other expenses by $4,226.
Financing costs, net from continuing operations
Financing costs, net were $41,520 for the six months ended June 30, 2014
compared with $10,494 for the six months ended June 30, 2013. In the 2013
comparative period there was a $16,862 credit recorded relating to the change
in fair value of the Muzak contingent consideration. Additionally, the six
months ended June 30, 2014 include costs $13,435 related to the extinguishment
of the 2011 First Lien Credit Facilities and the fees and costs associated with
the 2014 First Lien Credit Facilities.
Income tax from continuing operations
There was an income tax credit of $766 for the six months ended June 30, 2014
compared to a charge of $6,891 for the six months ended June 30, 2013. The
change has arisen primarily as a result of a reduction in the deferred tax
liabilities and further recognition of deferred tax assets in the six months
ended June 30, 2014.
Loss after tax from discontinued operations
The loss after tax from discontinued operations was nil for the six months
ended June 30, 2014, a decrease of $14,736 compared to a loss of $14,736 for
the six months ended June 30, 2013 that was a result of accruing costs related
to exiting the Mood Entertainment operations in 2013.
Non-controlling interest from continuing operations
A charge of $43 representing the element of profit of subsidiaries where the
Company does not own 100% of the share capital has been taken in the six months
ended June 30, 2014 compared to a charge of $238 in the six months ended June
30, 2013.
Total assets
Total assets were $783,911 as at June 30, 2014 compared to $811,835 as at
December 31, 2013. The decrease of $27,924 is largely due to the reduction of
goodwill and intangible assets in connection with the sale of the residential
Latin America music operations and the DMX Canadian commercial account
portfolio.
Non-current liabilities
Long term liabilities were $667,004 as at June 30, 2014 compared to $649,688 as
at December 31, 2013. The increase of $17,316 is largely due to an increase in
long term debt related to the refinancing of the Company's 2011 First Lien
Credit Facilities and partially offset by the change in fair value of the 2014
First Lien Credit Facilities interest rate floor of $3,586 and the 2011 First
Lien Credit Facilities interest rate floor whose fair value at December 31, 2013
was $6,066. Another partial offset was due to lower deferred tax liabilities,
which at June 30, 2014 were $35,153 compared to $38,735 at December 31, 2013.
Liquidity and Capital Resources
Three months ended June 30 2014, compared with the three months ended June 30,
2013
During the three months ended June 30, 2014, cash decreased by $819.
Cash generated from operating activities for the three months ended June 30,
2014 was $11,343 compared with $19,872 in the three months ended June 30, 2013.
The decrease in cash generated from operating activities of $8,529 was driven
by lower operating profit before tax of $4,481 (three month ended June 30, 2014
operating profit before tax of $13,269 (adding back to pre-tax loss:
depreciation, amortization, impairment, interest and other non-cash charges)
compared to a three months ended June 30, 2013 operating profit before tax of
$17,750); a reduction in working capital additions of $3,079 (a decrease in
working capital of $825 for the three months ended June 30, 2014 compared to an
increase of $2,254 for the three months ended June 30, 2013) and higher cash
taxes paid by $949 ($1,109 for three months ended June 30, 2014 compared to
$160 for three months ended June 30, 2013).
Cash provided by investing activities for the three months ended June 30, 2014
was $2,388 compared with cash used in investing activities of $8,251 in the
three months ended June 30, 2013. The increase is primarily the result of the
sale of the DMX Canadian commercial account portfolio on June 27, 2014.
Cash used in financing activities for the three months ended June 30, 2014 was
$14,648 compared to cash used of $24,819 the three months ended June 30, 2013.
The decrease is primarily due to proceeds from the refinancing of the 2011
First Lien Credit Facilities.
Six months ended June 30 2014, compared with the six months ended June 30, 2013
During the six months ended June 30, 2014, cash increased by $11,905.
Cash generated from operating activities for the six months ended June 30, 2014
was $28,437 compared with $30,084 in the six months ended June 30, 2013. The
decrease in cash generated from operating activities of $1,647 was driven by
lower operating profit before tax of $2,135 (six month ended June 30, 2014
operating profit before tax of $33,667 (adding back to pre-tax loss:
depreciation, amortization, impairment, interest and other non-cash charges)
compared to a six months ended June 30, 2013 operating profit before tax of
$35,802); a reduction in working capital additions of $1,632 (a reduction in
working capital of $2,762 for the six months ended June 30, 2014 compared to an
reduction of $4,394 for the six months ended June 30, 2013) and higher cash
taxes paid by $1,111 ($2,487 for six months ended June 30, 2014 compared to
$1,376 for six months ended June 30, 2013).
Cash provided by investing activities for the six months ended June 30, 2014
was $2,982 compared with cash used in investing activities of $16,090 in the
six months ended June 30, 2013. The increase is primarily the result of the
sale of residential Latin America music operations on January 10, 2014 and DMX
Canada commercial account portfolio on June 27, 2104.
Cash used in financing activities for the six months ended June 30, 2014 was
$19,383 compared to cash used of $29,411 for the six months ended June 30,
2013. The decrease is primarily due to proceeds from the refinancing of the
2011 First Lien Credit Facilities.
As at June 30, 2014, the Company had cash of $34,135 and available lines of
credit of $11,810. Management believes that the Company has sufficient
liquidity in the form of its current cash balances, the cash generating
capacity of its businesses and the ability to draw down on revolving credit
facilities to meet its working capital and capital expenditure needs for the
forthcoming year. On an ongoing basis management evaluates the sufficiency of
its current liquidity, borrowing capacity and capital structure to assure its
capital structure is optimally poised to meet the needs of its operating
plans. The company monitors the debt and capital markets in order to be
opportunistic in refinancings of upcoming maturities and to better match terms
and pricing to the company's needs.
