HALIFAX, May 16 /CNW/ - DHX Media Ltd., (AIM & TSX ticker: DHX) ("DHX" or
the "Company") announces its unaudited consolidated interim results for the
third quarter ended March 31, 2007.Highlights
- Revenues for the third quarter ended March 31, 2007 increased over 216%
from the same period of 2006 to C$6.0 million;
- Gross profit margin increased from 15% to 40% over the same period of
2006 as the Company continues to focus on proprietary production;
- Net income for the three months ended March 31,2007 increased to
C$311,000 from a loss in the same period in 2006 of C$360,000;
- EBITDA(1) increased by C$995,000 for the quarter to a positive
C$917,000 from a loss of C$78,000 in the same period of 2006; and
- The number of delivered half-hours of production increased 97% to 33.5
from 17 in the same period of 2006.
Michael Donovan, Chairman and CEO, commented,
"We are very pleased to announce continued growth this quarter as we
look forward to our traditionally strongest quarter when the largest
proportion of our deliveries will take place. We continue to deliver
on our strategy. During the quarter, we were pleased to have launched
several new series and closed two significant merchandising and
licensing deals. We anticipate continued growth across our four
strategic drivers, being increasing merchandising & licensing
revenue, expanding the television and film library, leveraging our
international distribution capabilities and exploiting new content
platforms."
Operating Review
DHX continued to meet its strategic objectives during the third quarter.
Of note is the completion of a significant contract with PLAYSKOOL, a division
of Hasbro, Inc., as the worldwide licensee for DHX Media's DECODE
Entertainment division's Franny's Feet children's series, as previously
announced. This deal grants a worldwide license to PLAYSKOOL in exchange for
an upfront minimum guarantee and a percentage of PLAYSKOOL's net revenues
derived from the sale of Franny's Feet toys and games worldwide, subject to
certain conditions. In addition, the Company came to an agreement with major
publishing houses Penguin Group (USA) and Simon & Schuster as U.S. publishing
licensees for Franny's Feet. Pursuant to the appointments, DHX Media will
receive a minimum guarantee advance from both licensees with additional
royalty payments expected to commence in the second half of fiscal 2008.
The Company's distribution group made a number of notable sales during the
quarter to important broadcasters internationally, including Planet Sketch to
Nicktoons in the U.S.
In addition, the Company announced the launch of a new preschool show Bo
on the Go! 26 half hour episodes have been commissioned by CBC to be produced
by DHX Media's Ltd's Halifax Film division and will be distributed
internationally by its DECODE Entertainment division. The series will be
delivered for a fall launch on CBC.
In February, the Company announced that PBS KIDS will begin broadcasting a
second season of 13 half-hour shows of the award-winning pre-school series
Franny's Feet in key US broadcast markets including New York and Los Angeles.
In addition, DHX Media pre-sold and commenced production on 26 x half hour
episodes of a new animated series for YTV Canada, Clang Invasion, formerly
called Gizmo. DHX has worldwide distribution rights for this animated
Canada/Hong Kong/Singapore treaty co-production series to be delivered in fall
of 2007.
Financial Results
Revenues for the Q3 2007 were $5.974 million, up from $1.889 million for
Q3 2006, an increase of 216% and resulting from increases in the Company's
production, distribution, music royalties and new media revenue categories.
The Company also expects double digit revenue growth for Q4 2007 and Q1 Fiscal
2008 as some of the Company's projected Q3 television deliveries have been
delayed and are expected to deliver in the early summer. The growth in revenue
included a 66% organic increase to $2.510 million in proprietary production
revenue for the Halifax Film division and the inclusion of $1.475 million for
Q3 2007 as a result of the DECODE division acquisition. The revenue increase
for Q3 2007 is consistent with the Company's strategic goal to increase
production revenue generated from home grown productions both in absolute
dollars and as a percentage of the total production revenues earned.
For Q3 2007 the Company earned revenues from its distribution activities
of $1.343 million. The Company anticipates further revenue growth in
distribution revenue for Q4 2007.
Gross profit margin increased from 15% to 40% as the Company continued to
focus on proprietary production to maintain consistency with the Company's
strategic goals.
Music and royalty and new media revenues were $0.385 million increasing
from nil in Q3 2006, largely a reflection of the DECODE division acquisition.
Finally, rental income for the period was $0.112 million which related to
the rental of the Company's Electropolis production studios which was acquired
in July, 2006.
Outlook
Based on the momentum of our third quarter earnings, we anticipate growth
to continue, particularly in our proprietary production and distribution
segments, as we enter the last and most active part of the Company's year. The
Company's production revenues are generally highest in the fourth fiscal
quarter, driven by contracted deliveries with the primary broadcasters which
are typically made early in the calendar year within the Canadian television
industry.
Furthermore, we will continue to increase the number of proprietary
productions this fiscal period, with a view to growing our library and
continuing to deliver bottom-line growth and improved margins. We also
anticipate further growth from our additional strategic value drivers of
merchandising and licensing and new content platform exploitation. Our
business model gives us the ability to produce audience-winning programming
while minimizing financial risk and retaining the maximum exploitation rights
associated with a production for the generation of multiple revenue streams.
Management intends to continue exploiting this model in order to grow
profitably and add to its library of completed productions.
Please also see the 'Outlook' section of the below MD&A for more detailed
information. The full financial statements and MD&A can be found below and are
also available on SEDAR at www.sedar.com.
About DHX Media
DHX Media produces, distributes and exploits the rights for television and
film programming, with a primary focus on productions for children and youth.
The Company has twelve series currently in production and a feature film in
post-production. There are also twelve children's series currently in first
window broadcast on multiple major cable and broadcast networks around the
world including, Lunar Jim, Franny's Feet, The Save-Ums and Naturally Sadie.
DHX Media's prime-time production slate also includes notable achievements
in the comedy genre, including the award-winning Canadian prime-time comedy
series This Hour Has 22 Minutes, which is produced for the CBC and is now in
its 14th season.
Disclaimer
Certain statements herein may constitute forward-looking statements,
including those identified by the expressions "may", "will", "should",
"could", "anticipate", "believe", "plan", "estimate", "potential", "expect",
"intend" and similar expressions to the extent they relate to the Company or
its Management. These statements reflect the Company's current expectations
and are based on information currently available to Management. These
forward-looking statements are subject to a number of risks, uncertainties,
assumptions and other factors that could cause actual results or events to
differ materially from current expectations, including the matters discussed
under "Risk Factors" contained in the Company's prospectus dated May 12, 2006.
These forward-looking statements are made as of the date hereof, and the
Company assumes no obligation to update or revise them to reflect new events
or circumstances.
--------------------
(1) EBITDA represents net earnings (loss) of the Company before
amortization expense, interest income (expense), non-controlling
interest, equity income (loss), development expenses and stock-
based compensation expense.
DHX Media Ltd.
(Formerly "The Halifax Film Company Limited")
Consolidated Financial Statements
March 31, 2007 and 2006 (Unaudited) and June 30, 2006
May 14, 2007
Management's Responsibility for Financial Reporting
The accompanying unaudited interim consolidated financial statements,
Management's Discussion and Analysis ("MD&A") and supplemental information of
DHX Media Ltd. ("the Company") are the responsibility of management and have
been approved by the Audit Committee of the Board of Directors. The Board of
Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting, and is ultimately responsible for
reviewing and approving the unaudited interim consolidated financial
statements and MD&A. The Board carries out this responsibility through its
Audit Committee. The Audit Committee reviews the Company's interim
consolidated financial statements and recommends their approval by the Board
of Directors.
The Audit Committee is appointed by the Board and all of its members are
independent directors. It meets with the Company's management quarterly and
with its auditors at least annually and reviews internal control and financial
reporting matters to ensure that management is properly discharging its
responsibilities before submitting the financial statements to the Board of
Directors for approval.
The unaudited interim consolidated financial statements have been prepared
by management in accordance with Canadian generally accepted accounting
principles. When alternative methods of accounting exist, management has
chosen those it deems most appropriate in the circumstances. The unaudited
interim consolidated financial statements and information in the MD&A
necessarily include amounts based on informed judgements and estimates of the
expected effects of current events and transactions with appropriate
consideration to materiality. In addition, in preparing the financial
information management must make determinations as to the relevancy of
information to be included, and make estimates and assumptions that affect
reported information. The MD&A also includes information regarding the impact
of current transactions and events, sources of liquidity and capital
resources, operating trends, risks and uncertainties. Actual results in the
future may differ materially from our present assessment of this information
because future events and circumstances may not occur as expected.
These unaudited interim financial statements have not been reviewed by the
external auditors of the Company.
(signed) "Michael Donovan" (signed) "Dana Landry"
Chief Executive Officer Chief Financial Officer
Halifax, Nova Scotia
DHX Media Ltd.
(Formerly "The Halifax Film Company Limited")
Consolidated Balance Sheets
(Unaudited)
-------------------------------------------------------------------------
(in Canadian dollars)
March 31, June 30,
2007 2006
$ $
Assets
Current assets
Cash 5,257,821 6,111,391
Short-term investments 1,636,040 2,658,430
Amounts receivable (note 4) 34,969,693 30,786,367
Prepaid expenses and deposits 408,696 468,927
Current portion of investment in film and
television programs (note 5) 25,293,568 11,863,610
---------------------------
67,565,818 51,888,725
Investment in film and television
programs (note 5) 18,369,148 9,386,042
Restricted cash 470,166 802,908
Investment in production companies (note 6) 854,291 61,939
Property, plant and equipment 5,940,098 5,843,757
Intangible assets (note 7) 2,731,281 3,202,016
Goodwill 6,876,905 6,613,053
---------------------------
102,807,707 77,798,440
---------------------------
---------------------------
Liabilities
Current liabilities
Bank indebtedness (note 8) 500,000 -
Accounts payable and accrued liabilities 7,492,470 12,087,411
Income taxes payable 586,803 203,647
Deferred revenue 14,332,059 2,619,267
Interim production financing (note 9) 33,297,422 16,369,455
Current portion of long-term debt (note 10) 269,262 238,560
Note payable (note 11) 400,000 2,000,000
---------------------------
56,878,016 33,518,340
Long-term debt (note 10) 2,960,990 3,012,513
Other long-term liability 962,208 -
Future income taxes 973,000 1,128,000
Non-controlling interest (note 12 (i)) 559,736 543,469
---------------------------
62,333,950 38,202,322
---------------------------
Shareholders' Equity
Share capital and contributed
surplus (note 12) 41,917,102 41,382,333
Deficit (1,443,345) (1,786,215)
---------------------------
40,473,757 39,596,118
---------------------------
102,807,707 77,798,440
---------------------------
---------------------------
DHX Media Ltd.
(Formerly "The Halifax Film Company Limited")
Consolidated Statements of Operations and Deficit
For the periods ended March 31,
(Unaudited)
-------------------------------------------------------------------------
(in Canadian dollars)
For the For the For the For the
three-months three-months nine-months nine-months
ended ended ended ended
March 31, March 31, March 31, March 31,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
$ $ $ $
Revenues (note 15) 5,974,337 1,889,194 15,878,934 6,474,482
Direct production
costs and
amortization of
film and
television
programs (3,575,577) (1,611,876) (10,039,879) (5,347,548)
------------------------------------------------------
2,398,760 277,318 5,839,055 1,126,934
------------------------------------------------------
Operating income
(expenses)
Amortization (296,717) (2,540) (1,034,995) (5,975)
Income from
investing 495,559 - 1,463,789 -
Development
expenses (14,296) - (65,949) (201,315)
Selling, general
and administrative (2,056,226) (355,015) (5,598,520) (1,346,879)
------------------------------------------------------
(1,871,680) (357,555) (5,235,675) (1,554,169)
------------------------------------------------------
Income (loss)
before the
following 527,080 (80,237) 603,380 (427,235)
Interest and
amortization of
deferred
financing fees - (256,986) - (763,802)
Interest (expense)
income (36,247) 6,942 (103,712) 122,088
Equity loss (note 6) - (15,109) (14,530) (222,185)
Non-controlling
interest (5,179) (4,353) (16,268) (8,157)
------------------------------------------------------
Income (loss)
before income
taxes 485,654 (349,743) 468,870 (1,299,291)
Provision for
(recovery of)
income taxes
Large corporation
taxes 11,000 10,000 41,000 31,607
Current income taxes 223,000 - 240,000 -
Future income taxes (59,000) - (155,000) -
------------------------------------------------------
175,000 10,000 126,000 31,607
------------------------------------------------------
Net income (loss)
for the period 310,654 (359,743) 342,870 (1,330,898)
Deficit - Beginning
of period (1,753,999) (1,842,480) (1,786,215) (871,325)
------------------------------------------------------
Deficit -
End of period (1,443,345) (2,202,223) (1,443,345) (2,202,223)
------------------------------------------------------
------------------------------------------------------
Basic and fully
diluted earnings
(loss) per common
share (note 13) 0.01 (0.03) 0.01 (0.09)
------------------------------------------------------
------------------------------------------------------
DHX Media Ltd.
(Formerly "The Halifax Film Company Limited")
Consolidated Statements of Cash Flows
For the periods ended March 31,
(Unaudited)
-------------------------------------------------------------------------
(in Canadian dollars)
For the For the For the For the
three-months three-months nine-months nine-months
ended ended ended ended
March 31, March 31, March 31, March 31,
2007 2006 2007 2006
$ $ $ $
(unaudited) (unaudited) (unaudited) (unaudited)
Cash provided by
(used in)
Operating activities
Net income (loss)
for the period 310,654 (359,743) 342,870 (1,330,898)
Charges (credits)
to income not
involving cash
Amortization of
film and
television
programs 3,460,307 1,526,139 9,913,067 3,748,306
Amortization of
property, plant
and equipment 108,725 2,540 337,061 5,975
Amortization of
acquired
library 33,371 - 227,199 -
Amortization of
deferred
financing fees - 52,695 - 141,851
Amortization of
intangible
assets 154,621 - 470,735 -
Stock-based
compensation
(note 12(h)) 79,057 - 243,820 -
Interest on
promissory notes 3,290 - 11,882 -
Interest - 204,291 - 621,951
Equity loss (note 6) - 15,109 14,530 222,185
Non-controlling
interest 5,179 4,353 16,268 8,157
Future income tax
recovery (56,000) - (155,000) -
------------------------------------------------------
4,099,204 1,445,384 11,422,432 3,417,527
Investment in film
and television
programs (10,448,542) (2,674,564) (32,553,327) (3,942,792)
Net change in
non-cash working
capital balances
related to
operations
(note 14) 1,558,057 701,296 3,749,165 (2,520,742)
------------------------------------------------------
(4,791,281) (527,884) (17,381,730) (3,046,007)
------------------------------------------------------
Financing activities
Proceeds from
issuance of common
shares, net of
(issuance costs)
and share purchase
loans - 92,500 (38,184) 92,039
Proceeds from
issuance of shares
of a subsidiary,
net of (issuance
costs) - 22,760 - 530,762
Proceeds from
issuance of
preferred shares,
net of (issuance
costs) - - - 436,802
Proceeds from bank
indebtedness 500,000 - 500,000 -
Deferred financing
fees and other
costs - (2,046,668) - (2,532,721)
Proceeds from
interim production
financing 4,534,118 2,191,281 16,927,968 2,813,179
Repayment of
demand loan - - - (125,000)
Proceeds from
long-term debt - 712,468 180,029 1,157,678
Repayment of
long-term debt (72,798) (41,550) (271,026) (124,650)
Increase (decrease)
in other long-term
liability (120,000) - 962,208 -
Repayment of
note payable - - (1,282,750) -
------------------------------------------------------
4,841,320 930,791 16,978,245 2,248,089
------------------------------------------------------
Investing activities
Business acquisitions (83,481) - (232,191) -
Short-term
investments 426,146 (4,268) 1,022,390 (25,316)
Disposition
(acquisition)
of property,
plant and
equipment 45,591 (445,564) (433,402) (1,306,908)
Net cash advances
from (to)
investees (100,748) 781,093 (806,882) (510,873)
------------------------------------------------------
287,508 331,261 (450,085) (1,843,097)
------------------------------------------------------
Net change in cash
during the period 337,547 734,168 (853,570) (2,641,015)
Cash - Beginning
of period 4,920,274 3,187,872 6,111,391 6,563,055
------------------------------------------------------
Cash -
End of period 5,257,821 3,922,040 5,257,821 3,922,040
------------------------------------------------------
------------------------------------------------------
DHX Media Ltd.
