MOOD MEDIA CORP
Mood Media Reports Third Quarter 2014 Financial and Operating Results
Grows EBITDA Sequentially and Year-Over-Year
Reiterates 2014 EBITDA Guidance
Expects to Achieve Annualized Cost Savings of at Least $9 to $10 Million
from Integration and Synergy Activities
TORONTO, Nov. 12, 2014 /CNW/ - Mood Media Corporation ("Mood Media," "Mood"
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 third quarter of 2014 and provided an update on the
Company's progress executing against its strategic and operational plans.
Recent Highlights
- Mood achieved Q3 revenues of $124.1 million and EBITDA of $26.3 million
- Strong EBITDA performance in Q3:
- EBITDA was up year-over-year and grew nearly 10% sequentially
- Mood's Q3 EBITDA performance is the best in seven quarters on a pro-forma
basis excluding the impact of the sale of the Mood Latin America and Canadian
accounts and the impact of Muzak Independent Affiliate settlements
- All four Mood business units, North America, International, Technomedia and BIS,
posted sequential gains in EBITDA compared to Q2, and all but BIS achieved revenue
increases
- The Company continued to successfully implement its global transformation,
integration and consolidation activities; Mood now expects to deliver at least
$9 to $10 million in annualized cost savings by year-end 2014, excluding several
unrealized opportunities still in the early stages
- Mood signed a Premier U.S. Visual deal that is 5 times larger than its previous
largest U.S. QSR Visual win and 3 times larger than its previous largest U.S.
Visual deal
- Mood further expanded its Local Sales team, broadened its sales channels and
introduced new and innovative solutions
- The Company reached several significant deals in Mood International and Technomedia
resulting from cross-selling initiatives, most notably including an agreement for
more than $5 million in equipment and labor sales
- Mood reiterated its 2014 financial outlook to deliver EBITDA that is flat to
slightly up compared with 2013 performance
"We are pleased to see that our efforts to improve efficiencies and reduce our cost
structure are beginning to bear fruit as indicated by the nearly 10% sequential
improvement in EBITDA, as well as the growth we achieved relative to the prior year,"
said Steve Richards, President and CEO of Mood Media. "The improvement in our EBITDA
is consistent with the expectation for accelerating growth in the back half of 2014
that we outlined earlier in the year and shows that we are on track to achieve our full
year EBITDA guidance of flat to slightly up relative to 2013.
"In the third quarter, we made significant progress executing on our transformation
initiatives, which are driving expense reductions, enhancing revenues and improving
profitability," continued Mr. Richards. "We generated momentum across our key solution
platforms, developed and launched innovative products, such as Mood Social WiFi, and
leveraged Mood technology to build new capabilities for our clients and their customers.
We continued to make progress building out our Local Sales teams and establishing
partnerships that not only broaden our sales distribution channels, but expand our suite
of solutions. Notably, we signed several exciting new clients and projects in Visual,
Premier and International, and further developed our solid pipeline of opportunities in
North America, International and Technomedia. We also advanced our efforts to cross-sell
our solutions between Mood entities, which resulted in Mood International and Technomedia
landing several significant and exciting deals in the quarter.
"In addition, we made significant progress executing on Waves 2 and 3 of our cost saving
program, which we now expect to deliver at least $9 to $10 million in annualized cost
savings by the end of 2014, excluding several unrealized opportunities still in their
early stages," continued Mr. Richards. "Looking ahead, we remain focused on investing
in opportunities to drive top-line growth and executing on our programs to improve
operating margins. Our efforts are delivering results and beginning to demonstrate the
power of our operating model and strategy to generate enhanced Mood value and returns.
As we head into the fourth quarter and 2015, we believe we are well positioned to drive
growth and enhance shareholder value."
Third Quarter Financial Results
The Company reported Q3 revenues of $124.1 million and EBITDA of $26.3 million, both up
sequentially compared with Q2. Net loss per share from continuing operations was ($0.11)
compared with net loss per share of ($0.51) in the prior-year period and net loss per
share of ($0.18) in Q2. The Company's third quarter revenue and EBITDA performance was
impacted by the sale of its Latin American and Canadian accounts. Before adjusting for
these disposals, the Company's revenues were down 1% and EBITDA grew by $360,000 relative
to the prior year. Adjusting for these disposals, the Company's revenues would have been
up 1% and EBITDA would have improved by 5% on an underlying basis relative to the prior
year. EBITDA performance was also aided by a $2.8 million reduction in operating expenses
relative to the prior year, which was attributable primarily to the positive impact of its
integration and synergy programs in its North American, International and head office
operations.
Other expense totaled $7.3 million in the quarter compared with $11.5 million in the
prior year. Other expense in the quarter was comprised primarily of restructuring
expenses pertaining to severance expense in Mood International and BIS related to
the Company's integration and synergy program as well as onerous lease charges.
Key Performance Indicators
Q1.13 Q2.13 Q3.13 Q4.13 2013 Q1.14 Q2.14 Adjustment Q2.14* Q3.14*
Adjusted Reported
Audio sites 428,835 427,038 428,085 428,095 428,095 423,796 418,513 (11,155) 407,358 406,139
Visual sites 11,552 12,115 12,479 12,666 12,666 12,997 13,821 (498) 13,323 13,558
Total sites 440,387 439,153 440,564 440,761 440,761 436,793 432,334 (11,653) 420,681 419,697
Audio ARPU $ 47.19 $ 46.25 $ 45.65 $ 45.62 $ 46.17 $ 45.35 $ 45.17 - - $ 44.83
Visual ARPU $ 89.78 $ 83.42 $ 89.21 $ 81.27 $ 84.30 $ 84.59 $ 85.08 - - $ 83.60
Blended ARPU $ 48.28 $ 47.25 $ 46.87 $ 46.64 $ 47.23 $ 46.50 $ 46.40 - - $ 46.09
Audio gross
additions 11,599 9,960 9,208 9,765 40,532 10,112 6,981 - - 9,279
Visual gross
additions 1,092 699 497 1,219 3,507 478 996 - - 761
Total gross
additions 12,691 10,659 9,705 10,984 44,039 10,590 7,977 - - 10,040
Audio
monthly churn 0.8% 0.9% 0.6% 0.8% 0.8% 1.1% 1.0% - - 0.9%
Visual
monthly churn 1.4% 0.4% 0.4% 2.8% 1.3% 0.4% 0.4% - - 1.3%
Total
monthly churn 0.8% 0.9% 0.6% 0.8% 0.8% 1.1% 0.9% - - 0.9%
* Note: Effective July 1 the Company transferred 8,409 audio sites and 396 visual
sites as a result of the disposal of its Canadian commercial accounts to Stingray.
The Company also conducted a one-time adjustment to its site base to reflect the
settlement of the Muzak IA agreement, which resulted in a decrease of 2,848 sites,
including 102 visual sites.
In the third quarter, the number of total Company-owned sites declined by 12,637
relative to the second quarter. The decrease in sites was primarily attributable to
its sale of the Company's Canadian commercial accounts and to a lesser degree to a
one-time adjustment to its site base reflecting the settlement of the Muzak IA agreement
in 2013 in connection with its acquisition and integration of DMX. Excluding these
factors, the number of Company-owned sites decreased by 984 relative to the prior
quarter.
Monthly churn was 0.9% in the third quarter compared with 0.9% in the second quarter,
with Audio churn at 0.9% and Visual churn at 1.3%. The Company grew its Visual site
base by 235 sites on an adjusted basis relative to the second quarter.
