UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172021
or
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-35886
HEMISPHERE MEDIA GROUP, INC.
(Exact name of registrant as specified in its charter)
| | |
Delaware | 80-0885255 | |
(State or other jurisdiction of incorporation or | (I.R.S. Employer |
| | |
Hemisphere Media Group, Inc. | ||
4000 Ponce de LeonBoulevard Suite 650 Coral Gables, FL | ||
| ||
| 33146 | |
(Address of principal executive offices) | (Zip Code) |
(305) (305) 421-6364
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |||
| | |||
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Class A common stock, par value $0.0001 per share | | HMTV | | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
Class of Stock |
| Shares Outstanding |
Class A common stock, par value $0.0001 per share | |
|
Class B common stock, par value $0.0001 per share | |
|
HEMISPHERE MEDIA GROUP, INC. AND SUBSIDIARIES
September 30, 20172021
(Unaudited)
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Notes to |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I
Unless otherwise indicated or the context requires otherwise, in this disclosure, references to the “Company,” “Hemisphere,” “registrant,” “we,” “us” or “our” refers to Hemisphere Media Group, Inc., a Delaware corporation and, where applicable, its consolidated subsidiaries; “ASG Latin” refers to ASG Latin, LLC, a Delaware limited liability company, a joint venture among Pantelion 2.0, LLC, a subsidiary of Pantaya, and ASG Music Group, LLC; “Business” refers collectively to our consolidated operations; “Cable Networks” refers to our Networks (as defined below) with the exception of WAPA and WAPA2WAPA Deportes; “Canal 1” refers to a joint venture among us and Radio Television Interamericana S.A., Compania de Medios de Informacion S.A.SS.A.S. and NTC Nacional de Television y Comunicaciones S.A. to operate a broadcast television network in Colombia; “Centroamerica TV” refers to HMTV Centroamerica TV, LLC, a Delaware limited liability company; “Cinelatino” refers to Cine Latino, Inc., a Delaware corporation; “Distributors” refers collectively to satellite systems, telephone companies (“telcos”), app distribution platforms, as applicable, and cable multiple system operators (“MSO”s), and the MSO’s affiliated regional or individual cable systems; “Holdings” refers to “Hemisphere Media Holdings, LLC, a Delaware limited liability company and indirect, wholly owned subsidiary of Hemisphere; “HMTV Cable” refers to HMTV Cable, Inc., a Delaware corporation, the parent company of the entities for the networks consisting of Pasiones, TV Dominicana, and Centroamerica TV; “HMTV Distribution” refers to HMTV Distribution, LLC, a Delaware limited liability company, the parent company of Snap Media; “HMTV DTC” refers to HMTV DTC, LLC, a Delaware limited liability company, the parent company of Pantaya; “MarVista” refers to Mar Vista Entertainment, LLC, a Delaware limited liability company; “MVS” refers to Grupo MVS, S.A. de C.V., a Mexican Sociedad Anonima de Capital Variable (variable capital corporation) and its affiliates, as applicable; “Networks” refers collectively to WAPA, WAPA2WAPA Deportes, WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana; “Nielsen” refers to Nielsen Media Research; “Pantaya” refers to Pantaya, LLC, a Delaware limited liability company and its consolidated subsidiaries; “Pasiones” refers collectively to HMTV Pasiones US, LLC, a Delaware limited liability company, and HMTV Pasiones LatAm, LLC, a Delaware limited liability company; “REMEZCLA” refers to Remezcla, LLC, a New York limited liability company; “Second Amended Term Loan Facility” refers to our Term Loan Facility amended on February 14, 2017 as set forth on Exhibit 10.6 to ourthe Company’s Annual Report on Form 10-K filed with10 K for the SEC on March 15,year ended December 31, 2017; “Snap Media” refers to Snap Global, LLC, a Delaware limited liability company and its consolidated subsidiaries; “Television Dominicana” refers to HMTV TV Dominicana, LLC, a Delaware limited liability company; “WAPA” refers to Televicentro of Puerto Rico, LLC, a Delaware limited liability company; “Term Loan Facility” refers to our term loan facility amended on July 31, 2014 as set forth on Exhibit 10.5 to the Company’s Annual Report on Form 10-K10 K for the year ended December 31, 2015; 2017; “Third Amended Term Loan Facility” refers to our Term Loan Facility amended on March 31, 2021 as set forth on Exhibit 10.1 to the Company’s Quarterly Report on Form 10 Q for the quarter ended March 31, 2021; “WAPA” refers to Televicentro of Puerto Rico, LLC, a Delaware limited liability company; “WAPA America” refers to WAPA America, Inc., a Delaware corporation; “WAPA2“WAPA Deportes” refers to a sports television network in Puerto Rico operated by WAPA; “WAPA Holdings” refers to WAPA Holdings, LLC (formerly known as InterMedia Español Holdings, LLC), a Delaware limited liability company, the parent company of WAPA and WAPA America; and “WAPA.TV” refers to a news and entertainment website in Puerto Rico operated by WAPA.WAPA; “United States” or “U.S.” refers to the United States of America, including its territories, commonwealths and possessions.
3
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”), including the exhibits attached hereto, future filings by us with the Securities and Exchange Commission, our press releases and oral statements made by, or with the approval of, our authorized personnel, that relate to our future performance or future events, may contain certain statements about usHemisphere Media Group, Inc. (the “Company”) and ourits consolidated subsidiaries that do not directly or exclusively relate to historical facts. These statements are, or may be deemed to be, “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
These forward-looking statements are necessarily estimates reflecting the best judgment and current expectations, plans, assumptions and beliefs about future events (in each case subject to change) of our senior management and management of our subsidiaries (including target businesses) and involve a number of risks, uncertainties and other factors, some of which may be beyond our control that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Without limitation, any statements preceded or followed by or that include the words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,” “would,” “could,” “might,” “expect,” “positioned,” “strategy,” “future,” “potential,” “forecast,” or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These include, but are not limited to, the Company’s future financial and operating results (including growth and earnings), plans, objectives, expectations and intentions and other statements that are not historical facts.
We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. In addition to the risk factors described in “Item 1A—Risk1A-Risk Factors” in this Quarterly Report on Form 10-Q, those factors include:
| ● | the deterioration of general economic conditions, political instability, social unrest, and public health crises, such as the occurrence of a global pandemic like COVID-19, including measures taken by governmental authorities to address the pandemic, which may precipitate or exacerbate other risks and/or uncertainties, recent increases in, and any additional waves of, COVID-19 cases, new variants of the virus, such as the Delta variant, as well as the availability and efficacy of a vaccine and treatments for the disease and whether individuals choose to vaccinate themselves, either nationally or in the local markets in which we operate, including, without limitation, in the Commonwealth of Puerto Rico; |
| ● | Puerto Rico’s uncertain political climate, as well as delays in the disbursement of earmarked federal funds on the local economy and advertising market; |
| ● | the effects of extreme weather and climate events on our Business as well as our counterparties, customers, employees, third-party vendors and suppliers; |
| ● | changes in technology, including changes in the distribution and viewing of television programming, including expanded deployment of personal video recorders, subscription and advertising video on-demand, internet protocol television, mobile personal devices and personal tablets and their impact on subscription and television advertising revenue; |
| ● | the reaction by advertisers, programming providers, strategic partners, the Federal Communications Commission (the “FCC”) or other government regulators to businesses that we acquire; |
| ● | the potential for viewership of our Networks or Pantaya’s programming to decline or unexpected reductions in the number of subscribers to our Networks or Pantaya; |
| ● | the risk that we may fail to secure sufficient or additional advertising and/or subscription revenue; |
4
· the effects
| ● | the inability of advertisers or affiliates to remit payment to us in a timely manner or at all; |
| ● | the risk that we may become responsible for certain liabilities of the businesses that we acquire, including our recent acquisition of Pantaya, or joint ventures we enter into; |
| ● | future financial performance, including our ability to obtain additional financing in the future on favorable terms; |
| ● | the failure of our Business to produce projected revenues or cash flows; |
| ● | reduced access to capital markets or significant increases in borrowing costs; |
| ● | our ability to successfully manage relationships with customers and Distributors and other important third parties; |
| ● | continued consolidation of Distributors in the marketplace; |
| ● | a failure to secure affiliate agreements or the renewal of such agreements on less favorable terms; |
| ● | disagreements with our Distributors over contract interpretation; |
| ● | our success in acquiring, investing in and integrating businesses; |
| ● | the outcome of any pending or threatened litigation; |
| ● | the loss of key personnel and/or talent or expenditure of a greater amount of resources attracting, retaining and motivating key personnel than in the past; |
| ● | strikes or other union job actions that affect our operations, including, without limitation, failure to renew our collective bargaining agreements on mutually favorable terms; |
| ● | the failure or destruction of satellites or transmitter facilities that we depend upon to distribute our Networks; |
| ● | uncertainties inherent in the development of new business lines and business strategies; |
| ● | changes in pricing and availability of products and services; |
| ● | uncertainties regarding the financial results of equity method investees and changes in the nature of key strategic relationships with partners and Distributors; |
| ● | changes in domestic and foreign laws or regulations under which we operate; |