(Formerly "The Halifax Film Company Limited")
Notes to Consolidated Financial Statements
March 31, 2007 and 2006 (Unaudited) and June 30, 2006
-------------------------------------------------------------------------
(in Canadian dollars)
1 Nature of the business and significant accounting policies
DHX Media Ltd. (formerly "The Halifax Film Company Limited") (the
"Company") is a public company whose common shares were admitted to
trading on the Alternate Investment Market (AIM) and the Toronto Stock
Exchange (TSX) on May 19, 2006 (symbol DHX). The Company, incorporated
on February 12, 2004 under the laws of the Province of Nova Scotia,
Canada, and continued during the year ended June 30, 2006 under the
Canada Business Corporation Act, develops, produces and distributes
film and television programs for the domestic and international
markets. On March 17, 2006, the Company changed its name from "The
Halifax Film Company Limited" to "DHX Media Ltd." The address of the
head office is 1478 Queen Street, Halifax, Nova Scotia, Canada,
B3J 2H7.
Basis of presentation
The accompanying unaudited interim financial statements have been
prepared in accordance with the requirements of the Canadian Institute
of Chartered Accountants ("CICA") Handbook Section 1751 "Interim
Financial Statements". Accordingly, certain information and note
disclosure normally included in annual financial statements prepared
in accordance with Canadian generally accepted accounting principles
have been omitted or condensed. In the opinion of management, these
statements include all adjustments, consisting of normal accruals,
considered necessary by management to present a fair statement of the
results of operations, financial position and cash flows. These
unaudited interim financial statements were prepared using the same
accounting principles as were used for the audited consolidated
financial statements for the year ended June 30, 2006 and should be
read in conjunction with the audited financial statements of the
Company for the year ended June 30, 2006, as set out in the 2006
Audited Annual Financial Statements, available at www.sedar.com.
2 Change in accounting policy
Variable Interest Entities
Effective July 1, 2005, the Company adopted Accounting Guideline 15
("AcG 15") - Consolidation of Variable Interest Entities ("VIEs").
AcG 15 provides criteria for the identification of VIEs and further
criteria for determining what entity, if any should consolidate them.
AcG 15 defines a VIE as an entity that either does not have sufficient
equity at risk to finance its activities without subordinated
financial support or where the equity investors lack the
characteristic of a controlling financial interest. VIEs are subject
to consolidation by a company if that company is deemed the primary
beneficiary of the VIE. The primary beneficiary is the party that is
either exposed to a majority of the losses from the VIEs activities or
is entitled to receive a majority of the VIEs residual returns or
both.
Prior to the adoption of AcG 15, the Company consolidated all entities
that it controlled through ownership of a majority of voting
interests.
Effective July 1, 2005, the Company implemented AcG 15, retroactively
without the restatement of prior periods, and as a result, the Company
has consolidated entities in which it has control through ownership of
a majority of the voting interests as well as all VIEs for which it is
the primary beneficiary.
VIEs for which the Company is not the primary beneficiary have been
accounted for using the equity method (note 6).
On July 15, 2005, the Company obtained a variable interest in and was
determined to be the primary beneficiary of Media Fund (Atlantic) Ltd.
("Media Fund"). The Company is party to a management agreement and a
shareholder agreement with Media Fund, a company with the objectives
of promoting and supporting job creation and economic development
initiatives in the film and television industry in Nova Scotia. On
July 15, 2005, Media Fund closed its first financing. Under the terms
of the shareholder agreement, the new shareholders of Media Fund were
granted a right to sell their shares to the Company in exchange for
shares of the Company (the put option) provided that the Company was
able to obtain a public listing for its shares. Accordingly, on
July 15, 2005 the Company consolidated Media Fund's assets and
liabilities consisting of restricted cash of $957,195, accounts
payable and accrued liabilities of $449,193 and non-controlling
interest of $508,002.
3 Acquisitions
During the nine-month period ended March 31, 2007, the following
acquisitions occurred:
(a) On July 1, 2006 (the "Effective Date"), the Company completed a
business acquisition and acquired all of the issued and
outstanding shares of Electropolis Studios Incorporated for cash
consideration of $31,852.
The acquisition has been accounted for using the purchase method
and the results of operations are included in the consolidated
statement of operations from the Effective Date.
The following table summarizes the estimated fair value of the net
assets acquired as of the Effective Date:
Assets acquired $
Amounts receivable 45,041
Prepaid expenses and deposits 14,787
Goodwill 63,513
--------------
123,341
--------------
Less: liabilities assumed
Accounts payable and accrued liabilities 21,313
Long term debt 70,176
--------------
91,489
--------------
31,852
--------------
--------------
(b) On December 22, 2006, the Company completed the acquisition of the
license for the worldwide distribution rights to 520 half-hours of
television programming ("Distribution Rights") for $2,200,000. As
of March 31, 2007, the company has paid cash of $500,000 and is
scheduled to pay the remainder through ten quarterly payments of
$120,000 ending March 31, 2009 and one lump sum payment of
$500,000 due March 31, 2009. The fair value of the purchase price
of the distribution rights of $2,076,961 has been included in
investment in film and television programs (note 5) under the
category acquired participation and distribution rights.
During the year ended June 30, 2006, the following business
acquisitions occurred:
(c) On May 19, 2006, the Company acquired all of the issued and
outstanding shares of Decode Entertainment Inc. ("Decode"), a
television production company, for the total consideration of
$17,961,095 (adjusted for changes to March 31, 2007) as follows:
- Cash of $5,051,709 (Initial payment of $3,700,000 on May 19,
2006 and a payment of $1,351,709 December 15, 2006);
- $400,000 promissory note payable June 30, 2007, bearing interest
at 10%;
- 6,018,011 common shares of the Company valued at $11,888,789
(5,793,011 common shares valued at $11,571,539 issued on May 19,
2006 and 225,000 common shares valued at $317,250 issued on
December 18, 2006);
- Transaction costs of $620,597; and
- An "Earnout amount" calculated as 7.25 times the lesser of
$1,300,000 and the amount by which "EBITDA" (as that term is
defined in the agreement) exceeds $2,700,000 for the twelve-
month period ended June 30, 2007. This consideration will be
satisfied by the payment of readily available funds and/or by
the issuance of additional common shares of the Company.
The purchase price has been allocated to the assets acquired
(including all identifiable intangible assets arising from the
purchase) and liabilities assumed based on their estimated fair
value at the date of acquisition as follows:
Assets acquired $
Cash 2,483,957
Amounts receivable 24,700,343
Prepaid expenses and deposits 107,461
Investment in film and television programs 10,902,778
Property, plant and equipment 562,489
Customer and distribution relationships 545,500
Broadcaster relationships 1,910,000
Non-compete contracts and brand 674,000
Production back log 150,000
Goodwill 6,813,392
--------------
48,849,920
--------------
Less: liabilities assumed
Accounts payable and accrued liabilities 5,922,996
Income taxes payable 174,549
Deferred revenue 2,635,178
Interim production financing 10,504,102
Subordinated debenture 8,500,000
Future income taxes 3,152,000
--------------
30,888,825
--------------
17,961,095
--------------
--------------
The Company has adjusted the purchase price to March 31, 2007 for
adjustments found in the opening working capital balances and will
finalize the purchase price allocation upon completion of its review
of these working capital balances.
The estimated fair value of the share consideration is based on the
estimated fair value of the Company's common shares, as at the date
the Company and the shareholders of Decode agreed to the terms of the
purchase and sale, less a 15% discount for liquidity as these shares
are subject to a lock-in period.
The purchase agreement includes contingent payments, based on certain
Earnouts as described above, consisting of readily available funds and
common shares. The purchase consideration and allocation of the cost
of the purchase does not include any amounts related to the Earnout.
The maximum amount of the Earnout is not determinable as the number of
common shares that will be issued and the value attributed to these
shares will only be determined when the Earnout conditions are met.
When the contingency is resolved, any additional amounts due will be
attributed to goodwill.
The acquisition has been accounted for using the purchase method and
the results of operations are included in the consolidated statement
of operations from May 19, 2006, the date of acquisition.
(d) On April 7, 2006 (the "Effective Date"), The Company acquired all
of the issued and outstanding shares of Boy Girl Productions
Canada Limited, a film production company for cash consideration
of $128,719.
The acquisition has been accounted for using the purchase method
and the results of operations are included in the consolidated
statement of operations from the Effective Date.
The following table summarizes the estimated fair value of the net
assets acquired as of the Effective Date:
Assets acquired $
Cash 38,709
Amounts receivable 2,135,538
Investment in film and television programs 144,877
--------------
2,319,124
--------------
Less: liabilities assumed
Accounts payable and accrued liabilities 539,277
Income taxes payable 47,143
Interim production financing 1,603,985
--------------
2,190,405
--------------
128,719
--------------
--------------
(e) On April 7, 2006 (the "Effective Date"), the Company acquired all
of the issued and outstanding shares of Funny Farm Productions
Limited, a film production company for cash consideration of
$90,073.
The acquisition has been accounted for using the purchase method
and the results of operations are included in the consolidated
statement of operations from the Effective Date:
Assets acquired $
Cash 110,517
Amounts receivable 2,172,257
Investment in film and television programs 98,009
Deposits 5,427
--------------
2,386,210
--------------
Less: liabilities assumed
Accounts payable and accrued liabilities 1,585,373
Income taxes payable 6,764
Interim production financing 704,000
--------------
2,296,137
--------------
90,073
--------------
--------------
4 Amounts receivable
Trade 12,079,642 8,634,493
Income taxes receivable 135,606 38,618
Goods and services taxes recoverable 388,569 1,162,036
Federal and provincial film tax credits
and other government assistance 22,115,876 20,701,220
Due from an officer and director 250,000 250,000
---------------------------
---------------------------
34,969,693 30,786,367
---------------------------
---------------------------
The amount due from an officer and director bears interest at bank
prime.
5 Investment in film and television programs
March 31, June 30,
2007 2006
$ $
Development costs 1,569,155 681,181
Theatrical and non-theatrical productions
in progress
Cost, net of government and third party
assistance and third party participation 28,375,080 8,461,916
Acquired participation and distribution
rights - theatrical and non-theatrical 5,172,845 3,837,215
Non-theatrical productions completed and
released
Cost, net of government and third party
assistance and third party participation 24,583,110 21,626,579
Accumulated amortization (16,037,474) (13,357,239)
---------------------------
8,545,636 8,269,340
---------------------------
---------------------------
43,662,716 21,249,652
Less: Current portion (25,293,568) (11,863,610)
---------------------------
18,369,148 9,386,042
---------------------------
---------------------------
The Company expects that 30% of the costs related to non-theatrical
and theatrical productions completed and released will be amortized
during the year ending June 30, 2007. The Company expects that 64% of
the costs related to non-theatrical productions completed and released
will be amortized during the three-year period ending June 30, 2009.
The Company expects that over 80% of the costs related to productions
completed will be amortized by June 30, 2011.
The Company has estimated the current portion of investment in film
and television programs by reference to production delivery schedules,
expected revenues in the next twelve months and the related
amortization on a production by production basis. These estimates are
subject to change as ultimate revenues may differ from estimates. No
portion of development costs or acquired participation rights has been
reflected as current.
During the nine month period ended March 31, 2007, interest of
$1,180,759 (year ended June 30, 2006 - $210,261) has been capitalized
to investment in film and television.
6 Investment in production companies
As described in note 2, effective July 1, 2005, the Company
implemented VIE accounting for its investments in production companies
using the equity method where it was determined the Company was not
the primary beneficiary of the VIE.
A summary of the operations for the three and nine months ended
March 31, 2007 and 2006 are outlined below:
For the For the For the For the
three-months three-months nine-months nine-months
ended ended ended ended
March 31, March 31, March 31, March 31,
2007 2006 2007 2006
$ $ $ $
Recorded in
investee companies
Gross Revenues 1,845,555 2,514,892 31,590,850 4,188,973
Direct production
costs (1,696,555) (2,318,763) (31,185,250) (3,883,052)
------------------------------------------------------
Income recorded
in investees 149,000 196,129 405,600 305,921
Less: Elimination
of intercompany
profit (149,000) (211,238) (420,130) (528,106)
------------------------------------------------------
Equity loss - (15,109) (14,530) (222,185)
------------------------------------------------------
------------------------------------------------------
Recorded in DHX:
Net Revenues -
charges to
investees 149,000 378,753 1,249,523 1,926,945
Direct production
costs - charged by
investees - (167,515) (843,923) (1,398,839)
------------------------------------------------------
Gross Margin 149,000 211,238 405,600 528,106
------------------------------------------------------
------------------------------------------------------
As of March 31, 2007, DHX had $523,346 and $523,346 in accounts
receivables owing from and accounts payable owing to investee companies,
respectively (March 31, 2006 - $288,075 and nil).
March 31, June 30,
2007 2006
$ $
The continuity of investment in production
companies is as follows:
Opening balance 61,939 (291,644)
Equity loss (14,530) (294,481)
Net cash advances to investees 806,882 648,064
---------------------------
854,291 61,939
---------------------------
---------------------------
The advances to the production company are non-interest bearing with no
set terms of repayment.
7 Intangible assets
Intangible assets are as follows:
March 31, June 30,
2007 2006
$ $
Production backlog 150,000 150,000
Broadcaster relationships 1,910,000 1,910,000
Customer/distribution relationships 545,500 545,500
Non-compete contracts and brand 674,000 674,000
---------------------------
3,279,500 3,279,500
Less: accumulated amortization (548,219) (77,484)
---------------------------
2,731,281 3,202,016
---------------------------
---------------------------
8 Bank indebtedness
As of March 31, 2007 the Company had $500,000 (June 30, 2006-nil) in
bank indebtedness owing to the Royal Bank of Canada ("Royal Bank").
The bank indebtedness is a revolving operating demand loan bearing
interest at Royal Bank prime plus 0.5% per annum.
9 Interim production financing
March 31, June 30,
2007 2006
$ $
Revolving demand bank loans, bearing
interest at bank prime plus 0.75% - 2.00%.
Assignment and direction of specific
production financing and licensing contracts
receivable, with a net book value of
approximately $58,689,401
(year ended June 30, 2006 - $44,618,317),
a $1,500,000 guaranteed investment
certificate and general security
agreements have been pledged as security 33,132,684 16,198,378
Revolving demand loans, bearing interest at
prime plus 1%, secured by specific tax
credits receivable with a net book value
of approximately $168,347
(year ended June 30, 2006 - $168,347) 164,738 171,077
---------------------------
33,297,422 16,369,455
---------------------------
---------------------------
During the nine month period ended March 31, 2007, the bank prime rate
averaged 6.00% (year ended June 30, 2006 - 5.04%).
10 Long-term debt
March 31, June 30,
2007 2006
$ $
Loans payable, to a maximum authorized
amount of $3,575,000, bearing interest
at Business Development Bank of Canada prime
plus 1.5%, maturing in May 2021, repayable in
monthly principal instalments of $19,880
plus interest. A first mortgage on land and
building having a net book value of
$5,053,131 and a general assignment of
rents. 3,199,550 3,251,073
Loans payable, repayable in monthly
principal installments of $4,386,
non-interest bearing. 30,702 -
---------------------------
3,230,252 3,251,073
Less: Current portion (269,262) (238,560)
---------------------------
2,960,990 3,012,513
---------------------------
---------------------------
The aggregate amount of principal repayments required in each of the
next five years is as follows:
$
Year ending June 30, 2007 269,262
2008 238,560
2009 238,560
2010 238,560
2011 238,560
11 Note payable
As of March 31, 2007, the Company had a $400,000 (June 30, 2006-
$2,000,000) promissory note due June 30, 2007 bearing interest at 10%
as consideration for the acquisition of Decode.