Blended ARPU declined by 1.7% year-over-year in the third quarter to $46.09 per month,
which continues the pattern of sequential improvement compared with a decline of 5.2%
year-over-year in the third quarter of 2013, and remained stable compared with the
ARPU in recent quarters. Audio ARPU decreased by 1.8% relative to the prior year to
$44.83 compared with a year-over-year decrease of 5.6% in the third quarter of 2013
while Visual ARPU decreased by 6.3% year-over-year to $83.60 but is in line with the
trailing three quarter average Visual ARPU. Audio ARPU was stable in North America
and declined slightly in its International operations. Visual ARPU increased in North
America and decreased in its International operations, although International Visual
ARPU has improved sequentially over the past several quarters in local currency.
Conference Call
As previously announced, the Company will hold a conference call on November 13, 2014,
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 November 12, 2014, is a summary of our
third quarter results, and should be read in conjunction with our third 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", "Mood" and "the
Company" refer to Mood Media Corporation and our subsidiaries.
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF LOSS
Unaudited
For the three and nine months ended September 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2014 2013 2014 2013
Continuing operations
Revenue $124,137 $125,662 $367,008 $381,017
Expenses
Cost of sales (excludes
depreciation and
amortization) 58,337 57,471 169,107 170,634
Operating expenses 39,520 42,272 124,246 130,844
Depreciation and amortization 17,498 16,925 53,538 51,145
Impairment to goodwill - 75,000 - 75,000
Share-based compensation 379 1,172 991 1,860
Other expenses 7,302 11,460 16,641 25,270
Foreign exchange loss (gain)
on financing transactions 9,658 (6,634) 10,418 (4,777)
Finance costs, net 13,850 13,866 55,370 24,360
Loss for the period before taxes (22,407) (85,870) (63,303) (93,319)
Income tax charge (credit) (2,409) (16) (3,175) 6,875
Loss for the period from
continuing operations (19,998) (85,854) (60,128) (100,194)
Discontinued operations
Loss after tax from
discontinued operations - (1,751) - (16,487)
Loss for the period (19,998) (87,605) (60,128) (116,681)
Attributable to:
Owners of the parent (20,004) (87,695) (60,177) (117,009)
Non-controlling interests 6 90 49 328
$(19,998) $(87,605) $(60,128) $(116,681)
Net loss per share
Basic and diluted $(0.11) $(0.51) $(0.34) $(0.68)
Basic and diluted from
continuing operations (0.11) (0.50) (0.34) (0.58)
Basic and diluted from
discontinued operations - (0.01) - (0.10)
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 all 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 November 12, 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 Adjusted EBITDA information as a supplemental figure
because management believes it provides useful information regarding operating
performance. Adjusted 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 Adjusted 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 Adjusted 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 nine months ended September 30, 2014
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
As at September 30, 2014
In thousands of US dollars, unless otherwise stated
Notes September 30, December 31,
2014 2013
ASSETS
Current assets
Cash $29,586 $22,410
Restricted cash 409 713
Trade and other receivables 96,236 97,974
Income taxes recoverable 1,258 1,418
Inventory 33,731 31,033
Prepaid expenses 14,121 11,924
Deferred costs 7,682 8,198
Total current assets 183,023 173,670
Non-current assets
Deferred costs 9,412 8,623
Property and equipment 46,475 53,318
Other financial assets 11 10 97
Investment in associates 761 724
Intangible assets 277,351 311,261
Goodwill 16,19 248,403 264,142
Total assets 765,435 811,835
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables 114,277 115,038
Income taxes payable 1,627 3,219
Deferred revenue 16,858 15,432
Other financial liabilities 11 776 1,091
Current portion of long-term debt 10 2,350 2,132
Total current liabilities 135,888 136,912
Non-current liabilities
Deferred revenue 6,549 7,253
Deferred tax liabilities 31,745 38,735
Other financial liabilities 11 2,854 6,638
Long-term debt 10 621,741 597,062
Total liabilities 798,777 786,600
Equity
Share capital 14 326,956 323,318
Contributed surplus 33,972 33,209
Foreign exchange translation reserve 2,869 5,656
Deficit (397,353) (337,176)
Equity attributable to owners of
the parent (33,556) 25,007
Non-controlling interests 214 228
Total equity (33,342) 25,235
Total liabilities and equity $765,435 $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 nine months ended September 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Nine months ended
September September September September
Notes 30, 2014 30, 2013 30, 2014 30, 2013
Continuing operations
Revenue 5 $124,137 $125,662 $367,008 $381,017
Expenses
Cost of sales (excludes
depreciation and
amortization) 58,337 57,471 169,107 170,634
Operating expenses 39,520 42,272 124,246 130,844
Depreciation and amortization 17,498 16,925 53,538 51,145
Impairment to goodwill - 75,000 - 75,000
Share-based compensation 13 379 1,172 991 1,860
Other expenses 6 7,302 11,460 16,641 25,270
Foreign exchange loss (gain)
on financing transactions 9,658 (6,634) 10,418 (4,777)
Finance costs, net 7 13,850 13,866 55,370 24,360
Loss for the period before
taxes (22,407) (85,870) (63,303) (93,319)
Income tax charge (credit) 8 (2,409) (16) (3,175) 6,875
Loss for the period from
continuing operations (19,998) (85,854) (60,128) (100,194)
Discontinued operations
Loss after tax from
discontinued operations 15 - (1,751) - (16,487)
Loss for the period (19,998) (87,605) (60,128) (116,681)
Attributable to:
Owners of the parent (20,004) (87,695) (60,177) (117,009)
Non-controlling interests 6 90 49 328
$(19,998) $(87,605) $(60,128) $(116,681)
Net loss per share
Basic and diluted 9 $(0.11) $(0.51) $(0.34) $(0.68)
Basic and diluted from
continuing operations 9 (0.11) (0.50) (0.34) (0.58)
Basic and diluted from
discontinued operations 9 - (0.01) - (0.10)
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 nine months ended September 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Loss for the period $(19,998) $(87,605) $(60,128) $(116,681)
Items that may be reclassified
subsequently to the loss for the
period
Exchange differences on
translation of foreign operations (2,748) 3,470 (2,787) 855
Amount recognized through the
interim consolidated statements
of loss - - - (1,510)
Other comprehensive income (loss)
for the period, net of tax (2,748) 3,470 (2,787) (655)
Total comprehensive loss for the
period, net of tax (22,746) (84,135) (62,915) (117,336)
Attributable to:
Owners of the parent (22,752) (84,235) (62,964) (117,672)
Non-controlling interests 6 100 49 336
$(22,746) $(84,135) $(62,915) $(117,336)
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 nine months ended September 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Nine months ended
Notes September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Operating activities
Loss for the period before taxes
- continuing operations ($22,407) ($85,870) ($63,303) ($93,319)
Loss for the period before taxes
- discontinued operations 15 - (1,751) - (16,487)
(22,407) (87,621) (63,303) (109,806)
Non-cash adjustments to
reconcile loss for the period
before taxes to net cash flows
Depreciation of property and
equipment 5,815 6,718 19,208 21,084
Amortization and impairment of
intangible assets and goodwill 11,683 85,234 34,330 105,882
Loss (gain) on disposal of
property and equipment 87 1,751 (392) 9,145
Share-based compensation 13 379 1,172 991 1,860
Shares issued in lieu of
severance or consideration - - 2,588 -
Finance costs, net and foreign
exchange from financing 23,467 7,237 52,312 22,128