| ● | changes in laws or treaties relating to taxation, or the interpretation thereof, in the U.S. or in the countries in which we operate; |
| ● | the ability of suppliers and vendors to deliver products and services; |
| ● | our ability to timely and fully recover proceeds under our insurance policies; |
| ● | fluctuations in foreign currency exchange rates and political unrest and regulatory changes in the international markets in which we operate; |
| ● | changes in the size of the U.S. Hispanic population, including the impact of federal and state immigration legislation and policies on both the U.S. Hispanic population and persons emigrating from Latin America; |
| ● | changes in, or failure or inability to comply with, government regulations including, without limitation, regulations of the FCC, and adverse outcomes from regulatory proceedings; and |
5
· the reaction by advertisers, programming providers, strategic partners, the Federal Communications Commission (the “FCC”) or other government regulators to businesses that we acquire;
· the potential for viewershipTable of our Networks’ programming to decline or unexpected reductions in the number of subscribers to our Networks;Contents
· the risk that we may fail to secure sufficient or additional advertising and/or subscription revenue;
· the inability of advertisers or affiliates to remit payment to us in a timely manner or at all;
· the risk that we may become responsible for certain liabilities of the businesses that we acquire or joint ventures we enter into;
· future financial performance, including our ability to obtain additional financing in the future on favorable terms;
· the failure of our Business to produce projected revenues or cash flows;
· reduced access to capital markets or significant increases in borrowing costs;
· our ability to successfully manage relationships with customers and Distributors and other important third parties;
· continued consolidation of Distributors in the marketplace;
· a failure to secure affiliate agreements or renewal of such agreements on less favorable terms;
· disagreements with our Distributors over contract interpretation;
· our success in acquiring, investing in and integrating complementary businesses;
· the outcome of any pending or threatened litigation;
· the loss of key personnel and/or talent or expenditure of a greater amount of resources attracting, retaining and motivating key personnel than in the past;
· strikes or other union job actions that affect our operations, including, without limitation, failure to renew our collective bargaining agreements on mutually favorable terms;
· changes in technology including changes in the distribution and viewing of television programming, expanded deployment of personal video recorders, video on demand, internet protocol television, mobile personal devices and personal tablets and their impact on subscription and television advertising revenue;
· the failure or destruction of satellites or transmitter facilities that we depend upon to distribute our Networks;
· uncertainties inherent in the development of new business lines and business strategies;
· changes in pricing and availability of products and services;
· changes in the nature of key strategic relationships with partners and Distributors;
· the ability of suppliers and vendors to deliver products and services;
· fluctuations in foreign currency exchange rates and political unrest and regulatory changes in the international markets in which we operate;
· the deterioration of general economic conditions either nationally or in the local markets in which we operate, including, without limitation, in the Commonwealth of Puerto Rico;
· changes in the size of the U.S. Hispanic population, including the impact of federal and state immigration legislation and policies on both the U.S. Hispanic population and persons emigrating from Latin America;
· changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the FCC and adverse outcomes from regulatory proceedings; and
· competitor responses to our products and services.
| ● | competitor responses to our products and services. |
The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All subsequent written and oral forward-looking statements concerning the matters addressed in this Quarterly Report and attributable to us or any person acting on our behalf are qualified by these cautionary statements.
The forward-looking statements are based on current expectations about future events and are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations may not be achieved. We may change our intentions, beliefs or expectations at any time and without notice, based upon any change in our assumptions or otherwise. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
6
PART I - FINANCIAL INFORMATION
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share and par value amounts)
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
|
| (Unaudited) |
| (Audited) |
| ||
Assets |
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash |
| $ | 140,321 |
| $ | 163,090 |
|
Accounts receivable, net of allowance for doubtful accounts of $1,746 and $1,711, respectively |
| 25,243 |
| 25,566 |
| ||
Due from related parties |
| 1,889 |
| 1,505 |
| ||
Programming rights |
| 7,922 |
| 5,450 |
| ||
Prepaids and other current assets |
| 8,686 |
| 7,904 |
| ||
Total current assets |
| 184,061 |
| 203,515 |
| ||
|
|
|
|
|
| ||
Programming rights |
| 11,852 |
| 10,450 |
| ||
Property and equipment, net |
| 24,603 |
| 25,501 |
| ||
Broadcast license |
| 41,356 |
| 41,356 |
| ||
Goodwill |
| 164,887 |
| 164,887 |
| ||
Other intangibles, net |
| 54,967 |
| 64,849 |
| ||
Deferred taxes |
| 18,830 |
| 18,638 |
| ||
Equity method investments |
| 24,406 |
| — |
| ||
Other assets |
| 808 |
| 1,245 |
| ||
Total Assets |
| $ | 525,770 |
| $ | 530,441 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 5,034 |
| $ | 3,525 |
|
Due to related parties |
| 1,236 |
| 413 |
| ||
Accrued agency commissions |
| 3,116 |
| 6,725 |
| ||
Accrued compensation and benefits |
| 4,258 |
| 4,488 |
| ||
Accrued marketing |
| 5,183 |
| 6,378 |
| ||
Taxes payable |
| 36 |
| 1,619 |
| ||
Other accrued expenses |
| 3,434 |
| 3,610 |
| ||
Programming rights payable |
| 3,971 |
| 3,293 |
| ||
Current portion of long-term debt |
| 2,133 |
| — |
| ||
Total current liabilities |
| 28,401 |
| 30,051 |
| ||
|
|
|
|
|
| ||
Programming rights payable |
| 805 |
| 107 |
| ||
Long-term debt, net of current portion |
| 205,897 |
| 210,270 |
| ||
Deferred taxes |
| 17,829 |
| 17,829 |
| ||
Swap liability |
| 208 |
| — |
| ||
Defined benefit pension obligation |
| 2,595 |
| 2,844 |
| ||
Total Liabilities |
| 255,735 |
| 261,101 |
| ||
|
|
|
|
|
| ||
Stockholders’ Equity |
|
|
|
|
| ||
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2017 and December 31, 2016 |
| — |
| — |
| ||
Class A common stock, $.0001 par value; 100,000,000 shares authorized; and 25,171,432 and 24,944,913 shares issued at September 30, 2017 and December 31, 2016 |
| 2 |
| 2 |
| ||
Class B common stock, $.0001 par value; 33,000,000 shares authorized; 20,800,998 shares issued and outstanding at September 30, 2017 and December 31, 2016 |
| 2 |
| 2 |
| ||
Additional paid-in capital |
| 264,366 |
| 261,051 |
| ||
Treasury stock, at cost 4,481,439 and 3,606,696 at September 30, 2017 and December 31, 2016, respectively |
| (46,089 | ) | (35,069 | ) | ||
Retained earnings |
| 52,445 |
| 43,837 |
| ||
Accumulated other comprehensive loss |
| (691 | ) | (483 | ) | ||
Total Stockholders’ Equity |
| 270,035 |
| 269,340 |
| ||
Total Liabilities and Stockholders’ Equity |
| $ | 525,770 |
| $ | 530,441 |
|
| | | | | | | |
|
| September 30, |
| December 31, | | ||
| | 2021 | | 2020 |
| ||
|
| (Unaudited) |
| | | | |
Assets | | | | | | | |
Current Assets | | | | | | | |
Cash | | $ | 54,680 | | $ | 134,471 | |
Accounts receivable, net of allowance for doubtful accounts of $915 and $919, respectively | |
| 33,473 | |
| 35,955 | |
Due from related parties | |
| 581 | |
| 943 | |
Programming rights | |
| 6,836 | |
| 8,301 | |
Prepaids and other current assets | |
| 23,035 | |
| 9,298 | |
Total current assets | |
| 118,605 | |
| 188,968 | |
Programming rights, net of current portion | |
| 20,726 | |
| 13,430 | |
Property and equipment, net | |
| 31,728 | |
| 31,798 | |
Operating lease right-of-use assets | | | 1,425 | | | 1,820 | |
Broadcast license | |
| 41,356 | |
| 41,356 | |
Goodwill | |
| 236,764 | |
| 165,597 | |
Other intangibles, net | |
| 120,879 | |
| 24,761 | |
Equity method investments | | | 24,959 | | | 29,782 | |
Other assets | | | 7,429 | | | 4,333 | |
Total Assets | | $ | 603,871 | | $ | 501,845 | |
| | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | |
Current Liabilities | | | | | | | |
Accounts payable | | | 11,602 | | | 2,350 | |
Due to related parties | |
| 690 | |
| 648 | |
Accrued agency commissions | |
| 5,110 | |
| 6,529 | |
Accrued compensation and benefits | |
| 6,223 | |
| 5,934 | |
Accrued marketing | | | 7,965 | | | 7,066 | |
Other accrued expenses | |
| 22,978 | |
| 8,137 | |
Income taxes payable | | | 2,952 | | | 2,233 | |
Programming rights payable | |
| 13,245 | |
| 7,626 | |
Current portion of long-term debt | |
| 2,656 | |
| 2,134 | |
Total current liabilities | |
| 73,421 | |
| 42,657 | |
Programming rights payable, net of current portion | |
| 3,237 | |
| 776 | |
Long-term debt, net of current portion | |
| 247,261 | |
| 200,856 | |
Deferred income taxes | |
| 25,545 | |
| 19,306 | |
Other long-term liabilities | | | 2,794 | | | 3,932 | |
Defined benefit pension obligation | |
| 2,917 | |
| 2,832 | |
Total Liabilities | |
| 355,175 | |
| 270,359 | |
| | | | | | | |
Stockholders’ Equity | | | | | | | |
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued at September 30, 2021 and December 31, 2020 | |
| — | |
| — | |
Class A common stock, $.0001 par value; 100,000,000 shares authorized; 25,992,774 and 25,457,709 shares issued at September 30, 2021 and December 31, 2020, respectively | |
| 3 | |
| 3 | |
Class B common stock, $.0001 par value; 33,000,000 shares authorized; 19,720,381 shares issued at September 30, 2021 and December 31, 2020 | |
| 2 | |
| 2 | |
Additional paid-in capital | |
| 287,063 | |
| 279,800 | |
Class A treasury stock, at cost, 6,001,151 and 5,710,416 at September 30, 2021 and December 31, 2020, respectively | |
| (64,763) | |
| (61,453) | |
Retained earnings | |
| 27,560 | |
| 14,840 | |
Accumulated other comprehensive loss | |
| (1,169) | |
| (2,187) | |
Total Hemisphere Media Group Stockholders’ Equity | | | 248,696 | | | 231,005 | |
Equity attributable to non-controlling interest | | | — | | | 481 | |
Total Stockholders’ Equity | |
| 248,696 | |
| 231,486 | |
Total Liabilities and Stockholders’ Equity | | $ | 603,871 | | $ | 501,845 | |
See accompanying notesNotes to unaudited condensed consolidated financial statements.Condensed Consolidated Financial Statements.