12 Share capital and contributed surplus
a) Authorized
100,000,000 Preferred Variable Voting Shares, redeemable at the
option of the Company at any time at a millionth of a cent per
share, no entitlement to dividends, voting
10,000,000 Class A preferred shares, convertible to common shares
at the option of the holder, redeemable at the option of the
holder or the Company on or after June 16, 2010, at 1.5 times the
issue price, voting
Unlimited common shares without nominal or par value
b) Issued and outstanding
Changes in the Company's issued share capital during the periods
were as follows:
March 31, June 30,
2007 2006
Number Amount Number Amount
$ $ $
Preferred variable
voting shares
(note 12 (c))
Opening balance 100,000,000 100 - -
Issued for cash - - 100,000,000 100
------------------------------------------------------
100,000,000 100 100,000,000 100
------------------------------------------------------
------------------------------------------------------
Class A preferred
shares
Opening balance - - 3,893,673 1,603,992
Share issuance costs - - - (3,198)
Conversion to common
shares in connection
with IPO - - (3,893,673) (1,600,794)
------------------------------------------------------
- - - -
------------------------------------------------------
------------------------------------------------------
Common shares
(note 12 (d))
Opening balance 32,576,452 40,499,600 14,037,268 5,027,566
Issued for cash
consideration 8,852,500 20,832,707
Share issuance costs,
net of tax effect - (38,184) - (3,452,988)
Conversion of
preferred shares - - 3,893,673 8,624,814
Share issuance costs
transferred from
preferred shares - - - (2,104,038)
Issued as
consideration for
acquisition of
Decode (note 12(e)) 225,000 317,250 5,793,011 11,571,539
------------------------------------------------------
32,801,452 40,778,666 32,576,452 40,499,600
------------------------------------------------------
------------------------------------------------------
Common share
purchase loans
receivable
Opening balance - (460,134) - (175,000)
Loans to an officer
during the period
net of compensation
expense (note 12 (f)) - - - (285,134)
Interest received
on notes - 11,883 - -
------------------------------------------------------
- (448,251) - (460,134)
------------------------------------------------------
------------------------------------------------------
Warrants
(note 12 (g))
Opening balance 1,213,859 1,131,888 389,367 720,329
Value of warrants
issued in
connection with IPO - - 824,492 411,559
Expiration of
warrants issued
in connection with
IPO (389,367) (720,329) - -
------------------------------------------------------
824,492 411,559 1,213,859 1,131,888
------------------------------------------------------
------------------------------------------------------
Contributed surplus
(note 12 (h))
Stock options
Opening balance 1,021,547 210,879 275,000 173,000
Issued during the
period 900,000 73,351 746,547 37,879
Stock-based
compensation expense
on existing options - 170,469 - -
Options expired (175,000) - - -
Warrants expired - 720,329 - -
------------------------------------------------------
1,746,547 1,175,028 1,021,547 210,879
------------------------------------------------------
------------------------------------------------------
41,917,102 41,382,333
------------ ------------
------------ ------------
c) Preferred Variable Voting Shares
The Preferred Variable Voting Shares were issued May 12, 2006 to
an officer and director.
d) Common Shares
On May 19, 2006, in connection with the initial public offering
("IPO") of the Company, the Company issued 8,702,500 common shares
for total proceeds of $20,450,875 less offering costs of
$3,483,023 net of tax. Immediately prior to the closing of the
aforementioned IPO, the Company completed the acquisition of all
outstanding shares of Decode.
e) On December 18, 2006, the Company issued 225,000 common shares at
$1.41 per share for the gross amount of $317,250. The 225,000
common shares were issued to two directors and a former
shareholder of Decode as partial payment for a note payable owing
to them in connection with the purchase of their interest in
Decode.
f) Share purchase financing
During the period ended March 31, 2007, the Company issued no
amounts for share purchase financing (year ended June 30, 2006 -
$387,250, to an officer of the Company bearing interest at bank
prime less 1.5% and is secured by the shares of the Company à
acquired with the loan proceeds).
In accordance with the applicable accounting guidance, the Company
accounts for share purchase financing as a reduction of share
capital and the benefit of the financing has been estimated using
the Black Scholes option pricing model and the following à
assumptions: risk-free interest rate - 4.25%; expected life two
years; expected volatility 50%; and expected dividend yield 0%.
For the period ended March 31, 2007 no compensation expense was
recognized (year ended June 30, 2006 - $98,858). Interest and any
payments received on these loans are being recorded as a capital
contribution.
g) Warrants
During the nine month period ended March 31, 2007 no warrants were
granted and 389,367 expired.
Weigted
average
Number of exercise
warrants price
---------------------------
Outstanding at June 30, 2005 389,367 1.85
Granted in connection with the IPO 824,492 2.35
----------------------------
Outstanding at June 30, 2006 1,213,859 2.19
Warrants expired (389,367) 1.85
----------------------------
Outstanding at March 31, 2007 824,492 2.35
----------------------------
----------------------------
The fair value of the warrants has been estimated by management
using the Black Scholes option pricing model. The weighted
average assumptions used in the pricing model to value the
warrants are as follows:
March 31, June 30,
2007 2006
Risk-free interest rate 4.25% 4.25%
Expected option life 4 year 4 year
Expected volatility 50% 50%
Expected dividend yield nil nil
h) Stock options
On March 22, 2006, the Board of Directors approved an employee share
option plan which provides for the issuance of up to 3,500,000 common
shares. On the same date, the Company issued options under this plan
to purchase 746,547 shares at $2.25 per share, vesting at various
times over four years and expiring on March 22, 2011.
During the nine month period ended March 31, 2007, 175,000 stock
options issued at $1.85 per share expired and 900,000 were issued at
$2.35 per share, vesting at various times over four years and expiring
on October 3, 2011.
At March 31, 2007 and June 30, 2006, the Company had the following
stock options outstanding:
Weigted
average
Number of exercise
options price
---------------------------
Outstanding at June 30, 2005 275,000 1.85
Granted to directors, an officer and
employees 746,547 2.25
---------------------------
Outstanding at June 30, 2006 1,021,547 2.14
---------------------------
---------------------------
Granted to employees 900,000 2.35
Options expired (175,000) 1.85
---------------------------
Outstanding at March 31, 2007 1,746,547 2.28
---------------------------
---------------------------
The options exercisable as of March 31, 2007 total 100,000 at a
weighted average exercisable price of $1.85 and 275,000 at $1.85 as of
June 20, 2006. The weighted average grant date value of stock options
at March 31, 2007 has been estimated at $0.86 (June 30, 2006 - $1.27)
using the Black Scholes option pricing model. The following weighted
average assumptions were used in the calculations:
March 31, June 30,
2007 2006
Risk-free interest rate 4.25% 4.25%
Expected option life 5 years 7 years
Expected volatility 50% 50%
Expected dividend yield nil nil
Changes in the assumptions can materially affect the fair value
estimate and therefore, the existing models do not necessarily provide
a reliable measure of the fair value of the stock options.
During the three and nine month periods ended March 31, 2007, a total
of $79,057 and $243,820 respectively (three and nine month periods
ended March 31, 2006 - $nil, and $nil), was recognized as compensation
expense.
i) Put options
Pursuant to a financing by Media Fund, the Company granted to the new
shareholders of Media Fund a right to have the Company purchase their
common shares in exchange for common shares of the Company (the "put
option") on a one-for-one basis. These put options are exercisable
only if and when the Company obtains a public listing for its shares.
The put options are automatically exercised on January 15, 2009,
unless the holder rejects the put right. The Company has a buy-out
right to acquire all of the Media Fund shares after obtaining a public
listing unless more than 25 percent of the shareholders reject the put
right.
The common shares of Media Fund are redeemable by January 15, 2009
since a listing of the Company has occurred. However, as these common
shares of Media Fund are residual equity in Media Fund, these shares
have been presented as non-controlling interest.
The put option was issued for no consideration. At March 31, 2007,
425,420 (June 30, 2006 - 425,420) shares in Media Fund carried the put
option described above.
13 Earnings (loss) per common share
Earnings (loss) per common share is calculated as follows:
For the For the For the For the
three-months three-months nine-months nine-months
ended ended ended ended
March 31, March 31, March 31, March 31,
2007 2006 2007 2006
$ $ $ $
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss)
for the period 310,654 (359,743) 342,870 (1,330,898)
Weighted average
number of common
shares :
Basic 32,801,452 14,076,714 32,663,816 14,050,226
Fully diluted 35,972,911 15,166,501 35,886,199 15,166,724
Earnings (loss)
per common share:
Basic 0.01 (0.03) 0.01 (0.09)
Fully diluted 0.01 (0.03) 0.01 (0.09)
------------------------------------------------------
------------------------------------------------------
For the three and nine month periods ended March 31, 2006, the effect
of convertible, warrants, stock options and put options has been
excluded from the calculations because they are anti-dilutive as a
result of the net loss. The weighted average number of potentially
dilutive instruments, comprised of shares issuable in respect of
convertible warrants, stock options and put options for the three and
nine months ended March 31 are 3,171,459 and 3,222,383 respectively
(March 31, 2006 - 1,089,787 and 1,066,498 respectively).
14 Net change in non-cash working capital balances related to operations
For the For the For the For the
three-months three-months nine-months nine-months
ended ended ended ended
March 31, March 31, March 31, March 31,
2007 2006 2007 2006
$ $ $ $
(unaudited) (unaudited) (unaudited) (unaudited)
Decrease (increase)
in amounts
receivable (3,357,469) (802,934) (4,138,285) (1,506,658)
Decrease (increase)
in subscriptions
receivable - - - -
Decrease (increase)
in prepaid expenses
and deposits 38,373 (17,649) 75,018 78,263
Decrease (increase)
in restricted cash 367,839 83,565 332,742 (792,511)
Decrease (increase)
in development
costs - - - -
Decrease (increase)
in film and television
programs in progress - - - -
Increase (decrease)
in accounts payable
and accrued
liabilities 742,563 1,094,487 (4,616,259) (296,881)
Increase (decrease)
in income taxes
payable 278,721 10,062 383,156 (37,785)
Increase (decrease)
in deferred revenue 3,488,030 333,765 11,712,793 34,830
------------------------------------------------------
1,558,057 701,296 3,749,165 (2,520,742)
------------------------------------------------------
------------------------------------------------------
During the period,
the Company paid
and received the
following:
Interest paid 828,920 103,982 2,101,541 253,201
Interest received 19,452 14,200 83,656 70,906
15 Revenues
The Company has determined that it operates in one reporting segment
with the following sources of revenue:
For the For the For the For the
three-months three-months nine-months nine-months
ended ended ended ended
March 31, March 31, March 31, March 31,
2007 2006 2007 2006
$ $ $ $
(unaudited) (unaudited) (unaudited) (unaudited)
Production revenue 3,985,261 1,510,441 8,629,370 4,534,821
Distribution
revenue 1,343,308 - 4,662,958 12,716
Producer and service
fee revenues,
equity method 149,000 378,753 1,249,523 1,926,945
Other 496,768 - 1,337,083 -
------------------------------------------------------
5,974,337 1,889,194 15,878,934 6,474,482
------------------------------------------------------
------------------------------------------------------
16 Seasonality
Results of operations for any period are dependent on the number and
timing of film and television programs delivered which cannot be
predicted with certainty. Consequently, the Company's results from
operations may fluctuate materially from period to period and the
results of any one period are not necessarily indicative of results
for future periods. Cash flows may also fluctuate and are not
necessarily closely correlated with revenue recognition.
The film and television revenues are generally highest in the third
and fourth fiscal quarters, driven by contracted deliveries with the
primary broadcasters. Distribution revenues are contract and demand
driven and can fluctuate significantly from period to period.
17 Reconciliation of Canadian Generally Accepted Accounting Principles
("GAAP") and International Financial Reporting Standards ("IFRS")
These consolidated financial statements have been prepared in
accordance with Canadian GAAP. In certain aspects, GAAP, as applied
under IFRS differs from Canadian GAAP.
a) Judgments made by management
IFRS requires disclosure of judgments that have been made by
management in the preparation of the financial statements. In
this regard, other than estimates which are disclosed under
Canadian GAAP, management has made judgments about which
development projects, with total costs of $1,569,155 at March 31,
2007 (year ended June 30, 2006 - $681,181) are likely to result in
productions. Development projects which, during the reporting
period, have not been assessed as likely to proceed have been
written off.
b) Dividends per share
IFRS requires the Company to disclose dividends per share. There
were no dividends paid per share for the three and nine months
ended March 31, 2007 and 2006.
c) Leases
Under IFRS total costs charged to expenses under operating leases
must be disclosed. The Company incurred rent expense of $172,979
for the nine month period ended March 31, 2007 (nine month period
ended March 31, 2006 - $210,898).
d) Financial instruments
Under IFRS, transaction costs directly attributable to the
issuance of financial instruments are deducted from the proceeds
of the offering whereas under Canadian GAAP, such costs are
recorded as deferred financing fees. Accordingly, deferred
financing fees as at March 31, 2007 of $nil (March 31, 2006 -
$1,015,841) would be applied to reduce the financial liability
component of the Class A preferred shares. This difference has no
impact on the statements of operations and deficit as the
amortization method used under Canadian GAAP results in a charge
to the statement consistent with the use of the effective interest
rate method under IFRS.
DHX MEDIA LTD.
Q3 2007
FORM 51-102F1
Management Discussion and Analysis
of Financial Condition and Results of Operations
For the Three and Nine Months Ended March 31, 2007 and March 31, 2006
(Unaudited)
DHX MEDIA LTD.
Form 51 - 102F1 Quarterly Report
March 31, 2007
MANAGEMENT DISCUSSION AND ANALYSIS
The following Management Discussion & Analysis ("MD&A") prepared as of May
14, 2007, should be read in conjunction with the Company's unaudited interim
consolidated financial statements and accompanying notes for the three and
nine months ended March 31, 2007 and 2006, as well as the Company's annual
MD&A and audited consolidated financial statements and accompanying notes for
the years ended June 30, 2006 and 2005. The unaudited interim consolidated
financial statements and accompanying notes for the three and nine months
ended March 31, 2007 and 2006 have been prepared in accordance with Canadian
generally accepted accounting principles for preparation of interim financial
information and have been reviewed by DHX.
The Company's auditors, PricewaterhouseCoopers LLP, have not reviewed the
unaudited interim consolidated financial statements and accompanying notes for
the three and nine months ended March 31, 2007 and 2006.
The unaudited comparative interim consolidated financial statements and
accompanying notes for the three and nine months ended March 31, 2006, are for
periods prior to the acquisition of Decode Entertainment Inc. ("Decode") (see
"Acquisitions" section of this MD&A for further details on the Decode
acquisition).
DHX Media Ltd. (the "Company" or "DHX") is a public company incorporated
under the Canadian Business Corporations Act and its shares are listed on the
TSX and AIM Exchanges as of May 19, 2006 (symbol DHX). Additional information
relating to the Company can be found on SEDAR at www.sedar.com.
The Company prepares its financial statements in accordance with Canadian
generally accepted accounting principles. Figures in this MD&A that are shown
as ",000" (for example, "$100,000") are approximate and have been rounded to
the nearest thousand.
This MD&A contains certain forward-looking statements, which reflect
Management's expectations regarding the Company's growth, results of
operations, performance and business prospects and opportunities.
Statements about the Company's future plans and intentions, results,
levels of activity, performance, goals or achievements or other future events
constitute forward-looking statements. Wherever possible, words such as "may,"
"will," "should," "could," "expect," "plan," "intend," "anticipate,"
"believe," "estimate," "predict," or "potential" or the negative or other
variations of these words, or other similar words or phrases, have been used
to identify these forward-looking statements. These statements reflect
Management's current beliefs and are based on information currently available
to Management.