Loss on extinguishment of 2011
First Lien Credit Facility 41 - 13,476 -
Gain on disposal of Latin
America and DMX Canada assets 6 - - (6,478) -
Working capital adjustments
Decrease (increase) in trade and
other receivables (6,919) (4,005) 2,094 7,716
Increase in inventories (1,468) (3,417) (2,783) (6,063)
Increase (decrease) in trade and
other payables 2,664 7,054 (11,493) (10,782)
Increase (decrease) in deferred
revenue (3,035) (157) 662 4,210
10,307 13,966 41,212 45,374
Income taxes paid (1,269) (825) (3,756) (2,201)
Interest received 46 17 65 69
Net cash flows from operating
activities 9,084 13,158 37,521 43,242
Investing activities
Purchase of property and
equipment and intangible assets (8,030) (7,600) (25,701) (23,440)
Acquisition of businesses, net
of cash acquired - - - (2,347)
Proceeds from disposal of
discontinued operations - - - 2,000
Proceeds from disposal of Latin
America and DMX Canada assets - - 19,515 -
Proceeds from disposal of
property, equipment and other
assets - - 1,138 97
Net cash flows used in investing
activities (8,030) (7,600) (5,048) (23,690)
Financing activities
Repayment of borrowings (587) (533) (219,072) (1,599)
Proceeds from 2014 First Lien
Credit Facility - 235,000 -
Proceeds from exercise of share
options 34 - 819 -
Finance lease payments (185) (354) (877) (1,208)
Financing costs 2014 (51) - (9,256) -
Interest paid (4,292) (3,909) (31,078) (29,822)
Cost of extinguishment of
interest rate swap - - - (1,578)
Dividends paid to non-controlling
interest - (645) - (645)
Acquisition of non-controlling
interest - (4,000) - (4,000)
Net cash flows used in financing
activities (5,081) (9,441) (24,464) (38,852)
Net increase (decrease) in cash (4,027) (3,883) 8,009 (19,300)
Net foreign exchange gain (702) 747 (833) 589
Cash at beginning of period 34,315 30,809 22,410 46,384
Cash at end of period $29,586 $27,673 $29,586 $27,673
The accompanying notes form part of the interim consolidated financial statements
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited
For the nine months ended September 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 - - - (60,177) (60,177) 49 (60,128)
Translation of foreign
operations - - (2,787) - (2,787) - (2,787)
Total comprehensive
income (loss) - - (2,787) (60,177) (62,964) 49 (62,915)
Share-based compensation - 763 - - 763 - 763
Issue of share capital 14 2,820 - - - 2,820 - 2,820
Dividends paid to
non-controlling
interests - - - - - (63) (63)
Exercise of share
options 14 818 - - - 818 - 818
As at September 30, 2014 $326,956 $33,972 $2,869 $(397,353) $(33,556) $214 $(33,342)
The accompanying notes form part of the interim consolidated financial statements
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited
For the nine months ended September 30, 2013
In thousands of US dollars, unless otherwise stated
Foreign
Exchange Non-
Share Contributed Translation Discontinued 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 - - - (117,009) - (117,009) 328 (116,681)
Translation of
foreign operations - - 847 - - 847 8 855
Discontinued
operations - - - - (1,510) (1,510) - (1,510)
Total comprehensive
income (loss) - - 847 (117,009) (1,510) (117,672) 336 (117,336)
Share-based
compensation 13 - 1,860 - - - 1,860 - 1,860
Dividends paid to
non-controlling
interests - - - - - - (645) (645)
Acquisition of
non-controlling
interest - - - (2,958) - (2,958) (1,042) (4,000)
As at September
30, 2013 $323,318 $32,794 $3,010 $(324,636) $- $34,486 $242 $34,728
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 nine months ended September 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 consolidated
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 consolidated financial statements. Accordingly, these
interim consolidated financial statements should be read in conjunction with
the Company's annual consolidated 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 November 12, 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 Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Rendering of services $85,466 $90,062 $253,621 $268,595
Sale of goods 37,804 34,680 110,921 109,561
Royalties 867 920 2,466 2,861
$124,137 $125,662 $367,008 $381,017
6. Other expenses
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Transaction costs (i) $29 $2,802 $1,430 $10,080
Restructuring and integration
costs (ii) 7,273 5,158 17,582 11,690
Settlements and resolutions
(iii) - 3,500 4,226 3,500
Net gain on disposal of
certain assets (iv) - - (6,597) -
$7,302 $11,460 $16,641 $25,270
(i) Transaction costs incurred during the three and nine months ended
September 30, 2014 and September 30, 2013 primarily relate to the Company's
strategic and operational review as well as costs associated with prior
acquisitions.
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Legal and professional fees $- $1,485 $- $4,047
Consultant fees 29 473 $1,430 2,670
Other transaction costs (a) - 844 - 3,363
$29 $2,802 $1,430 $10,080
(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.
Subsequent to the third quarter ended September 30, 2014, on October 7, 2014,
the Company amended the securities purchase agreement for Technomedia. The
amendment revised the existing contingent consideration earn-out. The
amendment stipulates for the calendar year 2014 and each of the following three
years a cash payment equal to a percentage of the subsidiary's earnings in the
event the subsidiary achieves certain performance thresholds.
(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 Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Severance costs $2,595 $3,775 $4,099 $8,202
Other integration costs (a) 4,678 1,383 13,483 3,488
$7,273 $5,158 $17,582 $11,690
(a) Other integration costs include charges for various real estate
consolidations during the three and nine months ended September 30, 2014 and
September 30, 2013 and $3,100 for an onerous contract during the nine months
ended September 30, 2014.
(iii) During the nine months ended September 30, 2014, the Company negotiated
and finalized settlements including other liabilities and legal matters related
to DMX and Muzak. Settlements and resolutions in the comparative 2013 period
include $3,500 for a settlement involving certain terms of our arrangements
with independent affiliates that were revised to resolve matters related to the
acquired businesses.
(iv) The Company recognized gains from various sales and disposals of assets
during the nine months ended September 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 the final gain calculation
is partially contingent on the achievement of certain future key indicators.
7. Finance costs, net
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Interest expense $13,648 $13,421 $40,435 $39,448
Change in fair value of
financial instruments (i) (640) 539 (1,500) (677)
Change in fair value of
deferred and contingent
consideration (ii) - (1,081) - (17,591)
Cost of extinguishment of
2011 First Lien Credit
Facility (iii) 41 - 13,476 -
Other finance costs, net (iv) 801 987 2,959 3,180
$13,850 $13,866 $55,370 $24,360
(i) Change in fair value of financial instruments consists of:
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Cross-currency interest rate
swap (a) $- $- $- $(699)
Interest rate floor under
2011 First Lien Credit
Facility (b) - 25 (584) (3,014)
Interest rate floor under
2014 First Lien Credit
Facility (b) (738) - (1,003) -
Interest rate cap (c) - 3 - 9
Prepayment option on 9.25%
Notes (d) 98 511 87 3,027
$(640) $539 $(1,500) $(677)
(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 nine months
ended September 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.
(c) On August 2, 2011, 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. This interest rate cap matured on
August 4, 2014. Any changes in fair value in the interest rate cap are
recorded as finance costs, net in the interim consolidated statements of loss.