Contractual obligations
The following chart outlines the Company's contractual obligations as at June
30, 2014:
Less than One to Four to Beyond five
Description Total one year three years five years years
2014 First Lien Credit
Facility $234,413 $2,350 $4,700 $227,363 $-
2014 First Lien Credit
Facility interest 78,640 16,575 32,694 29,371 -
9.25% Senior Unsecured Notes 350,000 - - - 350,000
9.25% Senior Unsecured Notes
interest 213,585 32,825 65,739 65,649 49,372
Convertible debentures 50,266 - 50,266 - -
Convertible debenture
interest 7,665 5,096 2,569 - -
Operating leases 51,948 16,402 24,427 8,353 2,766
Finance leases 1,270 1,003 267 - -
Trade and other payables 101,784 101,784 - - -
Total $1,089,571 $176,035 $180,662 $330,736 $402,138
Bank debt
In connection with the acquisition of Muzak on May 6 2011, Mood entered into
credit facilities with Credit Suisse AG ("Credit Suisse"), as agent,
consisting of a $20,000 5-year Revolving Credit Facility (the "2011 First Lien
Revolving Credit Facility"), a $355,000 7-year First Lien Term Loan (the "2011
First Lien Term Loan", and together with the 2011 First Lien Revolving Credit
Facility, the "2011 First Lien Credit Facility") and a $100,000 7.5-year Second
Lien Term Loan (collectively, the "2011 Credit Facilities"). The 2011 First
Lien Revolving Credit Facility had a maturity date of May 6, 2016, the First
Lien Term Loan had a maturity date of May 6, 2018 and the Second Lien Term Loan
had a maturity date of November 6, 2018, although it was repaid in its entirety
in 2012.
On May 1, 2014, we completed a refinancing of the 2011 Credit Facilities with
Credit Suisse, as agent. The new facilities consist of a $15,000 5-year Senior
Secured Revolving Credit Facility (the "2014 First Lien Revolving Credit
Facility") and a $235,000 Senior Secured 5-year Term Loan (the "2014 First Lien
Term Loan", and together with the 2014 First Lien Revolving Credit Facility,
the "2014 First Lien Credit Facility"). Interest on the 2014 First Lien Term
Loan accrues at a rate of adjusted LIBOR plus 6.00% per annum with a LIBOR
floor of 1%. The 2014 First Lien Term Loan is repayable at a rate 1% of the
initial principal per annum at the rate of $588 per quarter and has a maturity
date of May 1, 2019. The 2014 First Lien Credit Facility has more favorable
financial covenants as well as provisions which permit the Company to use net
asset sales proceeds, within defined limits, to repay the Company's Senior
Unsecured Notes or its Subordinated Debentures. The proceeds of the 2014 First
Lien Credit Facility were used primarily to extinguish the liability under the
2011 First Lien Credit Facility and to strengthen the balance sheet. As a
result of the refinancing, Mood recognized an accounting loss on extinguishment
of the 2011 First Lien Credit Facility of $13,435, which included the fees and
costs associated with the 2014 First Lien Credit Facilities.
On October 19, 2012, we closed an offering of $350,000 aggregate principal
amount of senior unsecured notes (the "Notes") by way of private placement. The
Notes are due October 15, 2020 and bear interest at an annual rate of 9.25%. We
used the net proceeds of the Notes to repay $140,000 of the 2011 First Lien
Term Loan and the 2011 Second Lien Term Loan in its entirety.
Convertible debentures
On October 1, 2010, we issued convertible unsecured subordinated debentures
(the "New Debentures") with a principal amount of $31,690. As part of the
transaction, we also issued an additional $1,078 in New Debentures, for a total
of $32,768 aggregate principal amount of New Debentures, as partial payment of
the underwriter's fee. The New Debentures have a maturity date of October 31,
2015 and bear interest at a rate of 10% per annum, payable semi-annually. They
are convertible at any time at the option of the holders into common shares at
an initial conversion price of $2.43 per common share. $646 of New Debentures
were converted during 2011, resulting in the issuance of 265,843 common shares.
There are a maximum of 13,218,930 of our common shares issuable upon conversion
of the remaining New Debentures.
On May 6, 2011, we issued convertible unsecured subordinated debentures (the
"Consideration Debentures") with a principal amount of $5,000 as part of the
consideration for the Muzak acquisition. The Consideration Debentures have a
maturity date of October 31, 2015 and bear interest at a rate of 10% per annum,
payable semi-annually. They are convertible at any time at the option of the
holders into common shares at an initial conversion price of $2.43 per common
share. $356 of Consideration Debentures were converted during 2012, resulting
in the issue of 146,500 common shares. There are a maximum of 1,911,111 of our
common shares issuable upon conversion of the remaining Consideration
Debentures.
On May 27, 2011, we completed a private placement of convertible unsecured
subordinated debentures (the "Convertible Debentures" with a principal amount
of $13,500. The Convertible Debentures were issued for a subscription price of
$0.9875 per $1 principal amount, resulting in gross proceeds of $13,331. The
Convertible Debentures have a maturity date of October 31, 2015 and bear
interest at a rate of 10% per annum, payable semi-annually. They are
convertible at any time at the option of the holders into common shares at an
initial conversion price of $2.80 per common share. There are a maximum of
4,821,429 of our common shares issuable upon conversion of the New Debentures.
Trade and other payables
Trade and other payables arise in the normal course of business and are to be
settled within one year of the end of the reporting period.
Lease commitments
Operating leases and finance leases are entered into primarily for the rental
of premises and vehicles used for business activities.
Capitalization
Total managed capital was as follows:
June 30, December 31,
2014 2013
Shareholders' equity (11,220) $25,007
Convertible debentures 50,266 50,266
2011 and 2014 First Lien Credit 234,413 217,897
Facilities
9.25% Senior Unsecured Notes 350,000 350,000
Total Debt (contractual amounts due) 634,679 618,163
Total Capital $623,459 $643,170
As at June 30, 2014 our capital structure included shareholders' equity in the
amount of $(11,220). Our outstanding debt as at that date included convertible
debentures of $50,266, bank debt of $234,413 and unsecured notes of $350,000.
As at December 31, 2013 our capital structure included shareholders' equity in
the amount of $25,007. Our outstanding debt as at that date included
convertible debentures of $50,266, bank debt of $217,897 and unsecured notes of
$350,000.