Forward-looking statements involve significant risk, uncertainties and
assumptions. Many factors could cause actual results, performance or
achievements to differ materially from the results discussed or implied in the
forward-looking statements. These factors should be considered carefully and
readers should not place undue reliance on the forward-looking statements.
Although the forward-looking statements contained in this MD&A are based upon
what Management believes to be reasonable assumptions, the Company cannot
assure readers that actual results will be consistent with these
forward-looking statements. These forward-looking statements are made as of
the date of this MD&A, and the Company assumes no obligation to update or
revise them to reflect new events or circumstances. Many factors could cause
the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements, including:
general economic and market segment conditions, competitor activity, product
capability and acceptance, international risk and currency exchange rates, and
technology changes. An assessment of the risks that could cause actual results
to materially differ from current expectations is contained in the "Risk
Assessment" section of this MD&A. For a more detailed assessment of the risks
that could cause actual results to materially differ from current expectations
see the "Risk Assessment" section of the Company's Annual MD&A for the year
ended June 30, 2006 found on SEDAR at www.sedar.com.
The foregoing is not an exhaustive list and other risks are detailed from
time to time in other continuous disclosure filings of the Company. Should one
or more of these risks or uncertainties materialize, or should assumptions
underlying the forward-looking statements prove incorrect, actual results may
vary materially from those described herein as anticipated, believed,
estimated or expected.
Use of Non-GAAP Financial Measures
In addition to the results reported in accordance with Canadian generally
accepted accounting principles, determined with reference to the Handbook of
the CICA ("GAAP"), the Company uses various non-GAAP financial measures, which
are not recognized under Canadian GAAP, as supplemental indicators of our
operating performance and financial position. These non-GAAP financial
measures are provided to enhance the user's understanding of our historical
and current financial performance and our prospects for the future. Management
believes that these measures provide useful information in that they exclude
amounts that are not indicative of our core operating results and ongoing
operations and provide a more consistent basis for comparison between periods.
The following discussion explains the Company's use of EBITDA and Gross Margin
as measures of performance.
"EBITDA" means earnings (loss) before interest, taxes, depreciation,
amortization and stock-based compensation expense. Amortization includes
amortization of property, plant and equipment, acquired libraries and
intangible assets. EBITDA represents net income (loss) of the Company before
amortization of property, plant and equipment, acquired libraries and
intangible assets, interest and amortization of deferred financing fees,
interest income (expense), non-controlling interest, equity income (loss),
development expenses and stock-based compensation expense. EBITDA is not an
earnings measure recognized by GAAP and does not have a standardized meaning
prescribed by GAAP. Therefore, EBITDA may not be comparable to similar
measures presented by other issuers. Management believes EBITDA to be a
meaningful indicator of our performance that provides useful information to
investors regarding our financial condition and results of operation.
"Gross Margin" means revenue less direct production costs and amortization
of film and television programs. Gross Margin is not an earnings measure
recognized by GAAP and does not have a standardized meaning prescribed by
GAAP. Therefore, Gross Margin may not be comparable to similar measures
presented by other issuers.
A reconciliation of historical results to EBITDA is presented at the end
of this MD&A.
Business of the Company
DHX is a leading independent supplier of television and film productions.
The Company is the result of the combination of The Halifax Film Company
Limited ("Halifax Film") and Decode Entertainment Inc. ("Decode")
The Company produces, distributes and exploits the rights for television
and film programming. DHX's primary focus is on children's and youth
productions because of the international sales potential and longer-term and
multiple revenue streams that this genre of programming provides. Children's
programming travels across cultures more easily than other genres and can
therefore be sold into numerous markets, typically has a longer lifespan than
other genres and can be leveraged for merchandising and licensing revenues.
DHX's content library includes over 1,700 half-hours of programming and
over 40 individual titles produced over the last nine years. The Company has
twelve children's series currently in first window broadcast on multiple major
cable and broadcast networks in North America and internationally, including,
Lunar Jim, Franny's Feet, The Save-Ums and Naturally Sadie. The Company's
prime-time production slate also includes notable achievements in the comedy
genre, including the award-winning Canadian prime-time comedy series This Hour
Has 22 Minutes, which is produced for the CBC and is now in its 14th season.
The Company operates from its offices and production facilities in Halifax and
Toronto producing content for distribution in domestic and international
markets which is marketed via its Toronto and London, England-based sales
group.
Revenue Model
The Company historically earns revenues primarily from four categories:
production and then distribution of its proprietary productions, producer and
service fees from production services for third parties and other revenues
which includes rental of studios and office facilities, investing income,
music and royalty revenue and new media revenue. The Company is able to
generate revenue from productions by licensing its initial broadcast rights
and pre-licensing of territories for its programs. Production revenues include
the initial broadcast license revenues and any pre-sales or distribution
advances included in the initial financing of the production of a film and
television program. Once a production is completed and delivered, the program
is included in the Company's library of film and television programming.
Further revenue from exploitation of the program is included in distribution
revenue. The Company also generates revenue from production services for third
parties. These service and corporate overhead fees are earned for producing of
productions whose copyright is owned by third parties.
Production Revenue
The Company derives production revenues from the grant of initial
broadcast rights for the initial showing of commissioned productions and
pre-licensing of territories. These fees are typically partially earned upon
commissioning of a production, during production, once a completed production
is delivered for broadcast and at some point in time after delivery as a
holdback. (See "Critical Accounting Policies" section of this MD&A for details
on revenue recognition.)
Distribution Revenue
The Company is able to retain the ownership rights to its proprietary
production, which permits the Company to generate further revenues from the
distribution of the Company's productions. In addition to generating revenues
from the sale of initial broadcast rights, the Company is able to concurrently
generate revenues from the sale of broadcast rights in other jurisdictions and
on other platforms (such as DVD and video) for specified periods of time.
Producer and Service Fee Revenue
These service and corporate overhead fees are earned for producing
productions whose copyright is owned by third parties.
Other Revenue
Other revenue includes rental of studios and office facilities, investing
income, music and royalty (including merchandising and licensing) and new
media revenue.
Disclosure Controls and Procedures and Internal Controls over Financial
Reporting ("ICFR")
The Company's Chief Executive Officer and Chief Financial Officer are
responsible for establishing and maintaining the Company's disclosure controls
and procedures and establishing ICFR (as defined in Multilateral
Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim
Filings).
The Chief Executive Officer and Chief Financial Officer, after evaluating
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the date of this MD&A, have concluded that the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries required to be disclosed in the Company's reports filed or
submitted under the Multilateral Instrument would have been known to them.
The Company's Board of Directors has approved a Code of Business Conduct
and Ethics and it has been distributed to all directors, officers and
employees of the Company as of the date of this MD&A.
During the first nine months of fiscal 2007, the Company completed a
business acquisition (Q4 2006 - the Company completed three business
acquisitions) (see "Acquisitions" section of this MD&A). Management is in the
process of reviewing the design of ICFR for these new subsidiaries and to date
is not aware of any material weaknesses. Through this review process
management has implemented and anticipates implementing further changes to
enhance the ICFR for these subsidiaries to bring them in line with the overall
policies of the Company.
Critical Accounting Policies
Revenue Recognition
Production and Distribution Revenue
The Company recognizes revenues from the licensing of film and television
programs when: a) the Company has persuasive evidence of a contractual
arrangement; b) the production has been completed; c) the contractual delivery
arrangements have been satisfied; d) the licensing period has commenced;
e) the fee is fixed or determinable; and f) collectibility of proceeds is
reasonably assured.
Cash payments received or advances currently due pursuant to a broadcast
license or distribution arrangement are recorded as deferred revenue until all
of the foregoing conditions of revenue recognition have been met.
Producer and Service Fee Revenue
Revenues from production services for third parties are recognized on a
percentage-of-completion basis. Associated production costs are charged
against earnings as the revenue is recognized. Percentage-of completion is
based upon the proportion of costs incurred in the current period to total
expected costs. A provision is made for the entire amount of future estimated
losses, if any, on production-in-progress.
Variable Interest Entities
The Company follows Accounting Guideline 15 - Consolidation of Variable
Interest Entities ("AcG 15"). AcG 15 provides criteria for the identification
of Variable Interest Entities ("VIEs") and further criteria for determining
what entity, if any should consolidate them. AcG 15 defines a VIE as an entity
that either does not have sufficient equity at risk to finance its activities
without subordinated financial support or where the equity investors lack the
characteristic of a controlling financial interest. VIEs are subject to
consolidation by a company if that company is deemed the primary beneficiary
of the VIE. The primary beneficiary is the party that is either exposed to a
majority of the expected losses from the VIEs' activities or is entitled to
receive a majority of the VIEs' residual returns or both. (For a more detailed
discussion of VIEs see "Change in Accounting Policy" section of this MD&A.)
Investment in Film and Television Programs
Investment in film and television programs represents the unamortized
costs of film and television programs which have been produced by the Company
or for which the Company has acquired distribution rights. Investment in film
and television programs also includes acquired film and television libraries.
Costs of acquiring and producing film and television programs are capitalized,
net of federal and provincial program contributions earned, and amortized
using the individual film forecast method, whereby capitalized costs are
amortized and ultimate participation costs are accrued in the proportion that
current revenue bears to management's estimate of ultimate revenue expected to
be recognized from the exploitation, exhibition or licensing of the film or
television program. For film and television programs produced by the Company,
capitalized costs include all direct production and financing costs incurred
during production that are expected to benefit future periods. Financing costs
are capitalized to the costs of a film or television program until the film or
television program is complete. Capitalized production costs do not include
administrative and general expenses, the cost of overall deals, or charges for
losses on properties sold or abandoned. For episodic television series, until
estimates of secondary market revenue can be established, capitalized costs
for each episode produced are limited to the amount of revenue contracted for
each episode. Costs in excess of this limitation are expensed as incurred on
an episode-by-episode basis. Production financing provided by third parties
that acquire substantive equity participation is recorded as a reduction of
the cost of the production. Film and television programs in progress represent
the accumulated costs of productions, which have not been completed by the
Company. For films other than episodic television series and acquired
libraries, ultimate revenue includes estimates over a period not to exceed ten
years following the date of initial release. For episodic television series,
ultimate revenue includes estimates of revenue over a period not to exceed ten
years from the date of delivery of the first episode or, if still in
production, five years from the date of delivery of the most recent episode,
if later. For acquired film and television libraries previously released,
ultimate revenue includes estimates of revenue over a period not to exceed
twenty years from the date of acquisition.
Revenue estimates are prepared on a title-by-title basis and are reviewed
periodically based on current market conditions. For film, revenue estimates
include net theatrical receipts, sale of videocassettes and DVDs, licensing of
television broadcast rights and licensing of other ancillary film rights to
third parties. For television programs, revenue estimates include licensed
rights to broadcast television programs in development and rights to renew
licenses for episodic television programs in subsequent seasons. Ultimate
revenue includes estimates of secondary market revenue for produced episodes
only when the Company can demonstrate through its experience or industry norms
that the number of episodes already produced, plus those for which a firm
commitment exists and the Company expects to deliver, can be licensed
successfully in the secondary market.
Estimates of future revenue involve measurement uncertainty and it is
therefore possible that reductions in the carrying value of investment in film
and television programs may be required as a consequence of changes in
management's future revenue estimates.
The valuation of investment in film and television programs is reviewed on
a title-by-title basis when an event or change in circumstances indicates that
the fair value of a film or television program is less than its unamortized
cost. The fair value of the film or television program is determined using
management's estimates of future revenues and costs under a discounted cash
flow approach. A write-down is recorded equivalent to the amount by which the
unamortized costs exceed the estimated fair value of the film or television
program.
Stock-based Compensation
The Company follows the Canadian Institute of Chartered Accountants
Handbook Section 3870 ("CICA 3870"), "Stock-based Compensation and Other
Stock-based Payments". Under the amended standards of this Section, the fair
value of all stock options granted to employees are recorded in operations or
production costs, as applicable over their vesting periods.
The fair value of options is determined using the Black Scholes option
pricing model that takes into account, as of the grant date, the exercise
price, the expected life of the option, the current price of the underlying
stock and its expected volatility, expected dividends on the stock, and the
risk-free interest rate over the expected life of the option. The resulting
fair value of the options is expensed on a straight-line basis over their
vesting periods. Cash consideration received from employees when options are
exercised and the value of options accumulated in contributed surplus are
credited to share capital.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set out below for the three
and nine months ended March 31, 2007 and 2006 and as at March 31, 2007 and the
year ended June 30, 2006 has been derived from the Company's unaudited interim
consolidated financial statements and accompanying notes for the three and
nine months ended March 31, 2007 and 2006 and from the audited consolidated
financial statements and accompanying notes for the year ended June 30, 2006.
Both can be found at www.sedar.com. The financial information for the three
and nine months ended March 31, 2007 in the table includes a full three and
nine month's activity of the Company's Halifax Film division and Decode
division, however the comparative period for the three and nine months ended
March 31, 2006 only includes the activity of the Company's Halifax Film
division and no amounts for the Decode division (See-"Acquisitions" section of
this MD&A for further details on the Decode acquisition). Each reader should
read the following information in conjunction with those statements and the
related notes. Further, all financial information herein prior to May 18, 2006
is for activity of periods prior to the acquisition of Decode.
Three Months Ended Nine Months Ended
March 31, March 31,
2007 2006 2007 2006
$ $ $ $
------------------------------------------------------
Consolidated
Statements of
Operations Data:
Revenue 5,974,337 1,889,194 15,878,934 6,474,482
Direct production
costs and
amortization of
film and
television
programs 3,575,577 1,611,876 10,039,879 5,347,548
------------------------------------------------------
Gross margin 2,398,760 277,318 5,839,055 1,126,934
------------------------------------------------------
Selling, general
and administrative 2,056,226 355,015 5,598,520 1,346,879
Operating income
(loss) 527,080 (80,237) 603,380 (427,235)
Interest and other
(expenses), net (41,426) (269,506) (134,510) (872,056)
Net income (loss) 310,654 (359,743) 342,870 (1,330,898)
Basic and fully
diluted earnings
(loss) per common
share 0.01 (0.03) 0.01 (0.09)
Weighted average
common shares
outstanding
Basic 32,801,452 14,076,714 32,663,816 14,050,226
Fully Diluted 35,972,911 15,166,501 35,886,199 15,166,724
--------------------------
March 31, June 30,
2007 2006
$ $
--------------------------
Consolidated
Balance Sheet
Data:
Cash, restricted
cash and
short-term
investments 7,364,027 9,572,729
Investment in
film and
television
programs 43,662,716 21,249,652
Total assets 102,807,707 77,798,440
Total debts 62,333,950 38,202,322
Shareholder
equity 40,473,757 39,596,118
Results for the nine months ended March 31, 2007 ("Nine Months - 2007")
compared to the nine months ended March 31, 2006 ("Nine Months - 2006")
Revenues
Revenues for the Nine Months - 2007 were $15.879 million, up from
$6.474 million for the Nine Months - 2006, an increase of 145%. The increase
is due to increases in the Company's production, distribution, music royalties
and new media revenue categories. Management was pleased with the growth in
revenue given that Nine Months - 2007 was the first full nine months of
integrating the Decode activities into the results of the Company. Management
expects this integration to continue for the last quarter of Fiscal 2007 and
to result in further synergies and revenue growth for the remainder of Fiscal
2007 and into Fiscal 2008. The revenue growth for Nine Months - 2007 is also
encouraging given that the results included Q1 and Q2 which are typically
slower quarters in the Canadian film and television industry as the majority
of television deliveries occur in the winter and spring seasons, which for the
Company is its third and fourth quarter (See "Seasonality" section of this
MD&A for further details).
Proprietary production revenues for Nine Months - 2007 of $8.629 million
were up 90% over the $4.535 million for Nine Months - 2006. The increase for
Nine Months - 2007 is consistent with the Company's strategic goal to increase
production revenue generated from home grown productions both in absolute
dollars and as a percentage of the total production revenues earned. The
growth included a 25% increase to $5.659 million (Nine Months -
2006-$4.535 million) in proprietary production revenue for the Halifax Film
division and the inclusion of $2.970 million for the Nine Months - 2007 (Nine
Months - 2006-nil, as this was prior to the acquisition) for the Decode
division.