(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 Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
ICI deferred consideration $- $185 $- $537
Muzak contingent
consideration (a) - (1,266) - (18,128)
$- $(1,081) $- $(17,591)
(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 the closing in the event
that the Company achieves minimum earnings before interest, tax and
depreciation ("EBITDA") targets. The Company recorded this potential contingent
consideration at the established fair value at each reporting period end by
using the probability of expected outcomes. The Company finalized its
contingent obligation during the three months ended September 30, 2014
resulting in no additional consideration required.
(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
$13,476.
Cost of extinguishment of the 2011 First Lien Credit Facility consists of:
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Accelerated discount for
deferred financing costs $- $- $6,074 $-
Non-cash discount for the
2011 interest rate floor - - 3,636 -
Early extinguishment fee (a) - - 2,074 -
Other expenses incurred on
extinguishment (a) 41 - 7,174 -
Extinguishment of 2011
interest rate floor - - (5,482) -
$41 $- $13,476 $-
(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 $7,174 were cash
payments related to the extinguishment of the 2011 First Lien Credit
Facilities.
(iv) Other finance costs, net consist of:
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Accretion interest on
convertible debentures $463 $396 $1,658 $1,177
Accretion of the 2011 First
Lien Credit Facilities - 298 376 898
Accretion of the 9.25%
Senior Unsecured Notes 276 275 828 825
Accretion of debt related to
the 2011 interest rate floor - 223 221 668
Accretion of debt related to
the 2014 interest rate floor 192 - 321 -
Amortization of the debt
premium arising from the
prepayment option (99) (99) (298) (317)
Other (a) (31) (106) (147) (71)
$801 $987 $2,959 $3,180
(a) The remaining credit represents interest income and share of profits from
associates.
8. Income taxes
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Current tax expense
Current taxes on income
for the period $(224) $1,191 $2,459 $3,642
Total current taxes (224) 1,191 2,459 3,642
Deferred tax expense
Origination and reversal
of temporary differences (2,185) (1,207) (5,634) 3,233
Total deferred tax charge
(credit) (2,185) (1,207) (5,634) 3,233
Total income tax charge
(credit) $(2,409) $(16) $(3,175) $6,875
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 Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Weighted and diluted average
common shares (000's) 179,699 171,640 176,160 171,640
Total operations
Basic EPS $(0.11) $(0.51) $(0.34) $(0.68)
Diluted EPS (0.11) (0.51) (0.34) (0.68)
Continuing operations
Basic EPS $(0.11) $(0.50) $(0.34) $(0.58)
Diluted EPS (0.11) (0.50) (0.34) (0.58)
Discontinued operations
Basic EPS $- $(0.01) $- $(0.10)
Diluted EPS - (0.01) - (0.10)
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
interest September December
rate 30, 2014 31, 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) (6,793) (7,618)
Unamortized premium - prepayment
option (iii) 2,406 2,703
345,613 345,085
2011 First Lien Credit Facility (iv) 7.00-7.75% - 215,765
Unamortized discount - financing
costs(v) - (6,455)
Unamortized discount - 2011
interest rate floor (vi) - (3,858)
- 205,452
2014 First Lien Credit Facility (iv) 7.00% 231,476 -
Unamortized discount - 2014 interest
rate floor (vi) (3,531) -
227,945 -
10% Unsecured convertible debentures
(vii) 10.00% 48,183 46,525
621,741 597,062
Total loans and borrowings $624,091 $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 as it 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 September
30, 2014, repayments of $588 were made on the 2014 First Lien Term Loan (three
months ended September 30, 2013 - $533) and during the nine months ended
September 30, 2014, repayments of $1,708 were made on the 2014 First Lien Term
Loan and the 2011 First Lien Term Loan (nine months ended September 30, 2013 -
$1,599).
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 at September 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 September 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 $13,476 (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 matured on August 4, 2014. The interest rate cap was 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 2011 the
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, 2011 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
September 30, 2014 $32,122 $4,644 $13,500 $50,266
Reconciliation of carrying value and outstanding principal as at September 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 1,330 62 266 1,658
Carrying value as at
September 30, 2014 30,566 4,552 13,065 48,183
Unamortized balance 1,556 92 435 2,083
Principal outstanding as
at September 30, 2014 $32,122 $4,644 $13,500 $50,266
The unamortized balance for the New Debentures includes unamortized financing
costs as at September 30, 2014 of $414 (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
September 30, December 31,
2014 2013
Prepayment option $10 $97
Total other financial assets $10 $97
Due in more than one year $10 $97
Total other financial assets $10 $97
Other financial liabilities
September 30, December 31,
2014 2013
Finance leases $782 $1,663
2011 Interest rate floor - 6,066
2014 Interest rate floor 2,848 -
Total other financial liabilities $3,630 $7,729
Due in less than one year $776 $1,091
Due in more than one year 2,854 6,638
Total other financial liabilities $3,630 $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
September 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 September 30, 2014, with the
exception of the convertible debentures and the 9.25% Senior Unsecured Notes.
The September 30, 2014 book value of the convertible debentures outstanding was
$48,183 (December 31, 2013 - $46,525) and the fair value was $44,266 (December
31, 2013 - $43,670). The September 30, 2014 book value of the 9.25% Senior
Unsecured Notes was $345,613 (December 31, 2013 - $345,085) and the fair value
was $287,875 (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 September 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 $(2,848) $- $(2,848) $-
Prepayment option 10 - 10 -
Fair value as at December 31, 2013
Level 1
Quoted
prices Level 2
in 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 nine months ended September 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 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 August 19, 2014, 1,200,000 share options were granted with an exercise price
of CDN$0.52 (US$0.48). 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). On September
25, 2013, 2,000,000 share options were granted with an exercise price of
CDN$0.65 (US$0.63).
The expense recognized for the three months ended September 30, 2014 relating
to equity-settled share and option transactions for employees was $379 and for
the nine months ended September 30, 2014 was $991 (the three months ended
September 30, 2013 was $1,172 and for the nine months ended September 30, 2013
was $1,860.
Changes in the number of options, with their weighted average exercise prices
for the nine months ended September 30, 2014 and 2013, are summarized below:
September September
30, 2014 30, 2013
Weighted Weighted
average average
exercise exercise
Number price Number price
Outstanding at beginning
of period 18,818,300 $1.58 15,590,800 $1.92
Granted during the period 4,130,000 0.58 2,000,000 0.63
Exercised during the
period (3,600,000) 0.21 - -
Forfeited/expired during
the period (1,995,000) 2.40 (337,500) 2.81
Outstanding at end of
period 17,353,300 1.53 17,253,300 1.75
Exercisable at end of
period 8,423,300 $2.24 10,233,300 $1.48
The following information relates to share options that were outstanding as at
September 30, 2014:
Weighted average
remaining
Number of contractual life Weighted average
Range of exercise prices options (years) exercise price
$0.00-$0.30 100,000 4 $0.21
$0.31-$1.50 10,663,300 7 0.70
$1.51-$2.50 540,000 6 1.75
$2.51-$3.50 6,050,000 7 3.01
17,353,300 7 $1.53
Warrants
The following warrants were outstanding as at September 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 September 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 31, 2013 171,639,563 $323,318
Balance as at January 1, 2014 171,639,563 $323,318
Common shares issued, net of issue costs 4,527,556 2,820
Options exercised 3,600,000 818
Balance as at September 30, 2014 179,767,119 326,956
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 exited any residual activities.
The results of MME are as follows:
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Revenue $- $- $- $10,117
Expenses - - - 16,675
Operating loss - - - (6,558)
Loss on sale - 1,751 - 9,145
Impairment - - - 784
Loss before and after taxes
from discontinued operations $- $(1,751) $- $(16,487)
During the nine months ended September 30, 2013, the Company impaired property
and equipment of $784.