The number of our outstanding common shares as at June 30, 2014 was
179,667,119. The company issued 367,440 shares as severance payments and
4,160,116 shares in full satisfaction of the remaining obligations under a
consulting agreement for the integration of DMX. In addition 3,500,000 share
options were exercised. This represents an increase of 8,027,556 to shares
outstanding from June 30, 2013 of 171,639,563.
The following provides additional share information (in thousands of shares) on
a fully diluted basis:
On March 10, 2014, 925,000 share options were granted with an exercise price of
CDN$0.88 (USD$0.79).
On May 12, 2014 2,005,000 share options were granted with an exercise price of
CDN $0.60 (USD$0.55)
There were no share options granted during the three month period ended June
30, 2013.
The following table provides additional share information (in thousands of
shares) on a fully diluted basis:
Outstanding Outstanding
at August 14, as at June 30,
2014 2014
Common shares 179,667 179,667
Share options 16,153 17,110
Warrants 4,408 4,408
Convertible
debentures 19,951 19,951
There have been no shares issuances from June 30, 2014 to August 14, 2014.
Risk management
We are exposed to a variety of financial risks including market risk (including
foreign exchange and interest rate risks), liquidity risk and credit risk. Our
overall risk management program focuses on the unpredictability of financial
markets and seeks to evaluate potential adverse effects on the Company's
financial performance.
Foreign currency exchange risk
We operate in the US, Canada and internationally. The functional currency of
the Company is US dollars. Foreign currency exchange risk arises because the
amount of the local currency income, expenses, cash flows, receivables and
payables for transactions denominated in foreign currencies may vary due to
changes in exchange rates ("transaction exposures") and because the non-US
denominated financial statements of our subsidiaries may vary on consolidation
into US dollars ("translation exposures").
The most significant translation exposure arises from the Euro currency. We are
required to revalue the Euro denominated net assets of the European
subsidiaries at the end of each period with the foreign currency translation
gain or loss recorded in other comprehensive income. We do not currently hedge
translation exposures. Since the financial statements of Muzak, DMX, ICI and
Technomedia are denominated in US dollars, the impact associated with
translation exposure has been reduced with respect to percentage of total
income statement and balance sheet exposure following these acquisitions.
Interest rate risk
Our interest rate risk arises on amounts outstanding under the Credit
Facilities which bear interest at a floating rate. However, the level of
interest rate risk is mitigated by the fact that the Credit Facilities carry an
interest rate floor which currently exceeds LIBOR. The interest rate floor is
treated for accounting purposes as a non-cash liability which is disclosed
within other financial liabilities in the consolidated statement of financial
position. We also purchased an interest rate cap in 2011 to protect against
increasing LIBOR rates and this asset is recorded within other financial assets
in the consolidated statement of financial position. The fair value of these
instruments is determined by reference to mark to market valuations performed
by financial institutions at each reporting date and any changes in fair value
are recorded within finance costs within the consolidated statements of income.
The total change in fair value of financial instruments for the three month
period ended June 30, 2014 was a charge of $181 and a credit of $860 for the
six month period ended June 30, 2014.
Liquidity risk
Liquidity risk arises through excess of financial obligations over available
financial assets due at any point in time. The Company's objective in managing
liquidity risk is to maintain sufficient readily available reserves in order to
meet its liquidity requirements at any point in time. We achieve this by
maintaining sufficient cash balances, generating cash through the operation of
our businesses and management of working capital, and by maintaining
availability of funding from the committed 2014 First Lien Credit Facility.
Credit risk
Credit risk arises from cash held with banks and credit exposure to customers
on outstanding accounts receivable balances. The maximum exposure to credit
risk is equal to the carrying value of the financial assets. The objective of
managing counterparty credit risk is to prevent losses in financial assets. We
assess the credit quality of the counterparties, taking into account their
financial position, past experience and other factors. Management also monitors
payment performance and the utilization of credit limits of customers.
Critical Accounting Estimates
Described below are the key assumptions concerning the future and other key
sources of estimation uncertainty at the reporting date that have a significant
risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year. We based our assumptions and
estimates on parameters available when the consolidated financial statements
were prepared. Existing circumstances and assumptions about future
developments, however, may change due to market changes or circumstances
arising beyond our control. Such changes are reflected in the assumptions when
they occur.
Share-based compensation
We measure the cost of equity-settled transactions with employees by reference
to the fair value of the equity instruments at the date at which they are
granted. Estimating fair value for share-based compensation transactions
requires determining the most appropriate valuation model, which is dependent
on the terms and conditions of the grant. This estimate also requires
determining the most appropriate inputs to the valuation model including the
expected life of the share option, volatility and dividend yield and making
assumptions about them. The assumptions and models used for estimating fair
value for share-based compensation transactions are disclosed in note 20 of the
Company's annual financial statements.
Fair value measurement of contingent consideration
Contingent consideration, resulting from business combinations, is valued at
fair value at the acquisition date as part of the business combination. When
the contingent consideration meets the definition of a derivative and, thus, a
financial liability, it is subsequently remeasured to fair value at each
reporting date. The determination of the fair value is based on probability of
expected outcomes and discounted cash flows. The key assumptions take into
consideration the probability of meeting each performance target and the
discount factor.
Fair value of financial instruments
When the fair value of financial assets and financial liabilities recorded in
the consolidated statements of financial position cannot be derived from active
markets, their fair value is determined using valuation techniques including
the discounted cash flow model. The inputs to these models are taken from
observable markets where possible, but where this is not feasible, a degree of
judgment is required in establishing fair values. The judgments include
consideration of inputs such as liquidity risk, credit risk and volatility.
Changes in assumptions about these factors could affect the reported fair value
of financial instruments.
Income taxes
Tax regulations and legislation, and the interpretations thereof in the various
jurisdictions in which we operate, are subject to change. As such, income taxes
are subject to measurement uncertainty. Deferred tax assets are recognized to
the extent that it is probable that the deductible temporary differences will
be recoverable in future periods. The recoverability assessment involves a
significant amount of estimation including: an evaluation of when the temporary
differences will reverse, an analysis of the amount of future taxable earnings,
the availability of cash flow to offset the tax assets when the reversal occurs
and the application of tax laws. To the extent that the assumptions used in the
recoverability assessment change, there may be a significant impact on the
consolidated financial statements of future periods.