For Nine Months - 2007 the Company delivered
$8.629 million-92.5 half-hours of proprietary television programs, an 85%
increase in half-hours delivered over Nine Months - 2006. The breakdown for
Nine Months - 2007 of the $8.629 million was: $0.260 million-26 half-hours of
Naturally Sadie Season II to SRC in Canada, $1.235 million-13 half-hours of
Naturally Sadie Season III, $0.608 million-6.5 half-hours of Planet Sketch
Season II, $0.867 million-7 half-hours of Chop Socky Chooks Season I,
$0.245 million-1 half-hour for the pilot of The Truth About,
$0.655 million-8 half-hours of POKO Season III, $4.121 million-19 half-hours
of This Hour Has 22 Minutes Season XIV, $0.149 million-4 half-hours of Lunar
Jim II (note this amount is included in producer fees in net production
service revenue), and $0.638 million-8 half hours of Bo on the Go Season I.
The breakdown for Nine Months - 2006 of the $4.535 million-50 half-hours was:
$3.138 million-16 half-hours of This Hour Has 22 Minutes Season XIII,
$1.397 million-14 half hours of POKO II and $0.532 million in producer
fees-20 half-hours on Lunar Jim Season I (note this amount is included in
producer fees in net production service revenue).
Net production service revenues for Nine Months - 2007 brought forward to
the Company's consolidated statement of operations accounted for using the
equity method (see note 6 to the unaudited interim consolidated financial
statements for the three and nine months ended March 31, 2007 and 2006) were
$1.250 million down 35% from Nine Months - 2006 of $1.927 million. The
breakdown for net production service revenues was $1.101 million and
$0.149 million from the delivery of production services related to the feature
film entitled Outlander and producers fees and overheads earned for the
television series Lunar Jim Season II respectively (Nine Months -
2006-$1.355 million and $44,000 of production service revenues for delivery of
services on Slevin and Ambition respectively and $0.528 million for the
television series Lunar Jim Season I).
Gross production service revenues for Nine Months - 2007 (see note 6 to
the unaudited interim consolidated financial statements for the three and nine
months ended March 31, 2007 and 2006) were $31.591 million up 654% from Nine
Months - 2006 of $4.189 million. The breakdown for gross production service
revenues was $31.427 million, $15,000 and $0.149 million from the delivery of
production services related to the feature films entitled Outlander and Slevin
and producers fees and overheads earned for the television series Lunar Jim
Season II respectively (Nine Months - 2006-$1.355 million and $44,000 of
production service revenues for delivery of services on Slevin and Ambition
respectively and $2.790 million for the television series Lunar Jim Season I).
For Nine Months - 2007 distribution revenues were up significantly to
$4.663 million from $13,000 for Nine Months - 2006. For Nine Months - 2007 the
Company was successful in integrating the distribution team from the Decode
division into the remainder of the Company and as such was able to place some
20 titles from its current production slate and its library in multiple
territories throughout the world. Some of the more significant sales were on
the following titles: Angela Anaconda seasons I to III, Delilah & Julius
season I, Franny's Feet season I and II, Naturally Sadie season I to III, The
SaveUms season I and II, Girlstuff-Boystuff seasons I and II, Poko season I to
III, and Planet Sketch season I. The Company anticipates further revenue
growth in distribution revenue for Q4 2007.
For Nine Months - 2007 music and royalty and new media revenues were up to
$0.710 million (Nine Months - 2006-nil) and $0.392 million (Nine Months -
2006-nil) respectively. These revenue streams have increased as Nine Months -
2007 includes these revenue steams for the Decode division whereas Nine
Months - 2006 included no activities for Decode. The Company anticipates
further revenue growth, specifically in the category of music and royalty
revenues, as it embarks upon its merchandising and licensing ("M&L")
relationships with PLAYSKOOL, a division of Hasbro, Inc., for the Company's
preschool property, Franny's Feet, and Alliance Atlantis on another preschool
property, Lunar Jim. The Company is also focused on expanding into other M&L
relationships for other existing proprietary properties.
For Nine Months - 2007 rental revenues were $0.235 million (Nine Months -
2006-nil) from the rental of studio and office facilities to third parties as
a result of the Company's purchase of Electropolis (See "Acquisitions" section
of this MD&A for further details) and from rental of currently unused office
space in the Company's headquarters in Halifax, Nova Scotia.
Gross Margin
Gross Margin for Nine Months - 2007 was $5.839 million, an overall 36.8%
of revenue versus $1.127 million or 17.4% of revenue for Nine Months - 2006,
an increase of 111% or $4.712 million in absolute margin dollars. The Gross
Margin for Nine Months - 2007 was higher than Nine Months - 2006 as there were
significant increases in the following four revenue categories: production,
distribution, music and royalties and new media as a result of organic growth
and the inclusion of activities for Decode for Nine Months - 2007 over no
amounts for Nine Months - 2006. These revenue streams for the Nine Months -
2007 have much higher margins than the Company's historic production revenues
when comparing to Nine Months - 2006.
For Nine Months - 2007 the margins for each revenue category in absolute
dollars and as a margin percentage are as follows: production revenue margin
$2.704 million or 27.4%, distribution revenue margin of $2.076 million or
44.5% ($1.849 million or 39.7% when you remove $0.227 million for the
amortization of acquired libraries), music and royalty revenue margin
$0.688 million or 96.8%, new media revenue margin of $0.136 million or 34.7%
and rental revenue margin of $0.235 million or 100%. All revenue streams were
significant contributors to the margin increase for Nine Months - 2007.
In particular, production and distribution in terms of absolute dollars
contributed $2.704 million and $2.076 million respectively or 82% of the total
margin. Production margin at 27.4% is in line with management expectations.
Distribution margin can fluctuate greatly from title-to-title and at 44.5% is
at the high end of the range of management's expectations. This is as a result
of a few key sales on older titles that have a relatively low book value
resulting in higher margins for Nine Months - 2007. Going forward management
would expect the range on distribution margin to be from 30 to 45%. Music and
royalty margin at 96.8% was in line with management's expectations and are
generally already on a net basis as the Company's license arrangements call
for the deducting of third party commissions and expenses prior to the receipt
of the royalty stream to the Company. Therefore, management would expect this
revenue stream to have a low cost of goods sold going forward with margins in
the 80-90% range. New media margins at 34.7% are in line with management
expectations. Rental revenue at this time requires no dedicated cost of goods
sold associated with the earning of the revenue, so predominately all rental
revenues will fall to the bottom line with the exception of nominal
administrative charges of up to 5%.
Overall Gross Margin for Nine Months - 2007 at 36.8% was higher than
management's projected margin and we would expect that in future periods'
Gross Margin to be more in the line with a 25 to 35% range.
Income from other investing
For Nine Months - 2007 income from other investing activities was
$1.464 million versus no amounts for Nine Months - 2006.
Operating Expenses
Operating expenses for Nine Months - 2007 were $5.236 million compared to
$1.554 million for Nine Months - 2006, an increase of 237%. The increase for
Nine Months - 2007 is mainly due to a 316% increase in SG&A to $5.599 million
up from $1.347 million for Nine Months - 2006. SG&A costs have increased as a
result of the Company adding key personnel and expanding facilities as a
result of increased activities and increased regulatory requirements from
being public and nine months of SG&A related to the Company's Decode division
which was not included in the Nine Months - 2006 total. For Nine Months -
2007, included in Operating Expenses is $1.035 million for amortization versus
$6,000 for Nine Months - 2006 (see "Amortization" section in this MD&A for
further details).
EBITDA
In Nine Months - 2007 EBITDA was positive at $1.948 million
($1.464 million resulted from income from other investing), a significant
improvement as compared to a loss of $0.220 million for Nine Months - 2006.
For Nine Months - 2007 this was due to the increase in Gross Margin dollars of
$4.712 million and adding back of non-cash stock-based compensation expense of
$0.244 million and was offset by the increase in SG&A, net of income from
other investing of $2.788 million for a positive total dollar change of
$2.168 million.
Amortization
Amortization includes amortization of property, plant and equipment,
acquired libraries and intangible assets. For Nine Months - 2007 amortization
was $1.035 million (Nine Months - 2006-$6,000). The breakdown for amortization
was $0.337 million, $0.227 million, and $0.471 million for amortization of
property, plant and equipment, acquired libraries and intangible assets
respectively. For Nine Months - 2007 amortization of property, plant and
equipment was $0.337 million (Nine Months - 2006-$6,000) due to the
significant additions to property, plant and equipment, specifically the
building purchase and construction of the Company headquarters in Halifax,
Nova Scotia and the inclusion of the Decode property, plant and equipment for
Nine Months - 2007 which was not included in Nine Months - 2006. For Nine
Months - 2007 the amortization of acquired libraries was $0.227 million (Nine
Months - 2006-nil) which relates to the library acquired as part of the
acquisition of Decode (see "Acquisitions" section in the MD&A for further
details). For Nine Months - 2007 amortization of intangible assets was
$0.471 million (Nine Months - 2006-nil) which relates to the intangible assets
acquired as part of the acquisition of Decode (see "Acquisitions" section in
the MD&A for further details).
Interest
Interest expense, net of interest revenue, for Nine Months - 2007 was
$0.104 million versus net interest expense of $0.642 million for Nine Months -
2006. Net interest expense consists of $0.213 million and $15,000 for interest
expense on long-term debt and interest and bank charges respectively offset by
interest revenue in Nine Months - 2007 of $0.124 (Nine Months - 2006-nil,
$2,000 and $0.124 million respectively). For Nine Months - 2007 there were no
amounts (Nine Months - 2006- $0.764 million) for interest accreted on the
Class A Preferred Shares and amortization and deferred financing.
Equity Income (Loss) and Non-Controlling Interest
For Nine Months - 2007 the Company recorded an equity loss of $15,000 for
its investment in production companies (Nine Months - 2006-$0.222 million for
equity loss) and $16,000 expense for non-controlling interest (Nine Months -
2006-$8,000).
Income Taxes
Income tax expenses for Nine Months - 2007 was a net expense of income
taxes of $0.126 million (Nine Months - 2006- $32,000 income tax expense) made
up from provisions of $41,000 (Nine Months - 2006-$32,000) for large
corporation taxes and $240,000 (Nine Months - 2006-nil) for current income
taxes offset by a recovery of future income taxes of $155,000 (Nine Months -
2006-nil).
Net Income (Loss)
Net Income for Nine Months - 2007 was $0.343 million, a significant
improvement compared to a net loss of $1.331 million for Nine Months - 2006,
totaling an improvement of $1.674 million in absolute dollars. For Nine
Months - 2007 the overall improvement of $1.674 million was due to changes
over Nine Months - 2006 of the following amounts: a gross margin increase of
$4.712 million offset by an increase in operating expenses, net of income from
other investing of $3.682 million and helped by a $0.738 million improvement
in net interest and other expenses and further offset by a $94,000 increase of
income taxes.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
The following tables set out selected consolidated financial information
for each of the last eight quarters with the last one being the most recent
quarter ended March 31, 2007. In the opinion of management, this information
has been prepared on the same basis as the audited consolidated financial
statements for the years ended June 30, 2006 and 2005 as filed on
www.sedar.com, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results when read in conjunction with
the audited consolidated financial statements and the notes to those
statements. The financial information in the table below, with the exception
of information for Q1, Q2, and Q3 Fiscal 2007 ended September 30, 2006,
December 31, 2006, and March 31, 2007, is for periods prior to the acquisition
of Decode Entertainment Inc. (see "Acquisitions" section of this MD&A for
further details on the Decode acquisition). The operating results for any
quarter should not be relied upon as any indication of results for any future
period.
-----------------------------------------------------------
Fiscal 2007
-----------------------------------------------------------
Q3 Q2 Q1
31-Mar 30-Dec 30-Sep
$ $ $
-----------------------------------------------------------
Revenue 5,974,337 6,704,811 3,199,786
Gross
Margin(1) 2,398,760 2,361,030 1,079,264
EBITDA(1) 917,150 950,859 80,135
Net Income
(Loss) 310,654 234,165 (201,949)
Basic and
Diluted
Earnings
(Loss) Per
Share 0.01 0.01 (0.01)
-----------------------------------------------------------
-----------------------------------------------------------
Fiscal 2006 Fiscal
2005
-----------------------------------------------------------
Q4 Q3 Q2 Q1 Q4
30-Jun 31-Mar 31-Dec 30-Sep 30-Jun
$ $ $ $ $
-----------------------------------------------------------
Revenue 9,412,349 1,889,194 3,105,909 1,479,379 18,749,311
Gross
Margin(1) 1,831,139 277,318 690,148 159,468 486,592
EBITDA(1) 687,578 (77,697) 112,606 (254,854) (61,807)
Net Income
(Loss) 416,008 (359,743) (402,499) (568,656) (350,947)
Basic and
Diluted
Earnings
(Loss) Per
Share 0.02 (0.03) (0.03) (0.04) (0.01)
-----------------------------------------------------------
(1) Certain of the comparative Non-GAAP Financial Measures ("NGFM")
are adjusted for all necessary adjustments, consisting of normal
recurring adjustments and any changes in the current definition
of NGFM (see "Use of Non-GAAP Financial Measures" section of this
MD&A for further details).
Results for the three months ended March 31, 2007 ("Q3 2007") compared to
the three months ended March 31, 2006 ("Q3 2006")
Revenues
Revenues for the Q3 2007 were $5.974 million, up from $1.889 million for
Q3 2006, an increase of 216%. The increase is due to increases in the
Company's production, distribution, music royalties and new media revenue
categories. Management was pleased with the growth in revenue given that Q3
2007 was only the third quarter of integrating the Decode activities into the
results of the Company. The Company also expects double digit revenue growth
for Q4 2007 and Q1 Fiscal 2008 as some of the Company's projected Q3
television deliveries have been delayed and are expected to deliver in the
early summer to summer seasons, which for the Company is its fourth quarter
(See "Seasonality" section of this MD&A for further details).
Proprietary production revenues for Q3 2007 of $3.985 million were up 164%
over the $1.510 million for Q3 2006. The increase for Q3 2007 is consistent
with the Company's strategic goal to increase production revenue generated
from home grown productions both in absolute dollars and as a percentage of
the total production revenues earned. The growth included a 66% increase to
$2.510 million (Q3 2006 -$1.510 million) in proprietary production revenue for
the Halifax Film division and the inclusion of $1.475 million for Q3 2007 (Q3
2006-nil, as this was prior to the acquisition) for the Decode division.
For Q3 2007 the Company delivered $3.985 million-33.5 half-hours of
proprietary television programs ($0.608 million-6.5 half-hours of Planet
Sketch Season II, $0.867 million-7 half-hours of Chop Socky Chooks Season I,
$0.558 million-7 half-hours of Bo on the Go! Season I,
$0.149 million-4 half-hours of Lunar Jim II (note this amount is included in
producer fees in net production service revenue), and
$1.952 million-9 half-hours of This Hour Has 22 Minutes Season XIV) versus the
delivery of $1.510 million-17 half-hours ($1.510 million-9 half-hours of This
Hour Has 22 Minutes Season XIII, $0.528 million-8 half-hours of Lunar Jim
Season I (note this amount is included in producer fees in net production
service revenue for Q3 2006).
Net production service revenues for Q3 2007 brought forward to the
Company's consolidated statement of operations accounted for using the equity
method (see note 6 to the unaudited interim consolidated financial statements
for the three and nine months ended March 31, 2007 and 2006) were
$0.149 million down 60% from Q3 2006 of $0.379 million. The breakdown for net
production service revenues was $0.149 million for producer fees and overheads
earned for the television series Lunar Jim Season II (Q3 2006-$0.528 million
for the television series Lunar Jim Season I, less reversals of $72,000 and
$77,000 for production service revenue for Ambition and Slevin respectively).