The net cash flows incurred by MME are as follows:
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Operating activities $- $1,525 $- $(2,906)
Investing activities - - - 1,216
Net cash outflow $- $1,525 $- $(1,690)
MME is no longer disclosed as a separate reportable segment in note 18.
16. Goodwill
September 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 (5,610) 5,813
Cost, end of the period 328,821 344,560
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 $248,403 $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 September 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 in Mood
International.
17. Commitments and contingencies
Operating leases
Future minimum rental payments under non-cancellable operating leases are as
follows:
September 30, December 31,
2014 2013
Within one year $15,375 $16,470
After one year but not more than five years 30,807 33,840
More than five years 2,232 3,652
$48,414 $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:
September 30, 2014 December 31, 2013
Minimum Present Minimum Present
payments value payments value
Within one year $973 $930 $1,468 $1,374
After one year but not more
than five years 6 3 573 268
Total minimum lease payments 979 933 2,041 1,642
Less amounts representing
finance charges (197) (197) (378) (378)
Present value of minimum lease
payments $782 $736 $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 September 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 interim consolidated
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 September 30, 2014
In-store In-store
media North media Consolidated
America International Other Group
Revenue $67,649 $45,886 $10,602 $124,137
Expenses
Cost of sales 30,001 20,285 8,051 58,337
Operating expenses 16,518 20,123 2,879 39,520
Segment profit (loss) (i) $21,130 $5,478 $(328) $26,280
Segment information, three months ended September 30, 2013
In-store In-store
media North media Consolidated
America International Other Group
Revenue $72,446 $44,978 $8,238 $125,662
Expenses
Cost of sales 31,902 19,405 6,164 57,471
Operating expenses 18,231 20,898 3,143 42,272
Segment profit (loss) (i) $22,313 $4,675 $(1,069) $25,919
Segment information, nine months ended September 30, 2014
In-store In-store
media North media Consolidated
America International Other Group
Revenue $200,644 $138,744 $27,620 $367,008
Expenses
Cost of sales 88,672 59,840 20,595 169,107
Operating expenses 51,523 63,053 9,670 124,246
Segment profit (loss) (i) $60,449 $15,851 $(2,645) $73,655
Segment information, nine months ended September 30, 2013
In-store In-store
media North media Consolidated
America International Other Group
Revenue $217,054 $134,935 $29,028 $381,017
Expenses
Cost of sales 93,595 55,831 21,208 170,634
Operating expenses 58,871 62,003 9,970 130,844
Segment profit (loss) (i) $64,588 $17,101 $(2,150) $79,539
Reconciliation of segment profit to Consolidated Group loss for the period
before taxes from continuing operations
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Segment profit (loss) (i) $26,280 $25,919 $73,655 $79,539
Depreciation and amortization 17,498 16,925 53,538 51,145
Impairment of goodwill - 75,000 - 75,000
Share-based compensation 379 1,172 991 1,860
Other expenses 7,302 11,460 16,641 25,270
Foreign exchange loss (gain)
on financing transactions 9,658 (6,634) 10,418 (4,777)
Finance costs, net 13,850 13,866 55,370 24,360
Loss for the period before
taxes from continuing
operations $(22,407) $(85,870) $(63,303) $(93,319)
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 Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
U.S. $74,041 $76,378 $219,493 $231,695
Canada 260 1,505 2,949 4,387
Netherlands 13,037 14,502 42,282 41,671
Other international 36,799 33,277 102,284 103,264
Total revenue $124,137 $125,662 $367,008 $381,017
Non-current assets
Non-current assets are derived from the following geographic areas based on the
location of the individual subsidiaries of the Company:
September 30, December 31,
2014 2013
U.S. $410,980 $435,174
Canada - 7,689
International 171,432 195,302
Total non-current assets $582,412 $638,165
19. Impairment testing of goodwill and intangible assets with indefinite lives
Goodwill acquired through business combinations and brands with indefinite
lives have been allocated to three groups of CGUs for impairment testing as
follows:
- Mood International
- Mood North America
- Technomedia
Carrying amount of goodwill and intangible assets with indefinite lives
allocated to each CGU
Mood International Mood North America Technomedia
September December September December September December
30, 2014 31, 2013 30, 2014 31, 2013 30, 2014 31, 2013
Goodwill $69,641 $75,249 $170,391 $180,522 $8,371 $8,371
Brands 13,569 14,530 - - - -
Valuation
Management identified indicators for impairment at September 30, 2013. The
Company considers the relationship between its market capitalization and its
book value, amongst other factors, when reviewing for indicators of impairment.
As a result, the Company recognized an impairment charge of $75,000 in Mood
International.
The recoverable amounts of the CGUs have been determined based on a fair value
less costs to sell calculation using cash flow projections from financial
budgets approved by senior management covering a one-year period. Cash flows
beyond the budgeted period are extrapolated using a growth rate that does not
exceed the long-term average growth rate for the industry.
20. Business combinations
Acquisition of DMX, ICI and Technomedia
On August 14, 2013 the Company acquired the remaining 30.84% non-controlling
interest of one of DMX's subsidiaries, AEI Collingham Holdings Company Ltd, for
$4,000. The difference of $2,958 between the consideration and the carrying
value of the additional interest acquired has been recognized as part of
retained deficit within equity.
On December 24, 2012, the Company acquired 100% of the issued and outstanding
shares of Technomedia. The Technomedia sale and purchase agreement contained a
working capital adjustment, which resulted in an additional payment of $525 in
the three months ended June 30, 2013.
On October 9, 2012, Muzak acquired certain assets and liabilities of ICI, one
of its largest franchises. The ICI sale and purchase agreement contained a
working capital adjustment, which resulted in an additional payment of $1,822
for the three months ended June 30, 2013.
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 November 12, 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
nine months ended September 30, 2014, the unaudited interim consolidated
financial statements and the related notes for the three and nine months ended
September 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 September 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. Mood Media's strategy is to
combine its media services into a single comprehensive experience solution, to
increase penetration of newly developed services, such as visuals, Wi-Fi and
mobile, by selling into its large existing client base, and to leverage its
leading market positions and solutions portfolio to enhance financial returns.
Our audio solutions emphasize the use of music to create a distinct atmosphere
within a commercial environment. 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. We are viewed as an established
distribution network by music producers, performance rights organizations and
third-party advertisers.
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, serve 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 generated approximately $9 million in
annualized savings from "Wave 1 Initiatives", which were initiatives
implemented in the fourth quarter of 2013. An additional $8 - $10 million in
annualized savings are expected 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. The Company is also developing plans for 2015 integration
initiatives with preliminary annualized savings expected to be in the range of
$4-$6 million.
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%
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
Convertible 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 $13,476 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 under a single
global brand, Mood, to better communicate our position as the global leader in
Experience Design and integrate our portfolio companies - Muzak, DMX and Mood
Media. 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 , Mood 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 of
Mood International. In March 2014, Ken Eissing was appointed President of 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. 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. Ross 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
Revenue to owners of the parent Basic and diluted EPS
Dis- Dis-
Continuing Continuing continued Continuing continued
Period operations operations operations Total operations operations
Q3-2014(6) $124,137 $(19,998) $- $(19,998) $(0.11) $-
Q2-2014(5) 119,881 (32,670) - (32,670) (0.18) -
Q1-2014(4) 122,990 (7,503) - (7,503) (0.04) (0.04)
Q4-2013 132,253 (12,625) 68 (12,557) (0.07) -
Q3-2013(3) 125,662 (85,944) (1,751) (85,695) (0.50) (0.01)
Q2-2013(2) 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(1) 131,946 (14,088) (13,203) (27,291) (0.08) (0.08)
1. The significant loss for the period 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.
2. The significant loss for the period is due to the recognition of the loss
on sale of the discontinued operation.
