Jam Filled Purchases Arc

According to C21 Media, Jam Filled has completed the purchase of Arc's assets.  There are about 200 employees returning to a facility in Toronto.  While the article specifies that the company will "take over production of current Arc projects," it does not specify what they are.  No word on whether Blazing Samurai, a feature that was in production, is still in-house or, if rumours are true, has moved to another company.

Jam Filled Entertainment Negotiates to Buy Arc

The Globe and Mail has another article behind a pay wall, providing some details.  Deloitte, the receiver, ran an auction to purchase the rights to Arc's continuing projects.  Jam Filled Entertainment, an Ottawa studio bought just weeks ago by Boat Rocker Media, won the auction.  However, the deal has to be approved by the court and Jam Filled will be doing additional due diligence before the deal is concluded.

One part of the deal is that enough of Arc's former employees are willing to return to the projects they were working on.  The hope is that the deal can be finalized within the next two weeks.

As of now, there are many questions.  I assume that the work will stay in Toronto.  If they're looking to rehire Arc employees, it's going to be easier to do this without asking them to move to Ottawa.

While the deal obviously includes contracts for the work and the files created so far, does it include the hardware that the files are sitting on?  Will they occupy Arc's former space or move to another location?  Software licenses are not always transferrable.  Will Jam Filled get rights to the licenses as part of the deal or will they have to purchase new ones?  Which clients will be willing to continue their projects with Jam Filled and which will prefer to move them elsewhere?

Will there be pay cuts for returning employees?  How much?  Will they be across the board, meaning that everyone rehired gets the same percentage of their former salary, or will salaries be negotiated from scratch?

Who will be managing all this?  As Jam Filled is located in Ottawa, will they be sending a management team to Toronto?  Will they be hiring local management talent?  As management was the source of Arc's problems, hiring the right team will be critical to the success of the salvage operation.

Will Jam Filled continue the facility, assuming it is in Toronto, once the existing contracts are completed?  That may not be decided until projects are delivered and the balance sheet is scrutinized.

While Jam Filled's acquisition, assuming it goes through, is certainly good news, much more will have to be answered before this can be called a success or failure.  Good luck to everyone.

More on the Arc Situation

The Globe and Mail has an article behind their paywall about the Thursday court proceedings relating to Arc.  I can't quote from it extensively due to copyright, but I can summarize it.

While I was quick to say that without knowing specifics, it was not fair to blame Arc's management for the shutdown, it's now clear that the management was aware of the situation for at least five months and did not do enough, if anything, to fix it.

In December of last year, Arc made an agreement with Grosvenor Park Media Fund LP giving Arc access to up to $45.3 million.  $17.5 million of that went to repay Callidus Capital Corp, a previous lender.

On Feb. 8, 2016, Arc defaulted on payments to Grosvenor.  Grosvenor twice signed waiver agreements allowing Arc to pay later and extended another $4.6 million in credit.  At this point, Arc convinced the producers of Blazing Samurai to make their $1.05 million payment due to Arc to Grosvenor instead.

Arc again defaulted on payments to Grosvenor in May and July.  In the first six months of 2016, Arc ran a $9.2 million dollar loss.  It was also behind $250,000 in rent, $2 million for office renovations and $1 million in payroll.

On July 26, Guy Collins of GFM Films, international rights holders to Blazing Samurai, sent an email to Grosvenor saying he was concerned that Arc had stopped production on the feature.  Arc was trying to get an early payment for moneys due in August from GFM.  GFM indicated that they would not be paying any more money.  With no promise of revenue for Arc, Grosvenor called their loan and forced Arc into receivership.

This does not make Arc's management look good.  Defaulting on loan payments while continuing to hire and increasing expenses is not the route to success.  While I only know what was in the article, the logical thing to do would have been to cut expenses to the bone, eliminating anything not directly related to completing paying projects.  Had they been seen to do that, Grosvenor might have been even more forgiving than they were.  Arc's management had 5 months to fix things and didn't.  What's worse, it doesn't appear that they tried all that hard.

ARC and the Hazards of Animation

The news that ARC, one of Toronto’s largest animation studios, has gone into receivership spread in record time thanks to social media.  I’ve been dismayed at many of the comments I’ve read in various places online.  Many are ignorant; some are accusatory.  I have no inside information, but anyone with experience in the animation business knows that a bankruptcy is always a possibility, especially for studios doing service work.

Everyone in animation has probably worked on a project that’s gone bad.  It could be due to demanding or ignorant clients.  It could be due to unforeseen technical challenges.  It could be due to an inadequate schedule.  If a job goes over budget, the costs have to be covered from the next job.  With luck, the profits from that job are enough to cover the loss, which leaves the studio in a break-even position.  But if the profits are not enough, or the next job goes bad as well, the debt begins to pile up.  This puts a studio in the position of using income from current jobs to pay off old jobs, and it becomes necessary to keep new jobs coming in so as to service old debts.

Every budget and schedule (really two sides of the same coin) contains unknowns.  Studios try to build contingencies into budgets to cover the unknowns, but in the competitive market that service studios face, budgets are lean and sometimes intentionally lower than the job requires.

There are valid reasons for under-budgeting.   The studio wants to work with a client that commissions a lot of work and the studio has to land a project in order to establish a relationship.  Or the studio has a crew that will finish a project shortly and needs something to keep the crew on the payroll.  Finally, there’s the need to keep money coming in to meet overhead and maybe service debt.  Every day that the studio stays alive is another chance for the studio to find the profitable job that will solve its problems.

There is also the issue of cash flow.  A studio can be profitable on paper, but if the money isn’t flowing in at a rate fast enough to meet the studio’s expenses, the studio is forced to borrow to bridge the gap.  That borrowing has costs attached to it: legal fees and interest to name just two.  If the cash flow can’t be straightened out, the interest piles up and the studio may be forced to seek other bridge financing.  The end result once again is debt that is paid by diverting money from current jobs.  This just pushes the debt forward.

Either of the above cases can drive a studio into receivership.  It’s important to understand that studios are forced into receivership by creditors.  It’s not something they would choose to do.  So when a studio shuts suddenly, it’s because the creditors have forced it to happen, not because management was trying to screw over artists.  Undoubtedly, management was negotiating with the creditors, hoping to reschedule debt payments or restructure the debt.  If the creditors decide that they’ve had enough, meaning they have no confidence that the studio can meet its obligations, they force receivership, capping their losses and hoping to recoup something from the bankruptcy.

No one – the creditors or the management – wants that to happen.  The creditors would prefer to be paid in full, something that rarely happens in a bankruptcy and won’t happen when a studio’s only assets are computers and furniture.  Management prefers to run a profitable company.  It puts more money in their pockets and makes their resumes look better.  Having a bankruptcy on a resume is not the greatest job reference.  It is possible that ARC’s management made bad decisions.  It’s equally possible that clients, competition and bad luck forced them into decisions they did not want to make.

There is no question that the closing of the studio is a tragedy for all concerned.  But without inside knowledge, no one can assume to know what went wrong.  Bankruptcies are common in all industries because sales, overhead, production and cash flow are difficult to get right.  Attributing malicious motives to this bankruptcy is wrong.  Attributing it to gross mismanagement may also be wrong. 

More than any other studio, ARC (under a series of owners) got Canada farther into the animated feature game than any other studio to date.  While the studio had an unhappy ending, it provided lots of jobs and opportunity while it lasted.  If the management is going to be criticized for the bankruptcy, the least we can do is give it credit for what it accomplished.