7
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(amounts in thousands, except per share amounts)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net revenues |
| $ | 32,173 |
| $ | 33,116 |
| $ | 100,512 |
| $ | 99,118 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Expenses: |
|
|
|
|
|
|
|
|
| ||||
Cost of revenues |
| 9,883 |
| 9,826 |
| 30,426 |
| 30,647 |
| ||||
Selling, general and administrative |
| 9,510 |
| 8,999 |
| 28,845 |
| 27,775 |
| ||||
Depreciation and amortization |
| 4,041 |
| 4,083 |
| 12,223 |
| 12,500 |
| ||||
Other expenses |
| 332 |
| 638 |
| 3,056 |
| 770 |
| ||||
(Gain) loss on disposition of assets |
| — |
| (9 | ) | 2 |
| 6 |
| ||||
Total operating expenses |
| 23,766 |
| 23,537 |
| 74,552 |
| 71,698 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| 8,407 |
| 9, 579 |
| 25,960 |
| 27,420 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other: |
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
| (2,863 | ) | (2,954 | ) | (8,089 | ) | (8,779 | ) | ||||
Loss on equity method investments, net |
| (2,571 | ) | — |
| (2,450 | ) | — |
| ||||
Loss on impairment of fixed assets |
| (533 | ) | — |
| (533 | ) | — |
| ||||
Total other expenses, net |
| (5,967 | ) | (2,954 | ) | (11,072 | ) | (8,779 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
| 2,440 |
| 6,625 |
| 14,888 |
| 18,641 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense |
| (1,758 | ) | (2,276 | ) | (6,280 | ) | (6,563 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 682 |
| $ | 4,349 |
| $ | 8,608 |
| $ | 12,078 |
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.02 |
| $ | 0.11 |
| $ | 0.21 |
| $ | 0.29 |
|
Diluted |
| $ | 0.02 |
| $ | 0.11 |
| $ | 0.21 |
| $ | 0.28 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| 40,398 |
| 40,499 |
| 40,515 |
| 42,057 |
| ||||
Diluted |
| 40,925 |
| 41,035 |
| 40,831 |
| 42,764 |
| ||||
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net revenues |
| $ | 50,791 | | $ | 37,172 | | $ | 138,828 | | $ | 104,316 |
Operating expenses: | | | | | | | | | | | | |
Cost of revenues | |
| 16,024 | |
| 10,994 | |
| 42,601 | |
| 34,521 |
Selling, general and administrative | |
| 31,164 | |
| 10,819 | |
| 67,463 | |
| 32,260 |
Depreciation and amortization | |
| 10,861 | |
| 2,771 | |
| 17,863 | |
| 8,696 |
Other expenses | |
| 413 | |
| 172 | |
| 8,504 | |
| 3,220 |
Gain from FCC spectrum repack and other | |
| (309) | |
| (1,004) | |
| (2,485) | |
| (831) |
Total operating expenses | |
| 58,153 | |
| 23,752 | |
| 133,946 | |
| 77,866 |
Operating (loss) income | |
| (7,362) | |
| 13,420 | |
| 4,882 | |
| 26,450 |
Other (expense) income: | | | | | | | | | | | | |
Interest expense and other, net | |
| (3,278) | |
| (2,551) | |
| (8,801) | |
| (7,833) |
(Loss) gain on equity method investment activity | |
| (3,222) | |
| (988) | |
| 20,818 | |
| (18,196) |
Impairment of equity method investment | | | — | | | — | | | — | | | (5,479) |
Other income (expense), net | | | 540 | | | — | | | (128) | | | — |
Total other (expense) income | |
| (5,960) | |
| (3,539) | |
| 11,889 | |
| (31,508) |
(Loss) income before income taxes | |
| (13,322) | |
| 9,881 | |
| 16,771 | |
| (5,058) |
Income tax expense | |
| (1,479) | |
| (4,664) | |
| (4,532) | |
| (5,873) |
Net (loss) income | | | (14,801) | | | 5,217 | | | 12,239 | | | (10,931) |
Net loss attributable to non-controlling interest | | | — | | | 80 | | | 32 | | | 118 |
Net (loss) income attributable to Hemisphere Media Group, Inc. | | $ | (14,801) | | $ | 5,297 | | $ | 12,271 | | $ | (10,813) |
| | | | | | | | | | | | |
(Loss) income per share attributable to Hemisphere Media Group, Inc.: | | | | | | | | | | | | |
Basic | | $ | (0.37) | | $ | 0.13 | | $ | 0.31 | | $ | (0.27) |
Diluted | | $ | (0.37) | | $ | 0.13 | | $ | 0.31 | | $ | (0.27) |
| | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic | |
| 39,713 | |
| 39,489 | |
| 39,578 | |
| 39,415 |
Diluted | |
| 39,713 | |
| 39,525 | |
| 39,960 | |
| 39,415 |
See accompanying notesNotes to unaudited condensed consolidated financial statements.Condensed Consolidated Financial Statements.
8
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statement of Comprehensive (Loss) Income
(Unaudited)
(amounts in thousands)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 682 |
| $ | 4,349 |
| $ | 8,608 |
| $ | 12,078 |
|
Net change in fair value of cash flow hedge |
| 132 |
| — |
| (208 | ) | — |
| ||||
Other comprehensive loss |
| — |
| — |
| — |
| (8 | ) | ||||
Comprehensive income |
| $ | 814 |
| $ | 4,349 |
| $ | 8,400 |
| $ | 12,070 |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net (loss) income | | $ | (14,801) | | $ | 5,217 | | $ | 12,239 | | $ | (10,931) |
Other comprehensive income (loss): | | | | | | | | | | | | |
Change in fair value of interest rate swap, net of income taxes | | | 344 | | | 373 | | | 1,018 | | | (1,433) |
Comprehensive (loss) income | | | (14,457) | | | 5,590 | | | 13,257 | | | (12,364) |
Comprehensive loss attributable to non-controlling interest | | | — | | | 80 | | | 32 | | | 118 |
Comprehensive (loss) income attributable to Hemisphere Media Group, Inc. | | $ | (14,457) | | $ | 5,670 | | $ | 13,289 | | $ | (12,246) |
See accompanying notesNotes to unaudited condensed consolidated financial statements.Condensed Consolidated Financial Statements.