Gross production service revenues for Q3 2007 (see note 6 to the unaudited
interim consolidated financial statements for the three and nine months ended
March 31, 2007 and 2006) were $1.846 million down 27% from Q3 2006 of $2.515
million. The breakdown for gross production service revenues was $1.697
million and $0.149 million from the delivery of production services related to
the feature films entitled Outlander and for producer fees and overheads
earned for the television series Lunar Jim Season II respectively (Q3
2006-$77,000 and $72,000 of production service revenues for reversals of
services on Slevin and Ambition respectively and $2.664 million for the
television series Lunar Jim Season I).
For Q3 2007 distribution revenues were up significantly to $1.343 million
from no amounts for Q3 2006. For Q3 2007 the Company was successful in placing
a multitude of titles from its current production slate and its library in
multiple territories throughout the world. Some of the more significant sales
were on the following titles: Angela Anaconda Seasons I to III, Delilah &
Julius Season I, Franny's Feet Season I and II, Naturally Sadie Season I to
III, Girlstuff-Boystuff Seasons I and II, POKO Season I to III, and Planet
Sketch Season I. The Company anticipates further revenue growth in
distribution revenue for Q4 2007.
For Q3 2007 music and royalty and new media revenues were up to
$0.327 million (Q3 2006-nil) and $58,000 (Q3 2006-nil) respectively. These
revenue streams have increased as Q3 2007 includes these revenue steams for
the Decode division whereas Q3 2006 did not include the activities of Decode.
For Q3 2007 rental revenues were $0.112 million (Q3 2006-nil) from the
rental of studio and office facilities to third parties as a result of the
Company's purchase of Electropolis (See "Acquisitions" section of this MD&A
for further details) and from rental of currently unused office space in the
Company's head quarters in Halifax, Nova Scotia.
Gross Margin
Gross Margin for Q3 2007 was $2.399 million an overall 40.2% of revenue
versus $0.277 million or 14.7% of revenue for Q3 2006, an increase of 173% or
$2.122 million in absolute margin dollars. The Gross Margin for Q3 2007 was
higher than Q3 2006 as there were significant increases in the following four
revenue categories: production, distribution, music and royalties and new
media as a result of the third full quarter's activities for Decode for Q3
2007 over no amounts for Q3 2006 and other organic growth. These revenue
streams for Q3 2007 have much higher margins than the Company's historic
production revenues when comparing to Q3 2006.
In particular, production and distribution in terms of absolute dollars
contributed $1.285 million and $0.629 million respectively or 80% of the total
margin. Production margin at 31.1% is in line with management expectations.
Distribution margin can fluctuate greatly from title-to-title and at 46.8% is
at the high end of the range of management's expectations. This is as a result
of a few key sales on older titles that have a relatively low book value
resulting in higher margins for Q3 2007. Going forward management would expect
the range on distribution margin to be from 30 to 45%. Music and royalty
margin at 98.1% was in line with management's expectations and are generally
already on a net basis as the Company's license arrangements call for the
deducting of third party commissions and expenses prior to the receipt of the
royalty stream to the Company. Therefore management would expect this revenue
stream to have a low cost of goods sold going forward with margins in the
80-90% range. New media margins are in line with management expectations.
Rental revenue at this time requires no dedicated cost of goods sold
associated with the earning of the revenue, so predominately all rental
revenues will fall to the bottom line with the exception of nominal
administrative charges of up to 5%.
Overall Gross Margin for Q3 2007 at 40.2% was higher than management's
projected margin and we would expect that in future periods' Gross Margin to
be more in the line with a 25 to 35% range.
Income from other investing
For Q3 2007 income from other investing activities was $0.496 million
versus no amounts for Q3 2006.
Operating Expenses
Operating expenses for Q3 2007 were $1.872 million compared to
$0.358 million for Q3 2006, an increase of 423%. The increase for Q3 2007 is
mainly due to a 479% increase in SG&A to $2.056 million up from $0.355 million
for Q3 2006. SG&A costs have increased as a result of the Company adding key
personnel and expanding facilities as a result of increased activities and
increased regulatory requirements from being public and the third full quarter
of SG&A related to the Company's Decode division which was not included in the
Q3 2006 total. For Q3 2007, included in Operating Expenses is $0.297 million
for amortization versus $3,000 for Q3 2006 (see "Amortization" section in this
MD&A for further details).
EBITDA
In Q3 2007 EBITDA was positive at $0.917 million a significant
improvement, as compared to a loss of $0.078 million for Q3 2006. For Q3 2007
this was due to the increase in Gross Margin dollars of $2.122 million and was
offset by the increase in SG&A, net of income from other investing of $1.206
million and adding back of non-cash stock-based compensation expense of $0.079
million for a positive total dollar change of $0.995 million.
Amortization
Amortization includes amortization of property, plant and equipment,
acquired libraries and intangible assets. For Q3 2007 amortization was
$0.297 million (Q3 2006-$3,000). The breakdown for amortization was
$0.109 million, $0.033 million, and $0.155 million for amortization of
property, plant and equipment, acquired libraries and intangible assets
respectively. For Q3 2007 amortization of property, plant and equipment was
$0.109 million (Q3 2006-$3,000) due to the significant additions to property,
plant and equipment, specifically the building purchase and construction of
the Company headquarters in Halifax, Nova Scotia and the inclusion of the
Decode property, plant and equipment for Q3 2007 which was not included in Q3
2006. For Q3 2007 the amortization of acquired libraries was $0.033 million
(Q3 2006-nil) which relates to the library acquired as part of the acquisition
of Decode (see "Acquisitions" section in the MD&A for further details). For Q3
2007 amortization of intangible assets was $0.155 million (Q3 2006-nil) which
relates to the intangible assets acquired as part of the acquisition of Decode
(see "Acquisitions" section in the MD&A for further details).
Interest
Interest expense, net of interest revenue, for Q3 2007 was $36,000 versus
interest expense of $0.250 million for Q3 2006. Net interest expense consists
of $67,000 and $12,000 for interest expense on long-term debt and interest and
bank charges (Q3 2006-nil and nil) offset by interest revenue in Q3 2007 of
$43,000 (Q3 2006-$7,000). For Q3 2007 there were no amounts (Q3
2006-$0.257 million) for interest accreted on the Class A Preferred Shares and
amortization and deferred financing.
Equity Income (Loss) and Non-Controlling Interest
For Q3 2007 the Company recorded no amounts from the equity pick up of its
investment in production companies (Q3 2006-$15,000 for net equity loss) and
$5,000 expense for non-controlling interest (Q3 2006-$4,000).
Income Taxes
Income tax expense for Q3 2007 was a net provision for income taxes of
$175,000 (Q3 2006-$10,000 income tax expense) made up from provisions of
$11,000 (Q3 2006-$10,000) for large corporation taxes, $223,000 (Q2 2006-nil)
for current income taxes offset by a recovery of future income taxes of
$59,000 (Q3 2006-nil).
Net Income (Loss)
Net Income for Q3 2007 was $0.311 million, a significant improvement
compared to a net loss of $0.360 million for Q3 2006, totaling an improvement
of $0.671 million in absolute dollars. For Q3 2007 the overall improvement of
$0.671 million was due to changes over Q3 2006 of the following amounts: a
gross margin increase of $2.122 million offset by an increase in operating
expenses, net of income from other investing of $1.514 million and helped by a
$0.228 million improvement in net interest and other expenses and further
reduced by $0.165 million change in provision for income taxes.
Results for the three months ended December 31, 2006 ("Q2 2007") compared
to the three months ended December 31, 2005 ("Q2 2006")
Revenues
Revenues for the Q2 2007 were $6.705 million, up from $3.106 million for
Q2 2006, an increase of 116%. The increase is due to increases in the
Company's production, distribution, music royalties and new media revenue
categories. Management was pleased with the growth in revenue given that Q2
2007 was only the second quarter of integrating the Decode activities into the
results of the Company. The revenue growth for Q2 2007 was also encouraging
given that Q2 along with Q1 is typically a slower quarter in the Canadian film
and television industry as the majority of television deliveries occur in the
winter and spring seasons, which for the Company is its third and fourth
quarter (See "Seasonality" section of this MD&A for further details).
Proprietary production revenues for Q2 2007 of $3.478 million were up 50%
over the $2.326 million for Q2 2006. The increase for Q2 2007 was consistent
with the Company's strategic goal to increase production revenue generated
from home grown productions both in absolute dollars and as a percentage of
the total production revenues earned. For Q2 2007 the Company delivered
$3.478 million-46 half-hours of proprietary television programs
($0.260 million-26 half-hours of Naturally Sadie Season II to SRC in Canada,
$0.855 million-9 half-hours of Naturally Sadie Season III,
$0.245 million-1 half-hour for the pilot of The Truth About and
$2.118 million-10 half-hours of This Hour Has 22 Minutes Season XIV) versus
the delivery of $2.326 million-14 half-hours ($0.967 million-7 half-hours of
POKO Season II and $1.359 million-7 half-hours of This Hour Has 22 Minutes
Season XIII) for Q2 2006.
Net production service revenues for Q2 2007 brought forward to the
Company's consolidated statement of operations accounted for using the equity
method (see note 6 to the unaudited interim consolidated financial statements
for the three and six months ended December 31, 2006 and 2005) were
$0.779 million up 2% from Q2 2006 of $0.767 million. The breakdown for net
production service revenues was $0.779 million from the delivery of production
services related to the feature films entitled Outlander (Q2
2006-$0.656 million and $0.111 million of production service revenues for
delivery of services on Slevin and Ambition respectively).
For Q2 2007 distribution revenues were up significantly to $2.049 million
from $13,000 for Q2 2006. For Q2 2007 the Company was successful in placing a
multitude of titles from its current production slate and its library in
multiple territories throughout the world.
For Q2 2007 music and royalty and new media revenues were up to
$0.136 million (Q2 2006-nil) and $0.139 million (Q2 2006-nil) respectively.
These revenue streams increased as Q2 2007 includes these revenue steams for
the Decode division whereas Q2 2006 did not include the activities of Decode.
For Q2 2007 rental revenues were $0.123 million (Q2 2006-nil) from the
rental of studio and office facilities to third parties as a result of the
Company's purchase of Electropolis (See "Acquisitions" section of this MD&A
for further details) and from rental of currently unused office space in the
Company's headquarters in Halifax, Nova Scotia.
Gross Margin
Gross Margin for Q2 2007 was $2.361 million an overall 35.2% of revenue
versus $0.690 million or 22.2% of revenue for Q2 2006, an increase of 59% or
$1.671 million in absolute margin dollars. The Gross Margin for Q2 2007 was
higher than Q2 2006 as there were significant increases in the following four
revenue categories: production, distribution, music and royalties and new
media as a result of the second full quarter's activities for Decode for Q2
2007 over no amounts for Q2 2006 and other organic growth. These revenue
streams have higher margins than the Company's historic production revenues
when comparing Q2 2007 to Q2 2006.
In particular, production and distribution in terms of absolute dollars
contributed $0.914 million and $1.004 million respectively or 81% of the total
margin. Production margin at 26.3% was in line with management expectations.
Distribution margin can fluctuate greatly from title-to-title and at 49% is at
the high end of the range of management's expectations. This is as a result of
a few key sales on older titles that have a relatively low book value
resulting in higher margins for Q2 2007. Music and royalty margin was in line
with management's. New media margin at 25% was in line with management
expectations. Rental revenue for Q2 2007 required no dedicated cost of goods
sold associated with the earning of the revenue.
EBITDA
In Q2 2007 EBITDA was positive at $0.951 million, as compared to
$0.113 million for Q2 2006, an improvement of 744%. For Q2 2007 this was due
to the increase in Gross Margin dollars of $1.671 million and was offset by
the increase in SG&A, net of income from other investing of $0.937 million and
adding back of non-cash stock-based compensation expense of $0.104 million for
a positive total dollar change of $0.838 million.
Net Income (Loss)
Net Income for Q2 2007 was $0.234 million, an improvement of 158% from a
net loss of $0.402 million for Q2 2006. For Q2 2007 the overall improvement of
$0.636 million was due to changes over Q2 2006 of the following amounts: a
gross margin increase of $1.671 million offset by an increase in operating
expenses, net of income from other investing of $1.456 million and helped by a
$0.428 million improvement in net interest and other expenses and further
offset by $7,000 change in provision for income taxes.
Results for the three months ended September 30, 2006 ("Q1 2007")
compared to the three months ended September 30, 2005 ("Q1 2006")
Revenues
Revenues for Q1 2007 were $3.200 million, up from $1.479 million for Q1
2006, an increase of 116%. The increase was due to increases in the Company's
major revenue categories. The revenue growth for Q1 2007 was also encouraging
given that Q1 is typically a slower quarter in the Canadian film and
television industry as the majority of television deliveries occur in the
winter and spring seasons, which for the Company is its third and fourth
quarter. (See "Seasonality" section of this MD&A for further details).
Proprietary production revenues for Q1 2007 of $1.166 million were up 67%
over the $0.699 million for Q1 2006. For Q1 2007 the Company delivered
$1.166 million-13 half-hours of proprietary television programs
($0.380 million-4 half-hours of Naturally Sadie Season III,
$0.655 million-8 half-hours of POKO Season III, $80,000-1 half hour of Bo on
the Go Season I and $51,000 for producer fees earned by DHX Media UK) versus
the delivery of $0.699 million-7 half-hours of POKO Season II for Q1 2006.
Net production service revenues for Q1 2007 brought forward to the
Company's consolidated statement of operations accounted for using the equity
method (see note 6 to the unaudited interim consolidated financial statements
for the three months ended September 30, 2006 and 2005) were $0.322 million
down 61% from Q1 2006 of $0.781 million. The breakdown for net production
service revenues was $0.307 million and $15,000 from the delivery of
production services related to the feature films entitled Outlander and Slevin
respectively (Q1 2006-$0.771 million and $10,000 of production service
revenues for delivery of services on Slevin and Ambition respectively).
For Q1 2007 distribution, music royalty and new media revenues were up to
$1.271 million (Q1 2006-nil), $0.245 million (Q1 2006-nil), and $0.196 million
(Q1 2006-nil) respectively. These revenue streams have increased from nil
amounts in Q1 2006 as Q1 2007 includes these revenue steams for the Decode
division whereas Q1 2006 includes no activities for Decode.
Gross Margin
Gross Margin for Q1 2007 was $1.079 million an overall 33.7% of revenue
versus $0.160 million or 10.8% of revenue for Q1 2006, an increase of 212% or
$0.920 million in absolute margin dollars. The Gross Margin for Q1 2007 was
higher than Q1 2006 as there were significant increases in the following three
revenue categories: distribution, music royalties and new media as a result of
a full three months of activities for Decode. These revenue streams have much
higher margins than the Company's historic production revenues when comparing
Q1 2007 to Q1 2006. For Q1 2007 the margins for each revenue category in
absolute dollars and as a percentage of revenue earned for each category are
as follows: production revenue margin $0.333 million or 28.5%, net production
service revenue margin of $95,000 or 29.7%, distribution revenue margin of
$0.405 million or 31.9%, music royalty revenue margin $0.128 million or 52.5%
and new media revenue margin of $0.118 million or 60%.
EBITDA
In Q1 2007 EBITDA was $80,000, as compared to a loss of $0.255 million for
Q1 2006, an improvement of 131%. For Q1 2007 this was due to the increase in
Gross Margin dollars of $0.920 million and was offset by the increase in net
operating expenses and other expenses of $0.645 million and adding back of
non-cash stock-based compensation of $60,000 for a total dollar change of
$0.335 million.
Net Income (Loss)
Net loss for Q1 2007 was $0.202 million, an improvement of 64% from a net
loss of $0.569 million for Q1 2006. For Q1 2007 the overall decrease in the
loss of $0.367 million was due to changes over Q1 2006 of the following
amounts: a gross margin increase of $0.920 million offset by an increase in
net operating expenses of $0.761 million and helped by a $0.130 million
improvement in net interest expense and non-controlling interest and $78,000
recovery of income taxes.