3. The significant loss for the period is due to the impairment of goodwill
in the period.
4. 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.
5. The increase in loss for the period 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.
6. The decrease in the loss vs the prior quarter is due to prior quarter's
recognition of the loss on extinguishment of the 2011 First Lien Credit
Facility offset by fluctuating foreign exchange rates, primarily the
weakening of the Euro on certain foreign subsidiaries' intercompany loans
denominated in US dollars rather than their native functional currencies.
Selected Financial Information
Mood Media Corporation
INTERIM CONSOLIDATED STATEMENTS OF LOSS
Unaudited
For the three and nine months ended September 30, 2014
In thousands of US dollars, unless otherwise stated
Three months ended Nine months ended
September September September September
30, 2014 30, 2013 30, 2014 30, 2013
Continuing operations
Revenue $124,137 $125,662 $367,008 $381,017
Expenses:
Cost of sales (excludes
depreciation and
amortization) 58,337 57,741 169,107 170,634
Operating expenses 39,520 42,272 124,246 130,844
Depreciation and
amortization 17,498 16,925 53,538 51,145
Impairment to goodwill - 75,000 - 75,000
Share-based compensation 379 1,172 991 1,860
Other expenses 7,302 11,460 16,641 25,270
Foreign exchange loss
(gain) on financing
transactions 9,658 (6,634) 10,418 (4,777)
Finance costs, net 13,850 13,866 55,370 24,360
Loss for the period before
taxes (22,407) (85,870) (63,303) (93,319)
Income tax charge (credit) (2,409) (16) (3,175) 6,875
Loss for the period from
continuing operations (19,998) (85,854) (60,128) (100,194)
Discontinued operations
Loss after tax from
discontinued operations - (1,751) - (16,487)
Loss for the period (19,998) (87,605) (60,128) (116,681)
Attributable to:
Owners of the parent (20,004) (87,695) (60,177) (117,009)
Non-controlling interests 6 90 49 328
$(19,998) $(87,605) $(60,128) $(116,681)
Net loss per share:
Basic and diluted $(0.11) $(0.51) $(0.34) $(0.68)
Basic and diluted from
continuing operations (0.11) (0.50) (0.34) (0.58)
Basic and diluted from
discontinued operations - (0.01) - (0.10)
September 30, December 31,
2014 2013
Total assets $765,435 $811,835
Total non-current liabilities 662,889 649,688
Operating Results
Three months ended September 30, 2014 compared to the three months ended
September 30, 2013
Revenue from continuing operations
We report our continuing operations in 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 September 30,
2014 and September 30, 2013 were as follows:
Three months ended
September September
30, 2014 30, 2013 Variance % Change
In-Store Media North America $67,649 $72,446 $(4,797) (6.6%)
In-Store Media International 45,886 44,978 908 2.0%
Other 10,602 8,238 2,364 28.7%
Total Consolidated Group $124,137 $125,662 $(1,525) (1.2%)
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 and royalties.
In-store Media North America revenue decreased by $4,797 for the three months
ended September 30, 2014 compared to the three months ended September 30, 2013,
primarily as a result of a decrease in recurring monthly revenue of approximately
$3,193 (which includes a $1.2M decrease in revenues for the sale of our residential
Latin America music operations sold on January 10, 2014 and $1M in revenues for
the sale of commercial accounts related to a Canadian portfolio sold on June 27,
2014 that are no longer included in our consolidated revenue numbers for the three
months ended September 30, 2014 and a reduction of approximately $1,946 in revenue
derived from equipment and installation fees.
In-Store Media International revenue increased by $908 for the three months
ended September 30, 2014 compared to the three months ended September 30, 2013,
primarily driven by an increase in equipment revenue.
The revenue from other segments increased by $2,364 due to an increase in
equipment revenue in Technomedia.
Cost of sales from continuing operations
Cost of sales were $58,337 for the three months ended September 30, 2014, an
increase of $866 compared to $57,471 for the three months ended September 30,
2013. Cost of sales as a percentage of revenue for the three months ended
September 30, 2014 was 47.0%, compared with 45.7% for the three months ended
September 30, 2013. The increase of 130 basis points in cost of sales as a
percentage of revenue is due to a reduction in recurring revenues, which has a
higher gross margin than our overall In-Store Media business as well as higher
revenues for our Technomedia business unit, which has a lower gross margin.
Operating expenses from continuing operations
Operating expenses were $39,520 for the three months ended September 30, 2014,
a decrease of $2,752 compared with $42,272 for the three months ended September
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 as
well as the initial impacts of Wave 2 & 3 initiatives. The Wave 1 business
efficiency and integration synergy program focused on streamlining the
Company's operating infrastructure resulting from acquisition activity to
create efficiencies across the acquired companies, enhance profitability and
position the Company to capture opportunities for growth across Local Audio,
Visual Solutions and Mobile Services. The Company expects the Wave 1
initiatives to deliver nearly $9 million in annual cost savings in fiscal year
2014. Additionally, the Company's Waves 2 and 3 are expected to deliver
annualized savings in the range of $8 to $10 million. Wave 2 initiatives were
completed during the six month 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 $17,498 for the three months ended September
30, 2014, an increase of $573, compared with $16,925 for the three months ended
September 30, 2013. The increase is primarily due to additional capital
expenditures added during the first half of 2014 that would result in a larger
depreciable base for the three months ended September 30, 2014.
Share-based compensation from continuing operations
Share-based compensation expense was $379 for the three months ended September
30, 2014, a decrease of $793 compared with $1,172 for the three months ended
September 30, 2013. The decrease is due to share forfeitures and cancellations
during the second half of 2013 that would result in a smaller expense base
being straight-lined over the vesting period.
Other expenses (income) from continuing operations
Other expenses were $7,302 for the three months ended September 30, 2014
compared to an expense of $11,460 for the three months ended September 30,
2013. The higher costs in the comparative three month period ended September
30, 2013 was primarily due to higher transaction costs related to the Company's
strategic and operational reviews and costs associated with prior acquisitions
of $2,773 and a charge of $3,500 for a settlement involving certain terms of
our arrangements with independent affiliates that were revised to resolve
matters related to the acquired businesses. Partially offsetting the higher
costs in the comparative three month period in other expense is $2,115 higher
integration costs in 2014 related to charges for various real estate
consolidations.
Financing costs, net from continuing operations
Financing costs, net were $13,850 for the three months ended September 30, 2014
compared with $13,866 for the three months ended September 30, 2013. In 2013,
the costs included a gain of $1,081 related to the contingent consideration for
the acquisition of Muzak and a loss on the fair value of financial instruments
of $539. In 2014 the contingent consideration was finalized and no additional
cost was recorded, while the change in fair value of the financial instruments
resulted in a gain of $640.
Income tax from continuing operations
There was an income tax credit of $2,409 for the three months ended September
30, 2014 compared to a credit of $16 for the three months ended September 30,
2013. The change has arisen primarily as a result of recognition of deferred
tax assets in the three months ended September 30, 2014.