9
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three and Nine Months Ended September 30, 20172021
(Unaudited)
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
| Additional |
| Class A |
|
|
| Other |
|
|
| |||||||
|
| Class A Common Stock |
| Class B Common Stock |
| Paid-In |
| Treasury |
| Retained |
| Comprehensive |
|
|
| |||||||||||
|
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Total |
| |||||||
Balance at December 31, 2016 |
| 24,944 |
| $ | 2 |
| 20,801 |
| $ | 2 |
| $ | 261,051 |
| $ | (35,069 | ) | $ | 43,837 |
| $ | (483 | ) | $ | 269,340 |
|
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| 8,608 |
| — |
| 8,608 |
| |||||||
Vesting of restricted stock |
| 204 |
| — |
| — |
| — |
| — |
| (324 | ) | — |
| — |
| (324 | ) | |||||||
Stock-based compensation |
| — |
| — |
| — |
| — |
| 3,104 |
| — |
| — |
| — |
| 3,104 |
| |||||||
Repurchase of Class A common stock |
| — |
| — |
| — |
| — |
| — |
| (10,696 | ) | — |
| — |
| (10,696 | ) | |||||||
Exercise of warrants |
| 23 |
| — |
| — |
| — |
| 211 |
| — |
| — |
| — |
| 211 |
| |||||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (208 | ) | (208 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at September 30, 2017 |
| 25,171 |
| $ | 2 |
| 20,801 |
| $ | 2 |
| $ | 264,366 |
| $ | (46,089 | ) | $ | 52,445 |
| $ | (691 | ) | $ | 270,035 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | Additional | | Class A | | | | | Accumulated | | Non- | |
| | ||||||||||
| | Common Stock | | Common Stock | | Paid In | | Treasury | | Retained | | Comprehensive | | controlling | |
| | |||||||||||
|
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Interest |
| Total | ||||||||
Balance at June 30, 2021 |
| 25,988 | | $ | 3 |
| 19,720 | | $ | 2 | | $ | 285,373 | | $ | (64,719) | | $ | 41,912 | | $ | (1,513) | | $ | 449 | | $ | 261,507 |
Net loss |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| (14,801) | |
| — | |
| — | |
| (14,801) |
Vesting of restricted stock | | 5 | | | — | | — | | | — | | | — | | | (19) | | | — | | | — | | | — | | | (19) |
Repurchases of Class A Common Stock | | — | | | — | | — | | | — | | | — | | | (25) | | | — | | | — | | | — | | | (25) |
Stock-based compensation |
| — | |
| — |
| — | |
| — | |
| 1,690 | |
| — | |
| — | |
| — | |
| — | |
| 1,690 |
Other comprehensive income, net of tax |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| 344 | |
| — | |
| 344 |
Acquisition of non-controlling interest | | — | | | — | | — | | | — | | | — | | | — | | | 449 | | | — | | | (449) | | | — |
Balance at September 30, 2021 |
| 25,993 | | $ | 3 |
| 19,720 | | $ | 2 | | $ | 287,063 | | $ | (64,763) | | $ | 27,560 | | $ | (1,169) | | $ | 0 | | $ | 248,696 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | Additional | | Class A | | | | | Accumulated | | Non- | | | | ||||||||||
| | Common Stock | | Common Stock | | Paid In | | Treasury | | Retained | | Comprehensive | | controlling | | | | |||||||||||
|
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Interest |
| Total | ||||||||
Balance at December 31, 2020 |
| 25,458 | | $ | 3 |
| 19,720 | | $ | 2 | | $ | 279,800 | | $ | (61,453) | | $ | 14,840 | | $ | (2,187) | | $ | 481 | | $ | 231,486 |
Net income (loss) |
| — | | | — | | — | | | — | | | — | | | — | | | 12,271 | | | — | | | (32) | | | 12,239 |
Vesting of restricted stock | | 284 | | | — | | — | | | — | | | — | | | (844) | | | — | | | — | | | — | | | (844) |
Issuance of Class A Common Stock | | 238 | | | 0 | | 0 | | | 0 | | | 2,778 | | | (1,077) | | | 0 | | | 0 | | | 0 | | | 1,701 |
Repurchases of Class A Common Stock | | — | | | — | | — | | | — | | | — | | | (1,346) | | | — | | | — | | | — | | | (1,346) |
Stock-based compensation | | — | | | — | | — | | | — | | | 4,485 | | | — | | | — | | | — | | | — | | | 4,485 |
Exercise of stock options | | 13 | | | — | | — | | | — | | | (0) | | | (43) | | | — | | | — | | | — | | | (43) |
Other comprehensive income, net of tax | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 1,018 | | | — | | | 1,018 |
Acquisition of non-controlling interest | | — | | | — | | — | | | — | | | — | | | — | | | 449 | | | — | | | (449) | | | — |
Balance at September 30, 2021 |
| 25,993 | | $ | 3 |
| 19,720 | | $ | 2 | | $ | 287,063 | | $ | (64,763) | | $ | 27,560 | | $ | (1,169) | | $ | 0 | | $ | 248,696 |
See accompanying notesNotes to unaudited condensed consolidated financialCondensed Consolidated Financial Statements.
10
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three and Nine Months Ended September 30, 2020
(Unaudited)
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A |
| Class B |
| Additional |
| Class A |
| Retained |
| Accumulated |
| Non- |
| | | |||||||||||
| | Common Stock | | Common Stock | | Paid In | | Treasury | | (Deficit) | | Comprehensive | | controlling | | | | |||||||||||
|
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Interest |
| Total | ||||||||
Balance at June 30, 2020 |
| 25,439 | | $ | 3 |
| 19,720 | | $ | 2 | | $ | 277,154 | | $ | (61,031) | | $ | (35) | | $ | (2,598) | | $ | 1,346 | | $ | 214,841 |
Net income (loss) |
| 0 | | | 0 | | 0 | | | 0 | | | 0 | | | 0 | | | 5,297 | | | 0 | | | (80) | | | 5,217 |
Stock-based compensation | | 0 | | | 0 | | 0 | | | 0 | | | 1,315 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1,315 |
Vesting of restricted stock | | 0 | | | 0 | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
Other comprehensive income, net of tax | | 0 | | | 0 | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 373 | | | 0 | | | 373 |
Balance at September 30, 2020 |
| 25,439 | | $ | 3 |
| 19,720 | | $ | 2 | | $ | 278,469 | | $ | (61,031) | | $ | 5,262 | | $ | (2,225) | | $ | 1,266 | | $ | 221,746 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A |
| Class B |
| Additional |
| Class A |
| |
| Accumulated |
| Non- |
| | | |||||||||||
| | Common Stock | | Common Stock | | Paid In | | Treasury | | Retained | | Comprehensive | | controlling | | | | |||||||||||
|
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Interest |
| Total | ||||||||
Balance at December 31, 2019 |
| 25,202 | | $ | 3 |
| 19,720 | | $ | 2 | | $ | 274,518 | | $ | (60,521) | | $ | 16,075 | | $ | (792) | | $ | 1,384 | | $ | 230,669 |
Net loss |
| — | | | — | | — | | | — | | | — | | | — | | | (10,813) | | | — | | | (118) | | | (10,931) |
Stock-based compensation | | — | | | — | | — | | | — | | | 3,951 | | | — | | | — | | | — | | | — | | | 3,951 |
Vesting of restricted stock |
| 237 | | | — |
| — | |
| — | |
| — | |
| (510) | |
| — | |
| — | | | — | |
| (510) |
Other comprehensive loss, net of tax | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (1,433) | | | — | | | (1,433) |
Balance at September 30, 2020 |
| 25,439 | | $ | 3 |
| 19,720 | | $ | 2 | | $ | 278,469 | | $ | (61,031) | | $ | 5,262 | | $ | (2,225) | | $ | 1,266 | | $ | 221,746 |
See accompanying Notes to Condensed Consolidated Financial Statements.