Contingencies
Contingencies, by their nature, are subject to measurement uncertainty as the
financial impact will only be confirmed by the outcome of a future event. The
assessment of contingencies involves a significant amount of judgment including
assessing whether a present obligation exists and providing a reliable estimate
of the amount of cash outflow required in settling the obligation. The
uncertainty involved with the timing and amount at which a contingency will be
settled may have a material impact on the consolidated financial statements of
future periods to the extent that the amount provided for differs from the
actual outcome.
Inventory obsolescence
Our obsolescence provision is determined at each reporting period and the
changes are recorded in the consolidated statements of income (loss). This
calculation requires the use of estimates and forecasts of future sales.
Qualitative factors, including market presence and trends, strength of customer
relationships, as well as other factors, are considered when making assumptions
with regard to recoverability. A change in any of the significant assumptions
or estimates used could result in a material change to the provision.
Property and equipment
We have estimated the useful lives of the components of all property and
equipment based on past experience and industry norms and we depreciate these
assets over their estimated useful lives. We assess these estimates on a
periodic basis and makes adjustments when appropriate. Rental equipment
installed at customer premises includes costs directly attributable to the
installation process. Judgment is required in determining which costs are
considered directly attributable to the installation process and the percentage
capitalized is estimated based on work order hours for the year.
Impairment of long-lived assets
Long-lived assets primarily include property and equipment and intangible
assets. An impairment loss is recognized when the carrying value of the
cash-generating unit ("CGU"), which is defined as a unit that has independent
cash inflows, to which the asset relates, exceeds the CGU's fair value, which
is determined using a discounted cash flow method. We test the recoverability
of its long-lived assets when events or circumstances indicate that the
carrying values may not be recoverable. While we believe that no provision for
impairment is required, we must make certain estimates regarding profit
projections that include assumptions about growth rates and other future
events. Changes in certain assumptions could result in charging future results
with an impairment loss.
Leases
The determination of whether an arrangement with a customer is, or contains, a
lease is based on the substance of the arrangement at the inception date,
whether fulfillment of the arrangement is dependent on the use of a specific
asset or assets or the arrangement conveys a right to use the asset, even if
that right is not explicitly specified in an arrangement.
Goodwill and indefinite-lived intangible assets
We perform asset impairment assessments for indefinite-lived intangible assets
and goodwill on an annual basis or on a more frequent basis when circumstances
indicate impairment may have occurred. Under IFRS, we selected October 1 as the
date when to perform the annual impairment analysis. Impairment calculations
under IFRS are done at a CGU group level. Calculations use a discounted cash
flow method under a one-step approach and consider the relationship between the
Company's market capitalization and its book value. Goodwill is allocated and
tested in conjunction with its related CGU or group of CGUs that benefit from
collective synergies. The assessments used to test for impairment are based on
discounted cash flow projections that include assumptions about growth rates
and other future events. Industry information is used to estimate appropriate
discount rates used in the calculation of discounted cash flows.
Disclosure Controls and Internal Controls over Financial Reporting
The Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") are responsible for the design of the Company's Disclosure Controls and
Procedures (as defined in National Instrument 52-109 - Certification of
Disclosure in Issuers' Annual and Interim Filings ("NI 52-109")). The CEO and
CFO are also responsible for the design of the Company's Internal Controls over
Financial Reporting (as defined by NI 52-109) to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS.
The CEO and CFO have designed, or have caused to be designed, disclosure
controls and procedures and internal controls over financial reporting. These
controls have been evaluated and it has been determined that their design and
operation provide reasonable assurance as to their adequacy and effectiveness
as of, and for the three months ended June 30, 2014.
These controls were evaluated using the framework established in "Internal
Control - Integrated Framework" (1992) published by The Committee of Sponsoring
Organizations of the Treadway Commission (COSO Framework).
In designing such controls, it should be recognized that due to inherent
limitations in any control system, no evaluation of controls can provide
absolute assurance that all control issues, including instances of fraud, if
any, have been detected. Projections of any evaluations of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Additionally, management is required
to use judgment in evaluating controls and procedures.
The Company did not make any changes to the Company's internal controls over
financial reporting during the most recent reporting period that would have
materially affected or would reasonably be likely to materially affect the
Company's internal controls over financial reporting.
Risk Factors
The results of operations, business prospects and the financial condition of
the Company are subject to a number of risks and uncertainties, and are
affected by a number of factors outside the control of the Company's
management. These risks are noted below.
Integration risks
Making strategic acquisitions and business combinations has been a significant
part of Mood's historical growth. Our ability to continue to expand in this
manner depends in large part on our ability to identify suitable acquisition
targets and compete successfully with other entities for these targets. We
completed the acquisition of Technomedia in December 2012, ICI in October 2012,
BIS in May 2012, DMX in March 2012, and Muzak in May 2011, with the expectation
that these acquisitions would result in strategic benefits, economies of scale
and synergies. These anticipated benefits, economies of scale and synergies
will depend in part on whether the operations of Mood Media, Technomedia, ICI,
BIS, DMX and Muzak can be integrated in an efficient and effective manner. It
is possible that this may not occur as planned, or that the financial and other
benefits may be less than anticipated. In addition, management believes that
the integration will give rise to restructuring costs and charges, and these
may be greater than currently anticipated. Furthermore, the contracts governing
the Company's recent acquisitions do include, and the contracts governing the
Company's future business combinations and/or acquisitions may include,
post-closing purchase price adjustments that require it to make additional
payments to the relevant selling party post-closing and such payments could be
greater than anticipated. The integration of the Company's ERP systems presents
a risk to the Company and requires resources to accomplish, including capital
expenses and personal time.
Mood has been built via a series of acquisitions. Failure to properly integrate
these acquisitions will leave the Company less able to operate as a
consolidated whole and may lead to depressed revenue and margin performance.