Loss after tax from discontinued operations
The loss after tax from discontinued operations was nil for the three months
ended September 30, 2014, compared to a loss of $1,751 for the three months
ended September 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 $6 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 September 30, 2014 compared to a charge of $90 in the three months
ended September 30, 2013.
Nine months ended September 30, 2014 compared with the nine months ended
September 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 nine months ended September 30, 2014
and September 30, 2013 were as follows:
Nine months ended
September September
30, 2014 30, 2013 Variance % Change
In-Store Media North America $200,644 $217,054 $(16,410) (7.6%)
In-Store Media International 138,744 134,935 3,809 2.8%
Other 27,620 29,028 (1,408) (4.9%)
Total Consolidated Group $367,008 $381,017 $(14,009) (3.7%)
In-store Media North America revenue decreased by $16,410 for the nine months
ended September 30, 2014 compared to the nine months ended September 30, 2013,
primarily as a result of a decrease in recurring monthly revenue of
approximately $8,543 (which includes a $3.4M decrease in revenues for the sale
of our residential Latin America music operations sold on January 10, 2014 and
$1.1M in revenues for the sale of commercial accounts related to a Canadian
portfolio sold on June 27, 2014 that are no longer included in our consolidated
revenue numbers for the nine months ended September 30, 2014 and for the three
months ended September 30, 2014, respectively) and a reduction of approximately
$8,883 in revenue derived from equipment and installation fees.
In-Store Media International revenue increased by $3,809 for the nine months
ended September 30, 2014 compared to the nine months ended September 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 nine months ended September 30,
2014 have decreased by $437. This is primarily due to a $4,671 reduction in
recurring revenues however it is offset by a $3,025 increase in equipment
revenue.
The revenue from other segments decreased by $1,408 due to timing of
project-based revenue in Technomedia as a result of a decrease in the scope of
some contracts from the first half of the year.
Cost of sales from continuing operations
Cost of sales were $169,107 for the nine months ended September 30, 2014, a
decrease of $1,527 compared to $170,634 for the nine months ended September 30,
2013. Cost of sales as a percentage of revenue for the nine months ended
September 30, 2014 was 46.1%, compared with 44.8% for the nine months ended
September 30, 2013. The increase in the cost of sales as a percentage of
revenues is attributable to results in its North American and BIS units. In
North America, lower recurring revenues, which have a higher gross margin, and
higher installation costs produced the increase in cost of sales as a
percentage of revenues. BIS costs reflected lower revenues and pricing in the
current period.
Operating expenses from continuing operations
Operating expenses were $124,246 for the nine months ended September 30, 2014,
a decrease of $6,598 compared with $130,844 for the nine months ended September
30, 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 across the acquired companies,
enhance profitability and position the Company to capture opportunities for
growth across Local Audio, Visual Solutions and Mobile Services. The Company
expects the Wave 1 initiatives to deliver nearly $9 million in annual cost
savings in fiscal year 2014. Additionally, the Company's Waves 2 and 3 are
expected to deliver annualized savings in the range of $8 to $10 million. Wave
2 initiatives were completed during the six month 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 $53,538 for the nine months ended September
30, 2014, an increase of $2,393 compared with $51,145 for the nine months ended
September 30, 2013. The increase is primarily due to additional capital
expenditures added throughout Q4 2013 and the first half of 2014 that would
result in a larger depreciable base for the nine months ended September 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 $991 for the nine months ended September
30, 2014, a decrease of $869 compared with $1,860 for the nine months ended
September 30, 2013. The decrease is due to share forfeitures and cancellations
throughout 2013 that would result in a smaller expense base being
straight-lined over the vesting period.
Other expenses (income) from continuing operations
Other expenses were $16,641 for the nine months ended September 30, 2014
compared to an expense of $25,270 for the nine months ended September 30, 2013.
The decrease in costs are primarily due to the gain on disposal of assets which
for the nine months ended September 30, 2014 included initial recognized gains
of $3,541 and $2,937 for the Company's residential Latin America music
operations and DMX Canadian commercial accounts portfolio, respectively, each
of which 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 $8,650 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 nine
months ended September 30, 2014. Furthermore, the Company negotiated and
finalized settlements including other liabilities and legal matters related to
prior acquisitions, whose year over year increase offset the reduction in other
expenses by $726.
Financing costs, net from continuing operations
Financing costs, net were $55,370 for the nine months ended September 30, 2014
compared with $24,360 for the nine months ended September 30, 2013. In the
2013 comparative period there was a $17,591 credit recorded primarily relating
to the change in fair value of the Muzak contingent consideration. In 2014 the
contingent consideration was finalized and no additional cost was recorded.
Additionally, the nine months ended September 30, 2014 include $13,476 in costs
related to the extinguishment of the 2011 First Lien Credit Facilities and the
fees and costs associated with the 2014 First Lien Credit Facilities. Interest
expense was relatively flat year over year at $40,435 for the 2014 period
compared to $39,448 for the 2013 period. The impact of the prior year credit
related to the contingent Muzak consideration liability and the 2014 charges
recognized related to the First Lien refinancing explain most of the $31,010
increase in the year over year comparison.
Income tax from continuing operations
There was an income tax credit of $3,175 for the nine months ended September
30, 2014 compared to a charge of $6,875 for the nine months ended September 30,
2013. The change has arisen primarily as a result of recognition of deferred
tax assets in the nine months ended September 30, 2014.
Loss after tax from discontinued operations
The loss after tax from discontinued operations was nil for the nine months
ended September 30, 2014, compared to a loss of $16,487 for the nine months
ended September 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 $49 representing the element of profit of subsidiaries where the
Company does not own 100% of the share capital has been taken in the nine
months ended September 30, 2014 compared to a charge of $328 in the nine months
ended September 30, 2013.
Total assets
Total assets were $765,435 as at September 30, 2014 compared to $811,835 as at
December 31, 2013. The decrease of $46,400 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, the scheduled amortization of intangible assets, as well as the
impact of foreign exchange rates on goodwill and intangible assets denominated
in foreign currency, primarily in Euro.
Non-current liabilities
Long term liabilities were $662,889 as at September 30, 2014 compared to
$649,688 as at December 31, 2013. The increase of $13,201 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 extinguishment 2011
First Lien Credit Facilities interest rate floor whose fair value at December
31, 2013 was $6,066 and the recording of the 2014 First Lien Credit Facilities
interest rate floor valued at $2,848 in 2014. Another partial offset was due to
lower deferred tax liabilities, which at September 30, 2014 were $31,745
compared to $38,735 at December 31, 2013.
Liquidity and Capital Resources
Three months ended September 30 2014, compared with the three months ended
September 30, 2013
During the three months ended September 30, 2014, cash decreased by $4,729.
Cash generated from operating activities for the three months ended September
30, 2014 was $9,084 compared with $13,158 in the three months ended September
30, 2013. The decrease in cash generated from operating activities of $4,074
was driven by (i) an increase in working capital additions of $8,233 (an
increase in working capital of $8,758 for the three months ended September 30,
2014 compared to an increase of $525 for the three months ended September 30,
2013); (ii) higher cash taxes paid by $444 ($1,269 for three months ended
September 30, 2014 compared to $825 for three months ended September 30, 2013);
(iii) with an offset of $4,574 due to higher operating profit before tax (three
month ended September 30, 2014 operating profit before tax of $19,065 (adding
back to pre-tax loss: depreciation, amortization, impairment, interest and
other non-cash charges) compared to a three months ended September 30, 2013
operating profit before tax of $14,491);
Cash used in investing activities for the three months ended September 30, 2014
was $8,030 compared with cash used in investing activities of $7,600 in the
three months ended September 30, 2013. The increase is primarily due to
increased spending on acquisition of capital assets.