11
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
|
| Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Reconciliation of Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
| ||
Net income |
| $ | 8,608 |
| $ | 12,078 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 12,223 |
| 12,500 |
| ||
Program amortization |
| 9,572 |
| 9,010 |
| ||
Amortization of deferred financing costs |
| 217 |
| 375 |
| ||
Amortization of original issue discount |
| 258 |
| 284 |
| ||
Stock-based compensation |
| 3,104 |
| 2,522 |
| ||
Provision for bad debts |
| 48 |
| 262 |
| ||
Loss on disposition of assets |
| 2 |
| 6 |
| ||
Deferred tax expense |
| (192 | ) | (2,781 | ) | ||
Loss on equity method investments, net |
| 2,450 |
| — |
| ||
Loss on impairment of fixed assets |
| 533 |
| — |
| ||
Excess tax benefits |
| — |
| 209 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Decrease (increase) in: |
|
|
|
|
| ||
Accounts receivable |
| 275 |
| 879 |
| ||
Programming Rights |
| (13,446 | ) | (12,754 | ) | ||
Due from related parties |
| (384 | ) | 423 |
| ||
Prepaids and other assets |
| (345 | ) | (3,496 | ) | ||
(Decrease) increase in: |
|
|
|
|
| ||
Accounts payable |
| 1,509 |
| (126 | ) | ||
Due to related parties |
| 823 |
| (851 | ) | ||
Accrued expenses |
| (5,210 | ) | (2,432 | ) | ||
Programming rights payable |
| 1,376 |
| (123 | ) | ||
Taxes payable |
| (1,583 | ) | (1,665 | ) | ||
Other liabilities |
| (249 | ) | 150 |
| ||
Net cash provided by operating activities |
| 19,589 |
| 14,470 |
| ||
Cash Flows From Investing Activities: |
|
|
|
|
| ||
Funding of equity investments |
| (26,856 | ) | — |
| ||
Proceeds from sale of assets |
| — |
| 10 |
| ||
Capital expenditures |
| (1,979 | ) | (2,927 | ) | ||
Net cash used in investing activities |
| (28,835 | ) | (2,917 | ) | ||
Cash Flows From Financing Activities: |
|
|
|
|
| ||
Repayments of long-term debt |
| (1,600 | ) | (8,278 | ) | ||
Purchase of common stock |
| (11,020 | ) | (31,846 | ) | ||
Financing fees |
| (1,114 | ) | — |
| ||
Warrant repurchase |
| — |
| (976 | ) | ||
Warrant exercise |
| 211 |
| 420 |
| ||
Exercise of stock options |
| — |
| 155 |
| ||
Net cash used in financing activities |
| (13,523 | ) | (40,525 | ) | ||
|
|
|
|
|
| ||
Net decrease in cash |
| (22,769 | ) | (28,972 | ) | ||
Cash: |
|
|
|
|
| ||
Beginning |
| 163,090 |
| 179,532 |
| ||
Ending |
| $ | 140,321 |
| $ | 150,560 |
|
|
|
|
|
|
| ||
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
| ||
Cash payments for: |
|
|
|
|
| ||
Interest |
| $ | 7,654 |
| $ | 8,215 |
|
Income taxes |
| $ | 8,268 |
| $ | 11,230 |
|
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities: | | | | | | |
Net income (loss) | | $ | 12,239 | | $ | (10,931) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | |
| 17,863 | |
| 8,696 |
Program amortization | |
| 11,038 | |
| 12,246 |
Amortization of deferred financing costs and original issue discount | |
| 913 | |
| 438 |
Stock-based compensation | |
| 4,485 | |
| 3,951 |
Provision for bad debts | |
| 58 | |
| 952 |
Gain from FCC repack and other | | | (2,485) | | | (831) |
(Gain) loss on equity method investment activity | | | (20,818) | | | 18,196 |
Amortization of operating lease right-of-use assets | | | 416 | | | 361 |
Other non-cash acquisition charges | | | 1,258 | | | — |
Deferred tax expense | |
| (1,141) | |
| 306 |
Impairment of equity method investment | | | — | | | 5,479 |
Changes in assets and liabilities: | | | | | | |
Decrease (increase) in: | | | | | | |
Accounts receivable | |
| 5,445 | |
| (3,648) |
Due from related parties, net | |
| 404 | |
| 1,078 |
Programming rights | |
| (17,537) | |
| (10,841) |
Prepaids and other assets | |
| (9,095) | |
| 2,124 |
(Decrease) increase in: | | | | | | |
Accounts payable | |
| 6,445 | |
| 3,595 |
Other accrued expenses | |
| 1,677 | |
| 614 |
Programming rights payable | |
| (6,307) | |
| 4,147 |
Income taxes payable | |
| 719 | |
| — |
Other liabilities | |
| 271 | |
| 205 |
Net cash provided by operating activities | |
| 5,848 | |
| 36,137 |
Cash Flows From Investing Activities: | | | | | | |
Funding of equity method investments | | | (4,453) | | | (7,499) |
Capital expenditures | | | (3,199) | | | (1,977) |
FCC repack proceeds | | | 2,444 | | | 1,041 |
Cash paid for acquisition of Pantaya | | | (122,621) | | | — |
Net cash used in investing activities | |
| (127,829) | |
| (8,435) |
Cash Flows From Financing Activities: | | | | | | |
Purchases of common stock | |
| (3,310) | |
| (510) |
Repayments of long-term debt | | | (1,862) | | | (1,602) |
Proceeds from incremental term loan | |
| 48,000 | |
| — |
Payment of financing fees | | | (638) | | | — |
Net cash provided by (used in) financing activities | | | 42,190 | | | (2,112) |
Net (decrease) increase in cash | | | (79,791) | | | 25,590 |
Cash: | | | | | | |
Beginning | | | 134,471 | | | 92,151 |
Ending | | $ | 54,680 | | $ | 117,741 |
| | | | | | |
Supplemental Disclosures of Cash Flow Information: | | | | | | |
Cash payments for: | | | | | | |
Interest | | $ | 7,865 | | $ | 7,586 |
Income taxes | | $ | 2,307 | | $ | 1,112 |
Non-cash investing activity (acquisition related): | | | | | | |
Issuance of Class A Common Stock | | $ | 2,188 | | $ | — |
Effective settlement of pre-existing receivables and payables, net | | $ | 1,499 | | $ | — |
See accompanying notesNotes to unaudited condensed consolidated financial statements.Condensed Consolidated Financial Statements.
12
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Nature of businessBusiness
Nature of business:The accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements include the accounts of Hemisphere Media Group, Inc. (“Hemisphere” or the “Company”), the parent holding company of Cine Latino, Inc. (“Cinelatino”), WAPA Holdings, LLC (formerly known as InterMedia Español Holdings, LLC) (“WAPA Holdings”), HMTV Cable, Inc. (“HMTV Cable”), the parent company of the entities for the acquired networks consisting of Pasiones, TV Dominicana, and Centroamerica TV, HMTV Distribution, LLC (“HMTV Distribution”), the parent of Snap Global, LLC, and its wholly owned subsidiaries (“Snap Media”), in which we acquired a 75% interest on November 26, 2018 and subsequently received the remaining 25% interest via relinquishment on July 15, 2021 (see below), and HMTV Uno, S.A.S.DTC, LLC (“HMTV DTC”), the parent company of Pantaya, LLC, and its subsidiaries (“Pantaya”), including a joint venture, ASG Latin, LLC, which we acquired on March 31, 2021 (see below). Hemisphere was incorporated in Delawareformed on January 16, 2013 and consummatedfor purposes of effecting its initial public offering, which was consummated on April 4, 2013. In these notes, the terms “Company,” “we,” “us” or “our” mean Hemisphere and all subsidiaries included in our consolidated financial statements.Condensed Consolidated Financial Statements.
We also considerPrior to March 31, 2021, the Company owned a 25% equity interest in Pantaya, which was accounted for consolidation entitiesas an equity method investment. On March 31, 2021, the Company acquired the remaining 75% equity interest in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”Pantaya (the “Pantaya Acquisition”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activitiesfor a cash purchase price of $123.6 million. As a result of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. We have no consolidating variable interests as of September 30, 2017. Refer toacquisition, Pantaya is now a wholly owned consolidated subsidiary. For more information, see Note 5, “Equity method investments,”3, “Business Combination” of Notes to unaudited condensed consolidated financial statements, includedCondensed Consolidated Financial Statements.
Effective July 15, 2021, the Company entered into an omnibus modification agreement with Snap Distribution, Inc., a British Virgin Islands company, pursuant to which Snap Distribution, Inc. relinquished the non-controlling 25% interest in this Quarterly ReportSnap Media, at which point Snap Media became a wholly owned subsidiary of the Company. For more information, see Note 11, “Stockholders’ Equity” of Notes to Condensed Consolidated Financial Statements.
Reclassification: Certain prior year amounts on Form 10-Q for further information.the presented Condensed Consolidated Statement of Cash Flows have been reclassified to conform to current year presentation.
Basis of presentation: The accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements for Hemisphere and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Our financial condition as of, and operating results, for the three and nine months ended September 30, 20172021 are not necessarily indicative of the financial condition or results that may be expected for any future interim period or for the year ending December 31, 2017.2021. These unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statementsConsolidated Financial Statements and notesNotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Net earnings(loss) income per common share:Basic earnings(loss) income per share (“EPS”) areis computed by dividing incomeloss attributable to Hemisphere Media Group, Inc. common stockholders by the number of weighted-average outstanding shares of common stock. Diluted EPS(loss) income per share reflects the effect of the assumed exercise of stock options and vesting of restricted shares only in the periods in which such effect would have been dilutive.