Results for the three months ended June 30, 2006 ("Q4 2006") compared to
the three months ended June 30, 2005 ("Q4 2005")
Revenues
Revenues for Q4 2006 were $9.412 million, down from $18.749 for Q4 2005 a
decrease of 50%. The decrease was due to the reduction in production service
revenues by $16.645 million in absolute dollars as Q4 2006 actually had
$145,000 reversal of prior production service revenues booked for the nine
months ended March 31, 2006 down from $16.5 million for Q4 2005 ($9.7 million
and $6.8 million in production service revenues for third parties respectively
for Slevin and Ambition) as a conscious decision was made by management to
focus on higher margin proprietary production that are anticipated in the
future to generate distribution and exploitation revenue from the owning of
the rights. This was further evidenced when comparing the proprietary
production revenues for Q4 2006 of $8.489 million up 445% over the
$2.101 million for Q4 2005. The increase for Q4 2006 was consistent with the
Company's strategic goal to increase its proprietary television production and
therefore increase the revenue generated from home grown productions both in
absolute dollars and as a percentage of the total productions revenues earned.
For Q4 2006 distribution and other revenues are up to $0.583 million and
$0.485 million respectively over no amounts and $0.148 million respectively
for Q4 2005.
For Q4 2006 the Company delivered 13 half-hours of proprietary television
programs (6 half-hours of North South Season I, 2 half-hours of This Hour Has
22 Minutes Season XIII and 5 half-hours of POKO Season III) versus the
delivery of 17 half-hours (10 half-hours of POKO Season II, 1 half-hour of
Open Book Season III and 6 half-hours of Lunar Jim Season I). For Q4 2006 the
Company delivered 2 (8 half-hours) proprietary feature film programs
(4 half-hours for the feature film currently entitled It's a Boy Girl Thing
and 4 half-hours for the feature film currently entitled Intervention (aka
Funny Farm) versus no deliveries of proprietary feature film programs for Q4
2005.
Gross Margin
Gross Margin for Q4 2006 was $1.831 million an overall 19% of revenue
versus $0.487 million or 3% of revenue for Q4 2005, an increase of 533%. The
Gross Margin for Q4 2006 was higher than Q3 2005 because Q4 2006 had very
little amounts earned from service producing fees versus $16.5 million for Q4
2006. The Gross Margin for Q4 2006 was in line with management's projected
margins for proprietary productions of 15 to 25%. As each production is
financed differently, these Gross Margins can vary greatly with the Company
maintaining a larger share of the copyright on certain programs over others.
This is due to certain projects requiring a larger percentage of pre-licensing
in order to get the necessary production revenues to get the program produced.
As more of the program territories are pre-licensed in advance it naturally
reduces the number of territories available for distribution revenues. With
lower distribution revenues comes a lower margined production.
EBITDA
In Q4 2006 EBITDA was $0.688 million, as compared to a loss of
$0.062 million for Q4 2005, a significant improvement an improvement of
1,210%. For Q4 2006 this was due to the increase in Gross Margin dollars of
$1.35 million and offset by the increase in SG&A dollars of $0.559 million and
a decrease of $0.041 million for the difference in stock-based compensation
expense for a total dollar change of $0.750 million.
Net Income (Loss)
Net income for Q4 2006 was $0.416 million up from a net loss of
$0.351 million for Q4 2005. For Q4 2006 the overall increase of $0.767 million
was due to changes over Q4 2005 of the following amounts: increases from a
gross margin increase of $1.350 million, a development expense decrease of
$43,000, a change in recovery of income taxes of $0.174 million and an
interest revenue increase of $64,000 and reduced by an increase in SG&A of
$0.559 million, and increases of $120,000, $108,000, $72,000 and $5,000 for
amortization, net interest expense, an equity loss and non-controlling
interest.
Liquidity and Capital Resources
March 31, June 30,
2007 2006
$ $
---------------------------
(Amounts in Thousands,
Except Balance Sheet Ratios)
Key Balance Sheet Amounts and Ratios:
Cash, restricted cash(1) and short-term
investment 7,364 9,573
Long-term assets 35,242 25,910
Working capital 10,688 18,370
Long-term liabilities 5,456 4,684
Working capital ratio(2) 1.19 1.55
Cash Inflows and (Outflows) by Activity:
Operating activities (17,382) (4,363)
Investing activities (450) (6,100)
Financing activities 16,978 10,011
---------------------------
Net cash inflows (outflows) (854) (452)
---------------------------
---------------------------
----------------
(1) Restricted cash is the balance of cash on hand in Media Fund. The
use of this cash is restricted to specified uses related to the
production and development of film and television programs.
(2) Working capital ratio is current assets divided by current
liabilities.
Changes in Cash
Cash at March 31, 2007 was $5.258 million compared to $4.920 million, and
$6.111 million as at December 31, 2006 and June 30, 2006 respectively. For Q3
2007 the cash balance increased $0.338 million when comparing the cash balance
for March 31, 2007 to the cash balance at December 31, 2006.
For Q3 2007 cash flows from operating activities were a use of cash of
$4.791 million. Cash flows from operating activities resulted from net income
of $0.311 million and adding cash provided by non-cash items of amortization
of film and television programs, property, plant and equipment, acquired
library and intangible assets, stock-based compensation, interest on
promissory notes, non-controlling interest, and net change in non-cash working
capital balances related to operations of $3.460 million, $0.109 million,
$0.034 million, $0.155 million, $0.079 million, $3,000, $5,000 and
$1.558 million respectively. Cash flows were reduced by uses of cash of
$56,000 for recovery of future income taxes and $10.449 million for
investments in film and television programs.
For Q3 2007 cash flows generated from financing activities were
$4.841 million. Cash flows from financing activities resulted primarily from
cash generated from new borrowings of $4.534 million from interim financing
and $0.500 million increase in bank indebtedness. This was offset by uses of
cash of $0.073 million and $0.120 million respectively from adjustments to
repayments of long-term debt and other long-term liabilities.
For Q3 2007 cash flows generated from investing activities were
$0.288 million. Cash flows used in investing activities were $0.083 million
and $0.101 million for business acquisitions and cash advances to investees
offset by $0.426 million cash provided by a decrease in short-term investments
and $0.046 million for disposals in property, plant and equipment.
Working Capital
Working capital represents the Company's current assets less current
liabilities ("Working Capital"). Decreases of working capital of
$7.682 million as at March 31, 2007 over June 30, 2006 were predominantly
driven by increases in deferred revenue, bank indebtedness and interim
production financing and decreases in short-term investments and were offset
by increases in current portion of investment in film and television programs
and amounts receivable and decreases in accounts payable. The working capital
ratio remained strong at 1.19:1 for March 31, 2007.
Based on the Company's current revenue expectations for the remainder of
Fiscal 2007, which are based on contracted and expected production and
distribution revenue, the Company believes cash generated from operations will
be sufficient to satisfy working capital needs for at least the next twelve
months. Further to operations being self-sustaining to support contemplated
strategic initiatives including potential acquisitions and the expansion of
the Company's presence in international markets, the Company completed its IPO
on May 19, 2006 where the Company issued 8,702,500 common shares for gross
proceeds of $20.451 million (see "Initial Public Offering" section in this
MD&A). As a result of our IPO, management believes that these proceeds, along
with the remaining current working capital surplus totalling $10.688 million,
are sufficient to execute on its current business plan. If the Company
proceeds with one or any of the strategic acquisitions it is currently
exploring there may be a capital requirement to go back to the public markets
and raise additional financing to complete such acquisitions.
Contractual Obligations
As of March 31,
2007
Payments Due After
by Period Fiscal Fiscal Fiscal Fiscal
------------ Total 2007 2008-2010 2010-2011 2011
-----------------------------------------------------------
$ $ $ $ $
-----------------------------------------------------------
Purchase
Obligations
Rights purchase
for POKO(1) 250,000 250,000
Acquisition of
library
license
rights(2) 1,700,000 840,000 860,000 - -
Digital basic
license
application(3) 37,500 37,500 - - -
Note payable(4) 400,000 400,000 - - -
Long-term debt
payments
principal and
interest(5) 5,288,104 404,092 814,402 655,754 3,413,856
-----------------------------------------------------------
Total
Contractual
Obligations 7,675,604 1,931,592 1,674,402 655,754 3,413,856
-----------------------------------------------------------
-----------------------------------------------------------
--------------------
(1) Pursuant to an agreement whereby the Company acquired the right
to develop, produce, distribute and otherwise exploit future
seasons of the television series entitled "POKO". The amount
remaining as at March 31, 2007 was $250,000.
(2) Pursuant to an agreement whereby the Company acquired the
distribution rights to 520 half-hours of television programming.
The amount remaining as at March 31, 2007 was $1,700,000.
(3) As at March 31, 2007, the Company committed to invest an
additional $37,500 in a digital basic license application to the
Canadian Radio-television and Telecommunications Commission
("CRTC"). The Company has also contingently committed to an
additional $4,825,000. This additional investment is at the
option of the Company and is subject to the CRTC approving the
application as presented, among other conditions.
(4) As consideration for the acquisition of Decode, the Company has a
$400,000 promissory note payable June 30, 2007 bearing interest
at 10%.
(5) Long-term debt, bearing interest at Business Development Bank of
Canada's floating base rate plus 1.5%, maturing in May 2021.
Amounts repayable in monthly payments of principal of $19,900
plus interest and monthly principal installments of $4,386,
non-interest bearing.
Outlook
The Company's IPO, completed on May 19, 2006 has strengthened the balance
sheet and allows the Company to be in strong position going forward into Q4
2007 and Fiscal 2008. This capital infusion was key to building on the
Company's recent successes, with a view to taking advantage of the Company's
strengths and opportunities and creating further value for shareholders. In
particular, the Company believes it is well on its way to carrying forward its
contemplated strategic initiatives, including revenue growth in production and
distribution, increasing profitability metrics, expanding the Company's
presence in international markets, leveraging the Company's experience to
focus on children, youth and family content and merchandising, and undertaking
further potential acquisitions.
This Company has taken an important first step in this direction as was
exhibited by the 145% and 216% revenue growth for Nine Months - 2007 and Q3
2007 respectively. Management was pleased with the growth in revenue
considering that Nine Months - 2007 was the first full nine months of
integrating the Decode activities into the results of the Company. This was
further illustrated by the integration of the Halifax Film proprietary
properties, which are now being funnelled through the Decode distribution
pipeline and after only one major selling market the Company realized some
successes on this front. As evidenced by the Company's strong distribution
revenues of $4.663 million for Nine Months - 2007. Along with further
penetration of the Decode library, the distribution team has been able to
successfully place more than 20 titles from the Company's current production
slate and library in multiple territories throughout the world. Some of the
more significant sales were on the following titles: Angela Anaconda Seasons I
to III, Delilah & Julius Season I, Franny's Feet Season I and II, Naturally
Sadie Season I to III, The SaveUms Season I and II, Girlstuff-Boystuff
Seasons I and II, POKO Season I to III, and Planet Sketch Season I. The
Company anticipates further distribution revenue growth for Q4 2007 and Fiscal
2008.
For Q4 2007 and Q1 2008, the Company also expects double digit production
revenue growth as some of the Company's expected Q3 2007 television deliveries
have been delayed and are expected to deliver in the early summer to summer
seasons (See "Seasonality" section of this MD&A for further details). For Q4
2007, the Company has over 55 half-hours of contracted proprietary programs,
made up of 9 different episodic television series, which are scheduled for
delivery. The Company's historic average production revenue value per
half-hour is approximately $0.125-$0.175 million and management expects the
average production revenue value per half-hour actually delivered for Q4 2007
to be in this range.
For Q4 2007, the Company is expecting, largely based on contracted sales
delivered and awaiting their licensing periods to commence (See "Critical
Accounting Policies- Revenue Recognition" section of this MD&A for further
details), further distribution revenue penetration on a number of additional
titles in the current slate and from the library representing expected
significant growth, perhaps in the range of 50-70% over the distribution
totals for the first Nine Month - 2007. For Q4 2007, other revenues, including
music and royalty and new media revenues, are expected to have moderate
growth.
Further synergies from the acquisition of Decode are bearing out in
healthier Gross Margins as shown by margin increases to 36.8% and 40.2% for
Nine Months - 2007 and Q3 2007 respectively. For Q4 2007, Gross Margin is
expected to be in the 30-40% range. For Q4 2007 and Fiscal 2008, management
expects the integration of Decode to continue to result in further synergies
and revenue growth in all categories.
For Fiscal 2008 the Company has over 200 half-hours of contracted
proprietary programs (plus 50-100 half-hours of additional potential
proprietary programs currently in negotiation with various broadcasters), made
up of over 15 different episodic television series and a feature film
currently entitled "Shake Hands with the Devil", which are scheduled for
delivery. Further, for Fiscal 2008 the Company is anticipating 15-25% growth
in distribution revenues over 2007 levels. For Fiscal 2008 other revenues,
including new media revenues, are expected to have moderate growth. For Fiscal
2008, Gross Margin is expected to be in the 25-35% range. Finally for Fiscal
2008, the Company anticipates further revenue growth specifically in the
category of music and royalty revenues as it embarks upon its merchandising
and licensing ("M&L") relationships with PLAYSKOOL, a division of Hasbro, Inc
for the Company's preschool property Franny's Feet and Alliance Atlantis on
another preschool property Lunar Jim. The Company is also focused on
leveraging other existing proprietary properties for additional M&L revenues.
Statements about the Company's future plans and intentions, results,
levels of activity, performance, goals or achievements or other future events
constitute forward-looking statements. Wherever possible, words such as "may,"
"will," "should," "could," "expect," "plan," "intend," "anticipate,"
"believe," "estimate," "predict," or "potential" or the negative or other
variations of these words, or other similar words or phrases, have been used
to identify these forward-looking statements. These statements reflect
Management's current beliefs and are based on information currently available
to Management.
Forward-looking statements involve significant risk, uncertainties and
assumptions. Many factors could cause actual results, performance or
achievements to differ materially from the results discussed or implied in the
forward-looking statements. These factors should be considered carefully and
readers should not place undue reliance on the forward-looking statements.
Although the forward-looking statements contained in this MD&A are based upon
what Management believes to be reasonable assumptions, the Company cannot
assure readers that actual results will be consistent with these
forward-looking statements. These forward-looking statements are made as of
the date of this MD&A, and the Company assumes no obligation to update or
revise them to reflect new events or circumstances. Many factors could cause
the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements, including:
general economic and market segment conditions, competitor activity, product
capability and acceptance, international risk and currency exchange rates, and
technology changes. An assessment of the risks that could cause actual results
to materially differ from current expectations is contained in the "Risk
Assessment" section of this MD&A.
Seasonality
Results of operations for any period are dependent on the number and
timing of film and television programs delivered which cannot be predicted
with certainty. Consequently, the Company's results from operations may
fluctuate materially from period to period and the results of any one period
are not necessarily indicative of results for future periods. Cash flows may
also fluctuate and are not necessarily closely correlated with revenue
recognition.
The Company's film and television revenues are generally highest in the
third and fourth fiscal quarters, driven by contracted deliveries with the
primary broadcasters. Distribution revenues are contract and demand driven and
can fluctuate significantly from period to period.
Capital Stock Financings During Nine Months ended March 31, 2007
On December 18, 2006, the Company issued 225,000 common shares from
treasury at the five day volume weighted average price of $1.41 per share for
the gross amount of $317,250. The 225,000 common shares were issued to two
directors and a former shareholder of Decode as partial payment for a note
payable owing to them in connection with the purchase of their interest in
Decode.
Capital Stock Financings During Fiscal 2006
Initial Public Offering
In connection with the IPO of the Company, completed on May 19, 2006, the
Company issued 8,702,500 common shares for actual gross cash proceeds of
$20.529 or an average price per share of $2.35 less $3.236 million share
issuance costs, net of tax effect of $1.873 million. (See the Company's Final
Prospectus filed on May 11, 2006 on www.sedar.com for further details).