Cash used in financing activities for the three months ended September 30, 2014
was $5,081 compared to cash used of $9,441 in the three months ended September
30, 2013. The decrease is primarily due to cash outflows in the three months
ended September 2013 as a result of the acquisition of non-controlling
interests of $4,000 and payment of dividend to holders of non-controlling
interests of $645.
Nine months ended September 30 2014, compared with the nine months ended
September 30, 2013
During the nine months ended September 30, 2014, cash increased by $7,176.
Cash generated from operating activities for the nine months ended September
30, 2014 was $37,521 compared with $43,242 in the nine months ended September
30, 2013. The decrease in cash generated from operating activities of $5,721
was driven by (i) an increase in working capital additions of $6,601 (an
increase in working capital of $11,520 for the nine months ended September 30,
2014 compared to an increase of $4,919 for the nine months ended September 30,
2013); (ii) higher cash taxes paid by $1,555 ($3,756 for nine months ended
September 30, 2014 compared to $2,201 for nine months ended September 30,
2013); partially offset by (iii) higher operating profit before tax of $2,439
(nine months ended September 30, 2014 operating profit before tax of $52,732
(adding back to pre-tax loss: depreciation, amortization, impairment, interest
and other non-cash charges) compared to a nine months ended September 30, 2013
operating profit before tax of $50,293).
Cash used in investing activities for the nine months ended September 30, 2014
was $5,048 compared with cash used in investing activities of $23,690 in the
nine months ended September 30, 2013. The reduction of cash usedis 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, 2014.
Cash used in financing activities for the nine months ended September 30, 2014
was $24,464 compared to cash used of $38,852 for the nine months ended
September 30, 2013. The decrease is primarily due to incremental borrowings
related to the proceeds from the refinancing of the 2011 First Lien Credit
Facilities net of the costs and fees related to the new borrowings.
As at September 30, 2014, the Company had cash of $29,586 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, its revolving credit facilities, access to capital
markets and ongoing opportunities to divest non-core assets to meet its working
capital, debt servicing, capital expenditure and other funding requirements 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 an effort to be
opportunistic in refinancings of upcoming maturities and to better match terms
and pricing to the company's needs. The Company has implemented significant
cash improvement initiatives that it believes will improve its ability to
generate enhanced cash flow in the future, including the formation of a senior
management cash flow working group, implementation of enhanced controls and
other key operational improvements. Further, Mood initiated an ongoing program
to opportunistically divest non-core assets, commencing with the sale of its
Latin American business in January 2014 followed by the sale of its DMX Canada
accounts in June.
Contractual obligations
The following chart outlines the Company's contractual obligations as at
September 30, 2014:
Years Years Beyond
Less than two and four and five
Description Total one year three five years
2014 First Lien Credit
Facility $233,826 $2,350 $4,700 $226,776 -
2014 First Lien Credit
Facility interest 74,444 16,532 32,609 25,303 -
9.25% Senior Unsecured
Notes 350,000 - - - 350,000
9.25% Senior Unsecured
Notes interest 210,438 32,375 64,750 64,750 48,563
Convertible debentures 50,266 - 50,266 - -
Convertible debenture
interest 7,665 5,096 2,569 - -
Operating leases 48,414 15,375 22,808 7,999 2,232
Finance leases 979 973 6 - -
Trade and other
payables 114,277 114,277 - - -
Total $1,090,309 $186,978 $177,708 $324,828 $400,795
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% 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 $13,476, which included the fees and
costs associated with the 2014 First Lien Credit Facilities.
On October 19, 2012, we completed 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:
September 30, December 31,
2014 2013
Shareholders' equity $(33,556) $25,007
Convertible debentures 50,266 50,266
2011 and 2014 First Lien Credit Facilities 233,826 217,897
9.25% Senior Unsecured Notes 350,000 350,000
Total Debt (contractual amounts due) 634,092 618,163
Total Capital $600,536 $643,170
As at September 30, 2014 our capital structure included shareholders' equity in
the amount of $(33,556). Our outstanding debt as at that date included
convertible debentures of $50,266, bank debt of $233,826 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 September 30, 2014 was
179,767,119. 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 3,600,000 share
options were exercised. This represents an increase of 8,127,556 to shares
outstanding from September 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).
On August 19, 2014 1,200,000 share options were granted with an exercise price
of CDN $0.52 (USD$0.48).
On September 25, 2013, 2,000,000 share options were granted with an exercise
price of CDN$0.65 (USD$0.63).
The following table provides additional share information (in thousands of
shares) on a fully diluted basis:
Outstanding as at Outstanding as at
November 12, 2014 September 30, 2014
Common shares 179,767 179,767
Share options 15,228 17,353
Warrants 4,408 4,408
Convertible debentures 19,951 19,951
There have been no shares issuances from September 30, 2014 to November 12,
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,
Trusonic 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 was recorded within other financial
assets in the consolidated statement of financial position. The interest rate
cap expired August 4, 2014. 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 September
30, 2014 was a credit of $640 and a credit of $1,500 for the nine month period
ended September 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. Management believes that
the Company has sufficient liquidity in the form of its current cash balances,
the cash generating capacity of its businesses, its revolving credit
facilities, access to capital markets and ongoing opportunities to divest
non-core assets to meet its working capital, debt servicing, capital
expenditure and other funding requirements 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 an effort to be opportunistic in
refinancings of upcoming maturities and to better match terms and pricing to
the company's needs. The Company has implemented significant cash improvement
initiatives that it believes will improve its ability to generate enhanced cash
flow in the future, including the formation of a senior cash flow working
group, implementation of enhanced controls and other key operational
improvements. Further, Mood initiated an ongoing program to opportunistically
divest non-core assets, commencing with the sale of its Latin American business
in January 2014 followed by the sale of its DMX Canada accounts in June.
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 September 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. 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.
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 the Company 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 Management 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 security holders 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 performance
Given the sensitivity of capital markets worldwide, there is a risk that we may
not be able to obtain additional equity or debt financing that we 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,
access to capital markets and other liquidity sources, such as divestitures of
non-core assets, 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. There is no assurance that the major record labels 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.
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 may be 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 operate 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 US 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 International 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 expired in August 2014. The Company is currently
evaluating our future available hedging options.
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.
Management believes that the Company has sufficient liquidity in the form of
its current cash balances, the cash generating capacity of its businesses, its
revolving credit facilities, access to capital markets and ongoing
opportunities to divest non-core assets to meet its working capital, debt
servicing, capital expenditure and other funding requirements 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 an effort to be
opportunistic in refinancings of upcoming maturities and to better match terms
and pricing to the company's needs. The Company has implemented significant
cash improvement initiatives that it believes will improve its ability to
generate enhanced cash flow in the future, including the formation of a senior
management cash flow working group, implementation of enhanced controls and
other key operational improvements. Further, Mood initiated an ongoing program
to opportunistically divest non-core assets, commencing with the sale of its
Latin American business in January 2014 followed by the sale of its DMX Canada
accounts in June.
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.
(TSX:MM / LSE AIM:MM)
SOURCE Mood Media Corporation
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 9147MOOD MEDIA : 3rd Quarter Results
November 13, 2014 at 02:01 am EST
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