This integration is ongoing and requires dedication and substantial management
effort, time and resources which may divert management's focus and resources
from other strategic opportunities and from operational matters during this
process. The integration process may result in loss of key employees and the
disruption of the ongoing business, customer and employee relationships that
may adversely affect our ability to achieve the anticipated benefits of the
acquisitions. Further, the operating results and financial condition of the
Company could be materially adversely impacted by the focus on integration.
Future business combinations and/or acquisitions could materially and adversely
affect our business, financial condition and results of operations if it is
unable to integrate the operations of the acquired companies. Completing
business combinations and/or acquisitions could require use of a significant
amount of our available cash. Furthermore, the Company may have to issue equity
or equity linked securities to pay for future business combinations and/or
acquisitions. Acquisitions and investments may also have negative effects on
our reported results of operations due to acquisition-related charges,
amortization of acquired technology and other intangibles, failure to retain
key employees or customers of acquired companies and/or actual or potential
liabilities, known and unknown, associated with the acquired businesses or
joint ventures. Any of these acquisition-related risks or costs could
materially and adversely affect the Company's business, financial condition and
results of operations.
Costly and protracted litigation may be necessary to defend usage of
intellectual property
The Company may become subject to legal proceedings and claims in relation to
its business. In particular, while management believes that it has the rights
to distribute the music recordings used in connection with our business, we may
be subject to copyright infringement lawsuits for selling, performing or
distributing music recordings if it does not have the rights to do so. Results
of legal proceedings cannot be predicted with certainty. Regardless of their
merits, litigation, arbitration and/or mediation of such claims may be both
time-consuming and disruptive to our operations and cause significant expense
and diversion of management attention. The Company is currently defending
itself against a number of legal claims. While we believes these claims to be
without merit, and is vigorously defending itself, the Company cannot guarantee
that it will be successful or that it will reach commercially reasonable
settlement terms. Should we fail to prevail in such proceedings and claims, its
financial condition and operating results could be materially and adversely
affected.
If the current owners with which the Company contracts do not have legal title
to the digital rights they grant the Company, the Company's business may be
adversely affected
The Company's acquisition and distribution agreements with content owners
contain representations, warranties and indemnities with respect to the digital
rights granted to us. If we were to acquire and make available for purchase
music recordings from a person who did not actually own such rights and we were
unable to enforce on the representations, warranties and indemnities made by
such person, our business may be adversely affected.
The Company faces intense competition from our competitors that could
negatively affect our results of operations
The market for acquiring exclusive digital rights from content owners is
competitive, especially for the distribution of music catalogues owned by
independent labels. The number of commercialized music recordings available for
acquisition is large and many of the more desirable music recordings are
already subject to digital distribution agreements or have been directly placed
with digital entertainment services. We face competition in our pursuit to
acquire additional content, which may reduce the amount of music content that
it is able to acquire or license and may lead to higher acquisition prices. Our
competitors may from time to time offer better terms of acquisition to content
owners. Increased competition for the acquisition of digital rights to music
recordings may result in a reduction in operating margins and may reduce our
ability to distinguish itself from our competitors by virtue of our music
library.
The Company has different competitors in its local geographies but very few
that operate across international markets. Some of these local competitors
offer services at a lower price than we offer in order to promote their
services and gain share. If these competitors are able to leverage such price
advantages, it could harm our ability to compete effectively in the
marketplace. Furthermore, there is a threat of new entrants to the competitive
landscape, including traditional advertisers and media providers as well as
start-up companies. The growth of social media could facilitate other forms of
new entry that will compete with the Company.
We also compete with companies that are not principally focused on providing
business music services. Such competitors include Sirius XM Satellite Radio,
webcasters and traditional radio broadcasters that encourage workplace
listening, video services that provide business establishments with music
videos or television programming, and performing rights societies that license
business establishments to play sources such as CDs, tapes, MP3 files and
satellite, terrestrial and internet radio.
We compete on the basis of service, the quality and variety of its music
programs, the availability of its non-music services and, to a lesser extent,
price. Management believes that the Company can compete effectively due to the
breadth of its in-store media. While managements believes that the Company
competes effectively, the Company's competitors have established client bases
and are continually seeking new ways to expand such client bases and revenue
streams. As a result, competition may negatively impact the Company's ability
to attract new clients and retain existing clients.
If the Company is unable to generate demand for managed media services, its
financial results may suffer
The Company's current business plan contemplates deriving revenue from
businesses that want a professional media service that is available for sale
in-store or broadcast in-store. The Company's ability to generate such revenues
depends on the market demand for its media content and its ability to provide a
robust service that delivers a return on investment.
Mood's customers may choose to terminate their relationship with us or reduce
their spending on our services, which could have a material adverse effect on
its financial condition and results of operations. We depend on a large portion
of our revenues being derived from the continued spending by its clients on
in-store media services. Our top clients for such services typically have
lengthy tenures. However, should clients decide to stop using or to reduce
their expenditures on in-store media or decide to terminate their agreements
with us and to use one of our competitors; we would lose subscription income
which will have an adverse effect on our financial position.
The Company's success will depend, in part, on its ability to develop and sell
new products and services
Mood's success depends in part on the ability of its personnel to develop
leading-edge media products and services and the ability to cross sell visual
media and scent marketing to existing clients. Our business and operating
results will be harmed if it fails to cross sell its services and/or fails to
develop products and services that achieve widespread market acceptance or that
fails to generate significant revenues or gross profits to offset development
and operating costs. We may not successfully identify, develop and market new
products and service opportunities in a timely manner. We also may not be able
to add new content as quickly or as efficiently as its competitors, or at all.
If we introduce new products and services, they may not attain broad market
acceptance or contribute meaningfully to its revenues or profitability.
Competitive or technological developments may require us to make substantial,
unanticipated investments in new products and technologies, and we may not have
sufficient resources to make these investments.
The Company's use of open source and third party software could impose
unanticipated conditions or restrictions on its ability to commercialize its
solutions
While we have developed our own proprietary software and hardware for the
delivery of its media solutions, we may be restricted under existing or future
agreements from utilizing certain licensed technology in all of the
jurisdictions and/or industry sectors in which it operates. Failure to comply
with such restrictions may leave us open to proceedings by third parties and
such restrictions may, if alternative technology is not available, affect our
ability to deliver its services in such jurisdictions, in each case resulting
in an adverse effect on our financial position.