13
The following table sets forth the computation of the common shares outstanding used in determining basic and diluted EPS(loss) income per share attributable to Hemisphere Media Group, Inc. (amounts in thousands, except per share amounts):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||||||||||||
Numerator for earnings per common share calculation: |
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|
|
|
|
|
|
|
| ||||||||||||||||
Net income |
| $ | 682 |
| $ | 4,349 |
| $ | 8,608 |
| $ | 12,078 |
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| ||||||||||||||||
Denominator for earnings per common share calculation: |
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|
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| | | | | | | | | | | | | |||||||||||||
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |||||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||||||||||||||
Numerator for (loss) income per common share calculation: | | | | | | | | | | | | | |||||||||||||
Net (loss) income attributable to Hemisphere Media Group, Inc. | | $ | (14,801) | | $ | 5,297 | | $ | 12,271 | | $ | (10,813) | |||||||||||||
| | | | | | | | | | | | | |||||||||||||
Denominator for (loss) income per common share calculation: | | | | | | | | | | | | | |||||||||||||
Weighted-average common shares, basic |
| 40,398 |
| 40,499 |
| 40,515 |
| 42,057 |
| |
| 39,713 | |
| 39,489 | |
| 39,578 | |
| 39,415 | ||||
Effect of dilutive securities |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | ||||
Stock options, restricted stock and warrants |
| 527 |
| 536 |
| 316 |
| 707 |
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Stock options and restricted stock | |
| — | |
| 36 | |
| 382 | |
| — | |||||||||||||
Weighted-average common shares, diluted |
| 40,925 |
| 41,035 |
| 40,831 |
| 42,764 |
| |
| 39,713 | |
| 39,525 | |
| 39,960 | |
| 39,415 | ||||
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EPS |
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| | | | | | | | | | | | | |||||||||||||
(Loss) income per share attributable to Hemisphere Media Group, Inc. | | | | | | | | | | | | | |||||||||||||
Basic |
| $ | 0.02 |
| $ | 0.11 |
| $ | 0.21 |
| $ | 0.29 |
| | $ | (0.37) | | $ | 0.13 | | $ | 0.31 | | $ | (0.27) |
Diluted |
| $ | 0.02 |
| $ | 0.11 |
| $ | 0.21 |
| $ | 0.28 |
| | $ | (0.37) | | $ | 0.13 | | $ | 0.31 | | $ | (0.27) |
On June 20, 2017, the Company announced that its Board of Directors authorized the repurchase of up to $25 million of the Company’s Class A common stock, par value $0.0001 per share (“Class A common stock”). Under the Company’s stock repurchase program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases at prevailing prices, subject to stock price, business
and market conditions and other factors. As of September 30, 2017, the Company had $14.3 million of remaining authorization for future repurchases under the existing stock repurchase program, which will expire on July 17, 2018.
All common stock repurchases have been made through open market transactions and have been recorded as treasury stock on the condensed consolidated balance sheet. As of September 30, 2017, the Company had repurchased 0.8 million shares of Class A common stock under the repurchase program for an aggregate purchase price of $10.7 million.
We apply the treasury stock method to measure the dilutive effect of our outstanding stock options and restricted stock awards and include the respective common share equivalents in the denominator of our diluted (loss) income per common share calculation. Per the Accounting Standards Codification (“ASC”) 260, under the treasury stock method, the incremental shares (difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted (loss) income per share computation (ASC 260-10-45-23). The assumed exercise only occurs when the options are “In the Money” (exercise price is lower than the average market price for the period). If the options are “Out of the Money” (exercise price is higher than the average market price for the period), the exercise is not assumed since the result would be anti-dilutive. Potentially dilutive securities representing 1.91.7 million and 2.03.9 million shares of the Company’s Class A common stock, par value $0.0001 per share (“Class A common stock”) for the three and nine months ended September 30, 2017,2021 and 2020, respectively, were excluded from the computation of diluted incomeloss per common share for this periodthese periods because their effect would have been anti-dilutive. Potentially dilutive securities representing 2.0 million and 3.1 million shares of Class A common stock for the nine months ended September 30, 2021 and 2020, respectively, were excluded from the computation of diluted (loss) income per common share for these periods because their effects would have been anti-dilutive. The net (loss) income per share attributable to Hemisphere Media Group, Inc. amounts are the same for our Class A common stock and Class B common stock par value $0.0001 per share (“Class B common stock”), because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.
As a result of the loss from operations for the three months ended September 30, 2021, 0.4 million outstanding Class A common stock awards were excluded from the computation of diluted loss per share because their effect was anti-dilutive. As a result of the loss from operations for the nine months ended September 30, 2020, 0.2 million outstanding Class A common stock awards were excluded from the computation of diluted loss per share because their effect was anti-dilutive.
14
Risks and uncertainties: In March 2020, the World Health Organization characterized the coronavirus (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The impact of COVID-19 and measures to prevent its spread have continued to affect our businesses in a number of ways. Beginning in March 2020, the Company experienced adverse advertising revenue impacts. Operationally, most non-production and programming personnel are working remotely, and the Company has restricted business travel. The Company has managed the remote workforce transition effectively and there have been no material adverse impacts on operations through September 30, 2021. However, the Company is unable to reasonably predict the impact that a significant change in circumstances, including the ability of our workforce and/or key personnel to work effectively because of illness, government actions or other restrictions in connection with the COVID-19 pandemic, may have on our businesses in the future. The nature and full extent of the impact of the COVID-19 pandemic on our future operations will depend on numerous factors, all of which are highly uncertain and cannot be reasonably predicted. These factors include the length and severity of the outbreak, including the extent of surges in positive cases related to variants of COVID-19, such as the Delta variant, as well as the availability and efficacy of vaccines and treatments for the disease and whether individuals choose to vaccinate themselves, the responses of private sector businesses and governments, including the timing and amount of government stimulus, the impact on economic activity and the impact on our customers, employees and suppliers. For more information on the risks associated with the COVID-19 pandemic, see “Item 1A-Risk Factors” included elsewhere in this Quarterly Report.
The Company has evaluated and continues to evaluate the potential impact of the COVID-19 pandemic on its Condensed Consolidated Financial Statements, including the impairment of goodwill and indefinite-lived intangible assets and the fair value of equity method investments. The ultimate impact of the COVID-19 pandemic, including the extent of any adverse impact on our business, results of operations and financial condition, remains uncertain.
Use of estimates:In preparing these financial statements, management had to make estimates and assumptions that affected the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the balance sheet dates, and the reported revenues and expenses for each of the three and nine months ended September 30, 20172021 and 2016.2020. Such estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. However, actual results could differ from those estimates.
Recent accounting pronouncements:Recently adopted Accounting Standards: In August 2017, theOn January 1, 2021, we adopted Financial Accounting Standards Board (“the FASB”) issued Accounting Standards Update (“ASU” or “Update”) 2017-12 — Derivatives and HedgingASU 2019-12—Income Taxes (Topic 815)740): Targeted Improvements toSimplifying the Accounting for Hedging ActivitiesIncome Taxes. The updated guidance simplifies the accounting for income taxes in several areas by removing certain exceptions and by clarifying and amending existing guidance applicable to accounting for income taxes. The adoption of this ASU did not have an impact on our accompanying Condensed Consolidated Financial Statements as of and for the nine months ended September 30, 2021.
Accounting guidance not yet adopted: In March 2020, the FASB issued ASU 2020-04-Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update applyupdate provides optional expedients and exceptions for applying U.S. GAAP principles to any entitycontracts, hedging relationships, and other transactions that electsreference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance was effective beginning on March 12, 2020, and can be adopted on a prospective basis no later than December 31, 2022. We are currently evaluating the impact that the updated accounting guidance will have on our accompanying Condensed Consolidated Financial Statements.
In October 2021, the FASB issued ASU 2021-08-Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The update will require companies to apply hedge accountingthe definition of a performance obligation under ASC Topic 606 to recognize and is intendedmeasure contract assets and contract liabilities (i.e., deferred revenue) relating to better aligncontracts with customers that are acquired in a business combination. Under current U.S. GAAP, an entity’s risk management activitiesacquirer generally recognizes assets acquired and financial reporting for hedging relationships.liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. The Update amends effectiveness testing requirements, income statement presentationupdate will result in the acquirer recording acquired contract assets and disclosures and permits additional risk management strategies to qualify for hedge accounting. The amendments in thisliabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU areNo. 2021-08 is effective for fiscal years beginning after December 15, 2019. Early application is permitted; the effect of the2022, with early adoption should be reflected as of the beginning of the fiscal year of adoption.permitted. We are currently evaluating the impact of this Updatethat the updated accounting guidance will have on our accompanying Condensed Consolidated Financial Statements.