Common share issuances
During the remainder of Fiscal 2006 the company issued an additional
150,000 common shares to an officer and a director for net proceeds of
$0.304 million or an average price per share of $2.03.
As part of the consideration for the acquisition of Decode (see
"Acquisitions" section of this MD&A) 5,793,011 common shares were issued. As
part of the purchase price allocation a value of $11.572 million was placed on
the shares.
Distribution Arrangement
In Q2 2007, the Company cancelled its distribution arrangement with a
European distributor of television productions. The distribution arrangement
had provided the Company the opportunity to underwrite production distribution
advances in exchange for a share of the sales commissions and certain
exclusive distribution rights to these productions (see "Material Contracts -
Distribution Arrangement" in the Company's Final Prospectus filed on May 11,
2006 on www.sedar.com for more details).
For the nine months ended March 31, 2007 the Company recorded
$1.044 million and $0.592 million for revenues and amortization expense
respectively from this distribution arrangement. At March 31, 2007 the Company
had $0.679 million recorded in amounts receivable from these sales. All costs
associated with the cancelling of the agreement have been recorded in the
results for the nine months ended March 31, 2007. As of March 31, 2007 the
Company has amortized all amounts originally recorded under the category of
acquired participation rights included in investment in film and television
programs for any properties licensed under this distribution arrangement.
Since this distribution arrangement has now been cancelled the Company expects
to make no further licensing commitments and as a result expects no further
revenues or expenses from this arrangement.
Related Party Transactions
For Nine Months - 2007 the Company earned $1.250 million in production
service revenue and incurred $0.844 million in direct production service costs
for the production of a feature film currently entitled Outlander and the
television series Lunar Jim Season II from investee production companies (Nine
Months - 2006-$1.927 million in revenues and $1.399 million in direct
production service costs for Slevin, Ambition and Lunar Jim Season I).
As at March 31, 2007, the Company has $0.250 million (June 30, 2006 -
$0.250 million) owing from a director and officer bearing interest at bank
prime.
Acquisitions
During the nine -month period ended March 31, 2007, the following
acquisitions occurred:
(a) On July 1, 2006 (the Effective Date), the Company completed a
business acquisition and acquired all of the issued and outstanding
shares of Electropolis Studios Incorporated ("Electropolis") for
cash consideration of $31,852.
Electropolis holds the lease on a sound stage studio in Halifax,
Nova Scotia and is in the business of renting these facilities to
film and television productions.
The acquisition of Electropolis allows the Company to vertically
integrate and recapture some office and facility rental expenses
and also offers net new rental revenue streams for third party
productions. For Nine Months - 2007 the Company has recorded
$0.153 million for rental revenue.
(b) On December 22, 2006, the Company completed the acquisition of the
license for the worldwide distribution rights to 520 half-hours of
television programming ("Distribution Rights") for $2,200,000. As
of March 31, 2007, the company has paid cash of $500,000 and is
scheduled to pay the remainder through ten quarterly payments of
$120,000 ending March 31, 2009 and one lump sum payment of $500,000
due March 31, 2009.
During the year ended June 30, 2006, the following business acquisitions
occurred:
(c) On May 19, 2006, the Company acquired all of the issued and
outstanding shares of Decode Entertainment Inc. ("Decode"), a
television production company, for the total consideration of
$17,961,095.
Decode offered a highly complementary strategic fit due to its
distribution experience and capabilities, its broadcaster
relationships and the strength of its management. The key
principals of Decode's management team, Neil Court, Steven DeNure
and Beth Stevenson, have been retained with employment contracts.
Decode fits squarely into DHX's primary focus on children's and
youth programming.
(d) On April 7, 2006 (the Effective Date), The Company acquired all of
the issued and outstanding shares of Boy Girl Productions Canada
Limited ("Boy Girl"), a film production company for cash
consideration of $128,719.
(e) April 7, 2006 (the Effective Date), the Company acquired all of the
issued and outstanding shares of Funny Farm Productions Limited
("Funny Farm"), a film production company for cash consideration of
$90,073.
The acquisitions of Boy Girl and Funny Farm fit well into DHX's focus
on rights retention. Whether through original creation or in this
case through acquisition, the Company expects to generate
distribution revenues through the exploitation of these rights.
Change in Accounting Policy
Variable Interest Entities
Effective July 1, 2005, the Company adopted Accounting Guideline 15
("AcG 15") - Consolidation of Variable Interest Entities ("VIEs"). AcG 15
provides criteria for the identification of VIEs and further criteria for
determining what entity, if any should consolidate them. AcG 15 defines a VIE
as an entity that either does not have sufficient equity at risk to finance
its activities without subordinated financial support or where the equity
investors lack the characteristic of a controlling financial interest. VIEs
are subject to consolidation by a company if that company is deemed the
primary beneficiary of the VIE. The primary beneficiary is the party that is
either exposed to a majority of the losses from the VIEs activities or is
entitled to receive a majority of the VIEs residual returns or both.
Prior to the adoption of AcG 15, the Company consolidated all entities
that it controlled through ownership of a majority of voting interests.
Effective July 1, 2005, the Company implemented AcG 15, retroactively
without the restatement of prior periods, and as a result, the Company has
consolidated entities in which it has control through ownership of a majority
of the voting interests as well as all VIEs for which it is the primary
beneficiary.
VIEs for which the Company is not the primary beneficiary have been
accounted for using the equity method (see note 6 to the unaudited interim
consolidated financial statements for the three-month period ended March 31,
2007).
Financial Instruments
Fair Value of Financial Instruments
Management believes that the carrying amounts reported on the financial
statements for amounts receivable, accounts payable and accrued liabilities,
interim production financing, demand loan, note payable and long-term debt all
approximate their fair values due to their immediate or short-term maturities
or variable interest rates.
Credit Risk
Accounts receivable from the Canadian federal government and other
government agencies in connection with production financing represents 72% of
total accounts receivable at March 31, 2007 (June 30, 2006-66%). Certain of
these amounts are subject to audit by the government agency. Management
believes that these amounts are fully collectible. The balance of trade
accounts receivable are mainly with Canadian broadcasters and large
distribution companies. Management believes that these amounts are fully
collectible. No provision for losses has been booked in the financial
statements.
Interest Rate Risk
The Company is exposed to interest rate risk arising from fluctuations in
interest rates as its interim production financing and its long-term debt bear
interest at floating rates. Management believes this exposure to be minimal.
As an example, as at March 31, 2007, even a 1% rate increase would only result
in an annualized increase of approximately $200,000 in interest expense.
Risk Assessment
The following are the specific and general risks that could affect the
Company that each reader should carefully consider. Additional risks and
uncertainties not presently known to the Company or that the Company does not
currently anticipate will be material, may impair the Company's business
operations and its operating results and as a result could materially impact
its business, results of operations, prospects and financial condition. These
specific and general risks are as follows: risks related to the nature of the
entertainment industry, risks related to television and film industries, risks
related to doing business internationally, loss of Canadian status,
competition, limited ability to exploit filmed and television content library,
protecting and defending against intellectual property claims, fluctuating
results of operations, raising additional capital, concentration risk,
reliance on key personnel, market share price fluctuations, risks associated
with acquisitions and joint ventures, potential for budget overruns and other
production risks, management estimates in revenues and earnings, stoppage of
incentive programs, financial risks resulting from the Company's capital
requirements, government incentive program, change in regulatory environment,
litigation, risk connected to the Nova Scotia Equity Tax Credit Act,
technological change, labour relations and exchange rates. For further details
see "Risk Factors" contained in the Company's Annual MD&A for the year ended
June 30, 2006 on www.sedar.com.
Reconciliation of Historical Results to EBITDA
EBITDA is not a recognized earnings measure under GAAP and does not have
standardized meanings prescribed by GAAP. Therefore EBITDA may not be
comparable to similar measures presented by other companies or issuers.
Investors are cautioned that EBITDA should not be construed as alternatives to
net income or loss determined in accordance with GAAP as an indicator of the
Company's performance or to cash flows from operating, investing and financing
activities as a measure of liquidity and cash flows. The following table
reconciles income (loss) before income taxes, EBITDA and Gross Margin, based
on the historical unaudited financial statements of the Company for the three
and nine month periods ended March 31, 2007 and 2006 and the three-month
periods ended March 31, 2007, December 31, 2006, September 30, 2006, June 30,
2006 and March 31, 2006, December 31, 2005, September 30, 2005, and June 30,
2005 included elsewhere in this MD&A. For further description see "Use of
Non-GAAP Financial Measures" elsewhere in this MD&A.
Nine
Months
Ended
Q3-07 Q3-07 Q2-07 Q1-07 Q4-06
$ $ $ $ $
-----------------------------------------------------------
Income (loss)
before income
taxes for the
period 468,870 485,654 263,165 (279,949) 310,401
Interest and
amortization
of deferred
financing
fees - - - - 141,709
Interest
expense and
other
(income) 103,712 36,247 46,523 20,942 (101,826)
Equity loss
and non-
controlling
interest 30,798 5,179 16,886 8,733 76,846
Amortization 1,034,995 296,717 467,686 270,592 123,711
Development
expenses 65,949 14,296 51,653 - -
Stock-based
compensation
expense(2) 243,820 79,057 104,946 59,817 136,737
-----------------------------------------------------------
EBITDA(1) 1,948,144 917,150 950,859 80,135 687,578
Selling,
general and
administrative,
net of
stock-based
compensation
expense 5,354,700 1,977,169 1,835,450 1,542,081 1,143,561
Other
investing
income (1,463,789) (495,559) (425,278) (542,952) -
-----------------------------------------------------------
Gross
Margin(1) 5,839,055 2,398,760 2,361,031 1,079,264 1,831,139
-----------------------------------------------------------
Nine
Months
Ended
Q3-06 Q3-06 Q2-06 Q1-06 Q4-05
$ $ $ $ $
-----------------------------------------------------------
Income (loss)
before income
taxes for the
period (1,299,291) (349,743) (380,892) (568,656) (281,947)
Interest and
amortization
of deferred
financing
fees 763,802 256,986 239,626 267,190 33,826
Interest
expense and
other
(income) (122,088) (6,942) (66,339) (48,807) (32,667)
Equity loss
and non-
controlling
interest 230,342 19,462 318,494 (107,614) -
Amortization 5,975 2,540 1,717 1,718 3,349
Development
expenses 201,315 - - 201,315 42,632
Stock-based
compensation
expense(2) - - - - 173,000
-----------------------------------------------------------
EBITDA(1) (219,945) (77,697) 112,606 (254,854) (61,807)
Selling,
general and
administrative,
net of
stock-based
compensation
expense 1,346,879 355,015 577,542 414,322 548,399
Other
investing
income - - - - -
-----------------------------------------------------------
Gross
Margin(1) 1,126,934 277,318 690,148 159,468 486,592
-----------------------------------------------------------
(1) Certain of the comparative Non-GAAP Financial Measures ("NGFM")
are adjusted for all necessary adjustments, consisting of normal
recurring adjustments and any changes in the current definition
of NGFM (see "Use of Non-GAAP Financial Measures" section of this
MD&A for further details).
(2) Effective Q2 2007 and onward, the Company began adding back as
part of the EBITDA calculation non-cash stock-based compensation
expense and has adjusted accordingly for all prior quarters
reported herein.
DHX MEDIA LTD.
Q3 2007
Supplemental Information
For the Three and Nine Months Ended March 31, 2007
1. Summary of securities issued and options and warrants granted during
the nine-month period ended March 31, 2007 and the year ended June 30,
2006
a. Summary of securities issued
Common Shares Number of
Common Value
Shares $
---------------------------
Balance at June 30, 2005 14,037,268 5,027,566
Issued to Sir Graham Day, Director 50,000 92,500
Issued as consideration for Decode acquisition 5,793,011 11,571,539
Issued for cash in conjunction with IPO 8,702,500 20,529,207
Share issuance costs in conjunction with IPO,
net of tax asset of $1,873,000 - (3,452,988)
Conversion of preferred shares in conjunction
with IPO 3,893,673 8,624,814
Share issuance costs transferred from
preferred shares - (2,104,038)
Issued to Dana Landry, CFO 100,000 211,000
---------------------------
Balance at June 30, 2006 32,576,452 40,499,600
Issued to Neil Court, as consideration for
Decode acquisiton 100,000 141,000
Issued to Steven DeNure, as consideration for
Decode acquisition 100,000 141,000
Issued to a former shareholder of Decode, as
consideration for Decode acquisition 25,000 35,250
Adjusted share issuance costs in connection
with IPO (38,184)
---------------------------
Balance at March 31, 2007 32,801,452 40,778,666
---------------------------
---------------------------
Class A Prefered Shares Number of
Common Value
Shares $
---------------------------
Balance at June 30, 2005 3,893,673 1,603,992
Share issue cost adjustment - (3,198)
Conversion to Common Shares in conjunction
with IPO (3,893,673) (1,600,794)
---------------------------
Balance at June 30, 2006 and March 31, 2007 - -
---------------------------
---------------------------
c. Summary of options and warrants
Options Number of Weighted-
Options average
exercise
price
---------------------------
Balance at June 30, 2005 275,000 $1.85
Granted to Sir Graham Day, Director 100,000 $2.25
Granted to J. William Ritchie, Director 100,000 $2.25
Granted to Joe Medjuck, Director 100,000 $2.25
Granted to Donald Wright, Director 100,000 $2.25
Granted to Dana Landry, CFO 322,500 $2.25
Granted to Employees 24,047 $2.25
---------------------------
Balance at June 30, 2006 1,021,547 $2.14
---------------------------
---------------------------
Granted to Employees 900,000 $2.35
Options expired during period (175,000) $1.85
---------------------------
Balance at March 31, 2007 1,746,547 $2.28
---------------------------
---------------------------
Put Options Number of Weighted-
Put Options average
exercise
price
---------------------------
Gained in connection with issuance of common
shares of a subsidiary(1) 425,420 Nil
---------------------------
Balance at March 31, 2007 425,420 Nil
---------------------------
---------------------------
(1) Each convert on a one-to-one basis to common shares of the
Company (see note 12 (i) of the consolidated financial statements
for further details).
Warrants exercise
price
---------------------------
Balance at June 30, 2005 389,367 $1.85
Granted in connection with IPO 824,492 $2.35
---------------------------
Balance at June 30, 2006 1,213,859 $2.19
---------------------------
---------------------------
Warrants expired during period (389,367) $1.85
---------------------------
Balance at March 31, 2007 824,492 $2.35
---------------------------
---------------------------
c. Summary of securities as at the end of the reporting period
a. Authorized share capital
Unlimited common shares without nominal or par value;
10,000,000 preferred shares, convertible to common shares at
the option of the holder, redeemable at the option of the
holder or the Company on or after June 16, 2010 at 1.5 times
the issue price, voting;
100,000,000 preferred variable voting shares, redeemable at
the option of the Company at any time at a millionth of a
cent per share, no entitlement to dividends, voting.
b. Shares outstanding and recorded value
32,801,452 common shares at a recorded value of $40,778,666;
100,000,000 preferred variable voting shares at a recorded
value of $100.
c. Description of options and warrants
See Note 12 of the unaudited interim consolidated financial
statements for the three and nine month periods ended
March 31, 2007.
2. Directors and officers as at March 31, 2007
Directors
Sir Graham Day Lead Director
Michael Donovan Chairman, Board of Directors
J. William Ritchie Director
Donald Wright Director
Joe Medjuck Director
Charles Bishop Director
Steven DeNure Director
Neil Court Director
Officers
Michael Donovan CEO
Dana Landry CFO
Charles Bishop Secretary and President of Halifax Film Ltd.
Steven DeNure President of Decode Entertainment Inc.
Neil Court President of Decode Enterprises
David Regan Executive VP Corporate Development
For further information: DHX Media - Canada: Dana Landry, Chief
Financial Officer; David A. Regan - EVP, Corporate Development & IR; (902)
423-0260; AIM Nominated Advisors: Canaccord Adams Limited: Neil Johnson; Erin
Needra; +44 (0) 20 7050 6500