The Company's suppliers may choose to terminate their relationship with the
Company, which could have a material adverse effect on the Company's financial
condition and results of operations
We have licensing arrangements with suppliers of satellite services which are
used in the delivery of content to its customers. If such licensing
arrangements were terminated and alternative arrangements were not available,
this would affect our ability to deliver its services resulting in an adverse
effect on its financial or trading position.
The imposition of the obligation to collect sales or other taxes on shipments
into one or more states in the United States could create administrative
burdens on the Company and decrease its future sales
We do not collect sales or other taxes on shipments by its foreign subsidiaries
of most of its goods into most states in the United States. One or more states
or foreign countries may seek to impose sales or other tax collection
obligations on out-of-jurisdiction e-commerce companies. A successful assertion
by one or more states or foreign countries that the Company should collect
sales or other taxes on the sale of merchandise or services could result in
substantial tax liabilities for past sales, decrease our ability to compete
with traditional retailers, and otherwise harm its business.
Currently, U.S. Supreme Court decisions restrict the imposition of obligations
to collect state and local sales and use taxes with respect to sales made over
the internet. However, a number of states, as well as the U.S. Congress, have
been considering initiatives that could limit or supersede the Supreme Court's
position regarding sales and use taxes on internet sales. If any of these
initiatives were successful, we could be required to collect sales and use
taxes in additional states. The imposition by state and local governments of
various taxes upon internet commerce could create administrative burdens for
us, put it at a competitive disadvantage if they do not impose similar
obligations on all of its online competitors and decrease its future sales.
The Company is taxable on its worldwide income both in Canada and the United
States, which could, in certain circumstances, have a material adverse effect
on the Company
The Company is a resident in Canada for purposes of the Income Tax Act (Canada)
and management believes that it will continue to be treated as a domestic
corporation in the United States under the U.S. Internal Revenue Code 1986, as
amended. As a result, Mood Media (but not its subsidiaries) is generally
taxable on its worldwide income in both Canada and the United States (subject
to the availability of any tax credits and deductions in either or both
jurisdictions in respect of foreign taxes paid by Mood Media). Management
believes that the Company's status of being taxable both in Canada and the
United States has not given rise to any material adverse consequences as of the
date hereof. Management also believes that such status is not likely to give
rise to any material adverse consequences in the future as it is not
anticipated that it will have any material amounts of taxable income.
Nevertheless, the Company's status of being taxable on its worldwide income
both in Canada and the United States could, in certain circumstances, have a
material adverse effect on the Company.
As result of the Company being resident in both Canada and the United States,
withholding taxes of both Canada and the United States will be relevant to the
Company's securityholders and could, in certain circumstances, result in double
taxation to certain investors and other consequences.
If the Company is unable to access additional equity or debt financing at a
reasonable cost, it could affect our ability to grow
Given the sensitivity of capital markets worldwide, there is an increased risk
that we may not be able to obtain additional equity or debt financing that it
may require to consummate future acquisitions or to refinance its debt when it
is due. While management believes that the Company possesses sufficient cash
resources to execute the Company's business plan, an inability to access
financing at a reasonable cost could affect its ability to grow. If the
realization of various risk factors results in poor financial performance it
may make capital markets more difficult to access or closed completely to the
Company for debt and equity financing and the Company could go out of business.
Failure to continue to generate sufficient cash revenues could materially
adversely affect Mood Media's business
The Company's ability to be profitable and to have positive cash flow is
dependent upon its ability to maintain and locate new customers who will
purchase its products and use its services, and our ability to continue to
generate sufficient cash revenues. Mood presently generates the majority of its
revenue in the United States and Europe, with customers concentrated in the
retail and hospitality sectors. These sectors continue to be negatively
affected by ongoing economic difficulties and our revenues could be affected by
bankruptcies or rationalization of a portion of its existing client base. A
material reduction in revenue would negatively impact our financial position.
If our revenue grows more slowly than anticipated, or if our operating expenses
are higher than expected, it may not be able to sustain or increase
profitability, in which case Mood's financial condition will suffer and its
value could decline. Failure to continue to generate sufficient cash revenues
could also cause the Company to go out of business.
The Company may not have the financial or technological resources to adapt to
changes in available technology and its clients' preferences, which may have a
negative effect on the Company's revenue
Our product and service offerings compete in a market characterized by rapidly
changing technologies, frequent innovations and evolving industry standards.
There are numerous methods by which existing and future competitors can deliver
programming, including various forms of recorded media, direct broadcast
satellite services, wireless cable, fiber optic cable, digital compression over
existing telephone lines, advanced television broadcast channels, digital audio
radio service and the internet. Competitors may use different forms of delivery
for the services that we offer, and clients may prefer these alternative
delivery methods. We may not have the financial or technological resources to
adapt to changes in available technology and our clients' preferences, which
may have a negative effect on its revenue.
We cannot provide assurance that it will be able to use, or compete effectively
with competitors that adopt, new delivery methods and technologies, or keep
pace with discoveries or improvements in the communications, media and
entertainment industries. We also cannot provide assurance that the technology
it currently relies upon will not become obsolete.
The Company pays royalties to license music rights and may be adversely
affected if such royalties are increased
We pay performance royalties to songwriters and publishers through contracts
negotiated with performing rights societies such as The American Society of
Composers Authors and Publishers ("ASCAP") and Broadcast Music, Inc., and
publishing or mechanical royalties to publishers and collectives that represent
their interests, such as The Harry Fox Agency-a collective that represents
publishers and collects royalties on their behalf.
If mechanical royalty rates for digital music are increased, there can be no
assurance that the Company will be able to pass through such increased rates to
its customers. As a result, our results of operations and financial condition
may be adversely affected.
We also secure rights to music directly from songwriters. There is no assurance
that it will be able to secure such rights, licenses and content in the future
on commercially reasonable terms, if at all. Limitations on the availability of
certain musical works may result in the discontinuance of certain programs, and
as a result, may lead to increased client churn.