15
Note 2. Revenue Recognition
The following is a description of principal activities from which we generate our revenue:
Subscriber revenue: We enter into arrangements with multi-channel video Distributors, such as cable, satellite and telecommunications companies (referred to as “MVPDs”) to provide a continuous feed of our Networks generally based on a per subscriber fee pursuant to multi-year contracts, referred to as “affiliation agreements”, which typically provide for annual rate increases. We have used the practical expedient related to the right to invoice and recognize revenue at the amount to which we have the right to invoice for services performed. The specific subscriber revenue we earn varies from period to period, Distributor to Distributor, and also varies among our Networks, but is generally based upon the number of each Distributor’s paying subscribers who subscribe to our Networks. Changes in subscriber revenue are primarily derived from changes in contractual per subscriber rates charged for our Networks and changes in the number of subscribers. MVPDs report their subscriber numbers to our Networks generally on a two month lag. We record revenue based on estimates of the number of subscribers utilizing the most recently received remittance reporting of each MVPD, which is consistent with our past practice and industry practice. Revenue is recognized on a month by month basis when the performance obligations to provide service to the MVPDs is satisfied. Payment is typically due and received within sixty days of the remittance. We also generate subscriber revenue from monthly subscriptions to Pantaya, our subscription video on demand (“SVOD”) service. The SVOD service is available directly to consumers through our web application as well as through distribution partners. Certain distribution partners charge a fee, which is recorded in cost of revenues. Subscribers are billed at the start of their monthly or annual membership and revenue is recognized ratably over each applicable membership period. Subscriber revenue varies from period to period and is generally based upon the number of paying subscribers to our SVOD service. Estimates of revenue generated but not yet reported by the Company’s third party Distributors are made based on the estimated number of subscribers using the most recently received remittance reporting from each Distributor, which is consistent with our past practice and industry practice.
Advertising revenue: Advertising revenue is generated from the sale of commercial time, which is typically sold pursuant to sale orders with advertisers providing for an agreed upon commitment and price per spot. We recognize revenue from the sale of advertising as performance obligations are satisfied upon airing of the advertising; therefore, revenue is recognized at a point in time when each advertising spot is transmitted. Advertising agency fees are calculated based on a stated percentage applied to the gross billing revenue for our advertising inventory and are reported as a reduction of advertising revenue. Payment is typically due and received within thirty days of the invoice date.
Other revenue: Other revenues are derived primarily through the licensing of content to third parties. We enter into agreements to license content and recognize revenue when the performance obligation is satisfied and control is transferred, which is generally upon delivery of the content.
The following table presents the revenues disaggregated by revenue source (amounts in thousands):
| | | | | | |
| | Three months ended September 30, | ||||
Revenues by type |
| 2021 |
| 2020 | ||
Subscriber revenue | | $ | 32,412 | | $ | 19,048 |
Advertising revenue | |
| 17,155 | |
| 17,556 |
Other revenue | |
| 1,224 | |
| 568 |
Total revenue | | $ | 50,791 | | $ | 37,172 |
| | | | | | |
| | Nine months ended September 30, | ||||
Revenues by type |
| 2021 |
| 2020 | ||
Subscriber revenue |
| $ | 84,579 | | $ | 58,154 |
Advertising revenue | |
| 50,330 | |
| 41,750 |
Other revenue | |
| 3,919 | |
| 4,412 |
Total revenue |
| $ | 138,828 | | $ | 104,316 |
16
Note 3. Business Combination
Prior to March 31, 2021, the Company owned a 25% equity interest in Pantaya, which was accounted for as an equity method investment. On March 31, 2021, the Company acquired the remaining 75% equity interest in Pantaya. As a result of the Pantaya Acquisition, Pantaya is now a wholly owned consolidated financial statements.subsidiary. Pantaya is the leading U.S. Hispanic subscription streaming service offering the largest selection of current and classic, commercial free blockbusters and critically acclaimed movies and series from Latin America and the U.S., including original productions from Pantaya’s production arm, Pantelion, and titles from our library, as well as titles from third party providers such as Lionsgate and Grupo Televisa.
In May 2017,Total cash purchase price in connection with the FASB issued ASU 2017-09 — Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting. The amendments in this Update affect any entity that changesPantaya Acquisition was $123.6 million. Under the terms or conditionsof the purchase agreement (“Securities Purchase Agreement”), control of Pantaya transferred to the Company on March 31, 2021 (“Acquisition Date”), with cash consideration transferred on April 1, 2021. Cash consideration was funded with a combination of cash on hand and an add-on to our Term Loan Facility. For more information, see Note 8, “Long-Term Debt” of Notes to Condensed Consolidated Financial Statements. Fees and expenses incurred in connection with the Pantaya Acquisition were $8.1 million for the nine months ended September 30, 2021, consisting primarily of professional fees, financing costs,and certain non-cash charges, which are included in other expenses in the accompanying Condensed Consolidated Statement of Operations.
Prior to the closing of the Pantaya Acquisition, the Company accounted for the existing 25% equity interest in Pantaya using the equity method, and the net book value was $0 as of March 31, 2021. The Company accounted for the acquisition of the 75% equity interest of Pantaya as a step acquisition, which required remeasurement of the Company’s existing 25% ownership interest in Pantaya to fair value prior to completing the acquisition method of accounting. Using step acquisition accounting, the Company increased the value of its existing equity interest to its fair value resulting in the recognition of a share-based payment award and provides guidancenon-cash gain of $30.1 million, which was included in gain (loss) on which changesequity method investment activity in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2021. For more information, see Note 10, “Fair Value Measurements” of Notes to terms or conditions of an award require an entity to apply modification accounting. Condensed Consolidated Financial Statements.
The amendments in this ASU are effective for all entities for annual periods, and all interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. Our consolidated financial statements would only be impacted if we were to make changes to share-based payment awards.
In March 2016, the FASB issued ASU 2016-09 — Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments arePantaya Acquisition was accounted for as a business combination by applying the acquisition method of accounting pursuant to ASC Topic 805, “Business Combinations”. Due to the timing of the Pantaya Acquisition, the amounts recorded for assets acquired, liabilities assumed, total consideration, and presentedour existing 25% equity interest in Pantaya reflects preliminary fair value estimates based on management analysis, which the Company is still in the financial statements, suchprocess of reviewing and finalizing. Until the Company finalizes the valuation process, there may be adjustments during the measurement period.
The following table summarizes the purchase price consideration in connection with the Pantaya Acquisition as requiring all income tax effects of March 31, 2021 (amounts in thousands):
| | | |
Total cash consideration |
| $ | 123,605 |
Class A common stock consideration(a) | |
| 2,188 |
Effective settlement of pre-existing receivables and payables, net(b) | |
| 1,499 |
Total consideration | |
| 127,292 |
Fair value of existing 25% equity interest | | | 30,092 |
Total | | $ | 157,384 |
17
The following table summarizes the preliminary fair values of the assets acquired, liabilities assumed and resulting goodwill in the Pantaya Acquisition as of March 31, 2021 (amounts in thousands):
| | | |
|
| March 31, 2021 | |
Cash | | $ | 985 |
Accounts receivable | | | 5,357 |
Finite-lived intangible assets | |
| 110,671 |
Other assets | |
| 7,243 |
Accounts payable | |
| (2,807) |
Accrued expenses | |
| (12,934) |
Programming rights payable | | | (15,224) |
Deferred income tax | | | (7,074) |
Goodwill | | | 71,167 |
Fair value of net assets acquired | | $ | 157,384 |
The preliminary fair value of the accounts receivable is based on the net realizable value and 0 amounts are believed to be recognized inuncollectible.
During the income statement whenthree months ended September 30, 2021, the awards vest or are settledCompany identified finite-lived intangible assets and allowingrecorded measurement period adjustments of $79.9 million. As a policy election to account for forfeitures as they occur. In addition, all related cash flows resulting from share-based paymentsresult, the total preliminary fair value of the finite-lived intangible assets is $110.7 million, which is comprised of customer relationships of $34.2 million with a useful life of 4 years, programming rights of $29.4 million with a useful life of 4.6 years, brand of $24.6 million with a useful life of 10 years, and distribution agreements of $22.5 million with a useful life of 10 years. These finite-lived intangible assets will be reported as operating activitiesamortized on a straight-line basis over their respective useful lives. For the statementthree months ended September 30, 2021, the Company recorded an additional $3.2 million of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and has been adopted by the Company.
In May 2014, the FASB issued ASU 2014-09 — Revenue from Contracts with Customers, a comprehensive revenue recognition model that supersedes the current revenue recognition requirements and most industry-specific guidance. Subsequent accounting standard updates have also been issued which amend and/or clarify the application of ASU 2014-09. The guidance provides a five-step framework to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The guidance will be effectiveamortization for the first interimfinite-lived intangible assets identified during the period, which were retroactively amortized as of our 2018 fiscal year and allows adoption either under a full retrospective or a modified retrospective approach.the Acquisition Date. The Company has identified retransmission/subscriber feesnot yet finalized the estimated fair values of the net assets acquired.