The Company depends upon suppliers for the manufacture of its proprietary media
players, and the termination of its arrangements with these suppliers could
materially affect its business
We rely on suppliers to manufacture its proprietary media players. In the event
these agreements are terminated, management believes that we will be able to
find alternative suppliers. If it is unable to obtain alternative suppliers on
a timely basis, or at all, or if it experiences significant delays in shipment,
we may be forced to suspend or cancel delivery of products and services to new
accounts which may have a material adverse effect upon its business. If we are
unable to obtain an adequate supply of components meeting its standards of
reliability, accuracy and performance, the Company would be materially and
adversely affected.
Possible infringement by third parties of intellectual property rights could
have a material adverse effect on the Company's business, financial condition
and results of operations
We distribute digital music content to its business music consumers via its
proprietary media players. We cannot be certain that the steps it has taken to
protect its intellectual property rights will be adequate or that third parties
will not infringe or misappropriate its proprietary rights. To protect its
proprietary rights, we depend on a combination of patent, trademark, copyright
and trade secret laws, confidentiality agreements with its employees and third
parties and protective contractual provisions. These efforts to protect its
intellectual property rights may not be effective in preventing
misappropriation of its technology. These efforts also may not prevent the
development and design by others of products or technologies similar to,
competitive with or superior to those developed by the Company. Any of these
results could reduce the value of the Company's intellectual property. In
addition, any infringement or misappropriation by third parties could have a
material adverse effect on our business, financial condition and results of
operations.
The Company may be liable if third parties misappropriate its users' and
customers' personal information
Third parties may be able to hack into or otherwise compromise our network
security or otherwise misappropriate its users' personal information or credit
card information. If our network security is compromised, we could be subject
to liability arising from claims related to, among other things, unauthorized
purchases with credit card information, impersonation or other similar fraud
claims or other misuse of personal information, such as claims for unauthorized
marketing purposes. In such circumstances, we also could be liable for failing
to provide timely notice of a data security breach affecting certain types of
personal information in accordance with the growing number of notification
statutes. Consumer protection privacy regulations could impair our ability to
obtain information about its users, which could result in decreased advertising
revenues.
Our network also uses "cookies" to track user behavior and preferences. A
cookie is information keyed to a specific server, file pathway or directory
location that is stored on a user's hard drive or browser, possibly without the
user's knowledge, but is generally removable by the user. We use information
gathered from cookies to tailor content to users of its network and such
information may also be provided to advertisers on an aggregate basis. In
addition, advertisers may themselves use cookies to track user behavior and
preferences. A number of internet commentators, advocates and governmental
bodies in the United States and other countries have urged the passage of laws
directly or indirectly limiting or abolishing the use of cookies. Other
tracking technologies, such as so-called "pixel tags" or "clear GIFs", are also
coming under increasing scrutiny by legislators, regulators and consumers,
imposing liability risks on our business. In addition, legal restrictions on
cookies, pixel tags and other tracking technologies may make it more difficult
for us to tailor content to its users, making our network less attractive to
users. Similarly, the unavailability of cookies, pixel tags and other tracking
technologies may restrict the use of targeted advertising, making our network
less attractive to advertisers and causing it to lose significant advertising
revenues.
Government regulation of the internet and e-commerce is evolving and
unfavorable changes could harm our business
We are subject to general business regulations and laws, as well as regulations
and laws specifically governing the internet and e-commerce. Existing and
future laws and regulations may impede the growth of the internet or online
services. These regulations and laws may cover taxation, privacy, data
protection, pricing, content, copyrights, distribution, electronic contracts
and other communications, consumer protection, and the characteristics and
quality of products and services. It is not clear how existing laws governing
issues such as property ownership, libel, and personal privacy apply to the
internet and e-commerce. Unfavorable regulations and laws could diminish the
demand for our products and services and increase its cost of doing business.
The locations of the Company's users expose it to foreign privacy and data
security laws and may increase the Company's liability, subject it to
non-uniform standards and require it to modify its practices
Our users are located in the United States and around the world. As a result,
the Company collects and processes the personal data of individuals who live in
many different countries. Privacy regulators in certain of those countries have
publicly stated that foreign entities (including entities based in the United
States) may render themselves subject to those countries' privacy laws and the
jurisdiction of such regulators by collecting or processing the personal data
of those countries' residents, even if such entities have no physical or legal
presence there. Consequently, we may be obligated to comply with the privacy
and data security laws of certain foreign countries.
Our exposure to Canadian, European and other foreign countries' privacy and
data security laws impacts its ability to collect and use personal data, and
increases its legal compliance costs and may expose the Company to liability.
As such laws proliferate, there may be uncertainty regarding their application
or interpretation, which consequently increases our potential liability. Even
if a claim of non-compliance against the Company does not ultimately result in
liability, investigating or responding to a claim may present a significant
cost. Future legislation may also require changes in our data collection
practices which may be expensive to implement.
In addition, enforcement of legislation prohibiting unsolicited e-mail
marketing in the European Union without prior explicit consent is increasing in
several European countries, including France, Germany and Italy, which
activities could negatively affect the Company's business in Europe and create
further costs for it.
Evolving industry
We sell digital music at prices which are based, to a large extent, on the
price third party digital music retailers charge to consumers. The Company has
limited ability to influence the pricing models of the digital entertainment
services. While the major record labels were unsuccessful in their recent
attempt to change the pricing structure, there is no assurance that they will
not attempt to change the pricing structure in the future or that the digital
music retailers will not initiate such a change that could result in lower
pricing or tiered pricing that could reduce the amount of revenue we receive.
In addition, the popularity of digital music retailers that offer digital music
through subscription and other pricing models is increasing. The revenue we
earn per individual music recording is generally less under these models than
what it receives through sales of music outside of a subscription service.
Additionally, digital music services at present generally accept all the music
content that the Company and other distributors deliver to them. However, if
the digital music services in the future decide to limit the types or amount of
music recordings they will accept from content owners and distributors like the
Company, or limit the number of music recordings they will post for sale, or
change their current stocking plans, for instance by removing music recordings
that do not meet minimum sales thresholds or other criteria, our revenue may be
reduced.
Piracy is likely to continue to negatively impact the potential revenue of the
Company
A portion of our revenue comes from the sale of its digital content over the
Internet and wireless, cable and mobile networks, which is subject to
unauthorized consumer copying and widespread dissemination without an economic
return to the Company. Global piracy is a significant threat to the
entertainment industry generally and to the Company. Unauthorized copies and
piracy have contributed to the decrease in the volume of legitimate sales of
music and video content and have put pressure on the price of legitimate sales.
This may result in a reduction in our revenue.
The Company does not expect to pay dividends and there are potential adverse
tax consequences from the payment of dividends on the Common Shares
The Company has not paid any cash dividends with respect to its Common Shares,
and it is unlikely that we will pay any dividends on the Common Shares in the
foreseeable future. However, dividends received by shareholders could be
subject to applicable withholding taxes and the Company recommends that such
shareholders seek the appropriate professional advice in this regard.
Litigation
Mood is currently defending itself against a number of legal claims. While we
believe these claims to be without merit, and are vigorously defending
ourselves, Mood cannot guarantee that our efforts will be successful or that it
will reach commercially reasonable settlement terms. A negative judgment or the
costs of a protracted defense could materially affect the Company's earnings.
Reliance on debt facilities
A portion of our credit facilities bear interest at floating interest rates
and, therefore, are subject to fluctuations in interest rates. Interest rate
fluctuations are beyond our control and there can be no assurance that interest
rates will not have a material adverse effect on the Company's financial
performance. We have debt and owe money to creditors including banks and
holders of convertible debentures and the Notes. Such debt is secured against
the Company's assets or guaranteed by certain of our subsidiaries and is
subject to certain covenants being met. These covenants could reduce our
flexibility in conducting our operations and may create a risk of default on
our debt if the Company cannot satisfy or continue to satisfy these covenants.
Should we fail to satisfy or continue to satisfy our covenants and if our debt
is accelerated or required to be redeemed, we will need to find new sources of
finance or else cede ownership of some or all of our assets which may have a
material adverse effect on the business of the Company. The Company may also
issue Common Shares to refinance some of its indebtedness. Issuances of a
substantial number of additional Common Shares may adversely affect prevailing
market prices for the Common Shares. With any additional issuance of Common
Shares, investors will suffer dilution to their voting power and the Company
may experience dilution in its earnings per Common Share.
Foreign currency exchange risk
We operates in the US, Canada and internationally. The functional currency of
the Company is US dollars and a significant number of our transactions are
recorded in Canadian dollars and Euros. Foreign currency exchange risk arises
because the amount of the local currency income, expenses, cash flows,
receivables and payables for transactions denominated in foreign currencies may
vary due to changes in exchange rates ("transaction exposures") and because the
non-US denominated financial statements of the Company's subsidiaries may vary
on consolidation into US dollars ("translation exposures").
The most significant translation exposure arises from the Euro currency. We are
required to revalue the Euro denominated net assets of the European
subsidiaries at the end of each period with the foreign currency translation
gain or loss recorded in other comprehensive income. The Company does not
currently hedge translation exposures. Since the financial statements of Muzak
and DMX are denominated in US dollars, the risk associated with translation
exposures has reduced following the acquisition of Muzak and DMX. The most
significant transaction exposure arises as a result of a significant level of
US dollar transactions occurring within the Canadian operations.
Interest rate risk
Our interest rate risk arises on borrowings outstanding under the 2014 First
Lien Credit Facility, which bears interest at a floating rate. However the
level of interest rate risk is mitigated by the fact that the 2014 First Lien
Credit Facility carries an interest rate floor which currently exceeds LIBOR.
We also purchased an interest rate cap in 2011 to protect against increasing
LIBOR rates. This cap expires in August 2014.
Liquidity risk
Liquidity risk arises through excess of financial obligations over available
financial assets due at any point in time. Our objective in managing liquidity
risk is to maintain sufficient readily available reserves in order to meet
Mood's liquidity requirements at any point in time. We achieve this by
maintaining sufficient cash and through the availability of funding from the
committed 2014 First Lien Credit Facility.
Credit risk
Credit risk arises from cash held with banks and credit exposure to customers
on outstanding accounts receivable balances. The maximum exposure to credit
risk is equal to the carrying value of the financial assets. The objective of
managing counterparty credit risk is to prevent losses in financial assets. We
assess the credit quality of the counterparties, taking into account their
financial position, past experience and other factors. Management also monitors
payment performance and the utilization of credit limits of customers.
Further detail is provided in the "Risk Factors" section of the Company's AIF,
which can be found at www.sedar.com.
Forward-Looking Statements
Certain statements in this management's discussion and analysis contains
"forward-looking" statements that involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. When used in this management's discussion and
analysis, such statements use such words as "may," "will," "intend," "should,"
"expect," "expect to," "believe," "plan," "anticipate," "estimate," "predict,"
"potential," "continue," the negative of these terms or other similar
terminology. These statements reflect current expectations regarding future
events and operating performance and speak only as of the date of this
management's discussion and analysis. Forward-looking statements involve
significant risks and uncertainties, should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or not such results will be achieved. A number of factors could cause
actual results to differ materially from the results discussed in the
forward-looking statements, including, but not limited to, the impact of
general market, industry, credit and economic conditions and other risks
described herein and in the Company's AIF, which can be found at www.sedar.com.
These forward-looking statements are made as of the date of release of this
management's discussion and analysis, and the Company does not assume any
obligation to update or revise them to reflect new events or circumstances.
For further information:
Investor Inquiries
Randal Rudniski
Mood Media Corporation
Tel: +1 (512) 592 2438
Email: randal.rudniski@moodmedia.com
Dominic Morley
Panmure Gordon (UK) Limited
+44 020 7886 2500
North America Media Inquiries
Sumter Cox
Mood Media Corporation
Senior Director of Marketing and Communications
Tel: +1 (803) 242 9147
Mood Media (LSE:MM.)
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