During the three months ended September 30, 2021, the Company recorded a measurement period adjustment of $7.1 million for the preliminary fair value of a net deferred income tax liability primarily related to the finite-lived intangible assets and advertising salesthe impact of the Company’s previous 25% equity interest in Pantaya.
Goodwill of $71.2 million, as significantreduced for the measurement period adjustments, represents Company-specific operational synergies and has substantially completed its reviewthe future growth opportunities of each of these revenue streams in accordancePantaya’s subscription streaming service. The goodwill associated with the new guidance. transaction is expected to be deductible for tax purposes.
Supplemental Pro Forma Information (Unaudited)
The following table sets forth the unaudited supplemental pro forma results of operations assuming that the Pantaya Acquisition occurred on January 1, 2020:
| | | | | | |
| | Three months ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Net revenue | | $ | 50,791 | | $ | 48,781 |
Operating (loss) income | |
| (7,362) | |
| 6,272 |
| | | | | | |
| | Nine months ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Net revenue | | $ | 150,158 | | $ | 137,063 |
Operating income (loss) | |
| 1,455 | |
| (8,823) |
18
These unaudited supplemental pro forma results, as if the Pantaya Acquisition occurred on January 1,2020, are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company nor are they intended to represent or be indicative of future results of operations. The unaudited supplemental pro forma results of operations for all periods set forth above includes the combined historical operating results of Hemisphere and Pantaya, as adjusted for the inclusion of the amortization of finite-lived intangible assets identified as a result of the Pantaya Acquisition of $4.9 million for the nine months ended September 30, 2021, and $4.9 million and $14.7 million for the three and nine months ended September 30, 2020, respectively, and excluding all revenues and expenses from the business conducted between the Company and Pantaya. The results for the nine months ended September 30, 2020, are presented as adjusted for the inclusion of non-recurring costs incurred in connection with the Pantaya Acquisition of $8.1 million, which has determined that it will usebeen excluded from the prospective methodnine months ended September 30, 2021.
The Pantaya Acquisition closed at the end of transitionthe day on March 31, 2021, and the operating results of Pantaya from the date of acquisition are included in adoptingour Condensed Consolidated Statements of Operations for the new standard.three and nine months ended September 30, 2021.
Note 2.4. Related party transactionsParty Transactions
The Company has various agreements with MVS, a Mexican media and television conglomerate, which has directors and stockholders in common with the Company as follows:
· An agreement through August 1, 2017, pursuant to which MVS provides Cinelatino with satellite and support services including origination, uplinking and satellite delivery of two feeds of Cinelatino’s channel (for U.S. and Latin America), master control and monitoring, dubbing, subtitling and close captioning, and other support services (the “Satellite and Support Services Agreement”). This agreement was amended on May 20, 2015, to expand the services MVS provides to Cinelatino to include commercial insertion and editing services to support advertising sales on Cinelatino’s U.S. feed.
| ● | MVS provides Cinelatino with satellite and support services including origination, uplinking and satellite delivery of 2 feeds of Cinelatino’s channel (for U.S. and Latin America), master control and monitoring, dubbing, subtitling and closed captioning, and other support services. Expenses incurred under this agreement are included in cost of revenues in the accompanying Condensed Consolidated Statements of Operations. Total expenses incurred were $0.7 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively. Total expenses incurred were $2.0 million and $1.9 million for the nine months ended September 30, 2021 and 2020, respectively. Amounts due to MVS pursuant to the agreement amounted to $0.5 million and $0.6 million at September 30, 2021 and December 31, 2020, respectively. |
| ● | Dish Mexico (d/b/a Comercializadora de Frecuencias Satelitales, S. de R.L. de C.V.), an MVS affiliate that operates a subscription satellite television service throughout Mexico and distributes Cinelatino as part of its service. Total revenue recognized was $0.2 million and $0.3 million for the three months ended September 30, 2021 and 2020, respectively. Total revenue recognized was $0.7 million and $0.8 million for the nine months ended September 30, 2021 and 2020, respectively. Amounts due from Dish Mexico amounted to $0.1 million and $0.3 million at September 30, 2021 and December 31, 2020, respectively. |
| ● | MVS has the non-exclusive right to duplicate, distribute and exhibit Cinelatino’s service via cable, satellite or by any other means in Mexico. Cinelatino receives revenues net of MVS’s distribution fee, which is equal to 13.5% of all license fees collected from third party distributors managed but not owned by MVS. Total revenues recognized were $0.2 million for each of the three months ended September 30, 2021 and 2020. Total revenues recognized were $0.6 million and $0.7 million for the nine months ended September 30, 2021 and 2020, respectively. Amounts due from MVS pursuant to this agreement amounted to $0.2 million and $0.4 million at September 30, 2021 and December 31, 2020, respectively. |
Pantaya has an agreement with Univision Communications, Inc. (“UCI”), which has directors in common with the Company (who may hold a material financial interest in UCI), for the purchase of advertising on UCI’s television and radio properties. Expenses under this agreement are included in cost of revenuesselling, general and administrative expenses in the accompanying unaudited condensed consolidated statementsCondensed Consolidated Statement of operations.Operations. Total expenses incurred were $0.6 million for each of the three months ended September 30, 2017 and 2016, and $1.9 million for each of the nine months ended September 30, 2017 and 2016.
· A ten-year master license agreement through July 2017, which grants MVS the non-exclusive right (except with respect to pre-existing distribution arrangements between MVS and third party distributors in effect at the time of the consummation of our initial public offering) to duplicate, distribute and exhibit Cinelatino’s service via cable, satellite or by any other means in Latin America and in Mexico to the extent that Mexico distribution is not owned by MVS. In February 2016, MVS terminated the agreement. We continued to operate under the terms of the agreement through December 31, 2016. As of January 1, 2017, we assumed the management of all the rights for Latin American third party distributors, and MVS retained the non-exclusive right in Mexico. Pursuant to the agreement, Cinelatino receives revenue net of MVS’s distribution fee, which is presently equal to 13.5% of all license fees collected by MVS from third party distributors. Total revenues recognized were $0.3 million and $0.8 million for each of the three months ended September 30, 2017 and 2016, respectively, and $1.4 million and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively.
· An affiliation agreement through August 1, 2017, for the distribution and exhibition of Cinelatino’s programming service through Dish Mexico (d/b/a Comercializadora de Frecuencias Satelitales, S. de R.L. de C.V.), an MVS affiliate that transmits television programming services throughout Mexico. We continue2021. Amounts due to operate under the terms ofUCI pursuant to this agreement while we negotiate the renewal. Total revenues recognized were $0.5 million and $0.6 million for the three months ended September 30, 2017 and 2016, respectively, and $1.6 million and $1.7 million for of the nine months ended September 30, 2017 and 2016, respectively.
Amounts due from MVS pursuant to the agreements noted above amounted to $1.9 million and $1.3totaled $0.2 million at September 30, 2017 and December 31, 2016, respectively, and are remitted monthly. Amounts due to MVS pursuant to the agreements noted above amounted to $1.3 million and $0.5 million at2021. At September 30, 20172021, the Company has a remaining commitment of $5.0 million, which is included in Note 14, “Commitments” of Notes to Condensed Consolidated Financial Statements.
19
The Company entered into an amended and December 31, 2016, respectively, and are remitted monthly.
We renewed the three-yearrestated consulting agreement effective April 9, 2016 with James M. McNamara, a member of the Company’s Boardboard of Directors,directors, on August 13, 2019, to provide the development, production and maintenance of programming, affiliate relations, identification and negotiation of carriage opportunities, and the development, identification and negotiation of new business initiatives including sponsorship, new channels, direct-to-consumer programs and other interactive initiatives. Total expenses incurred under these agreementsthis agreement are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations and amounted to $0.1 million for each of the three months ended September 30, 20172021 and 2016,2020, and $0.4$0.3 million and $0.2 million for each of the nine months ended September 30, 20172021 and 2016, respectively. No2020. NaN amounts were due to this related party at September 30, 20172021 and December 31, 2016.2020.
We have entered into programming agreements with Panamax Films, LLC (“Panamax”), an entity owned by James M. McNamara, for the licensing of three specific movie titles. Expenses incurred under this agreement are included in cost of revenues and amounted to $0.0 million for each of the three and nine months ended September 30, 2017 and 2016. At September 30, 2017 and December 31, 2016, $0.1 million is included in programming rights related to these agreements.
We entered into agreements to license the rights to motion pictures from Lionsgate for a total license fee of $1.0 million. Some of the titles are owned or controlled by Pantelion Films, LLC (“Pantelion”), for which Lionsgate acts as Pantelion’s exclusive licensing agent. Pantelion is a joint venture made up of several organizations, including Panamax (an entity owned by James M. McNamara), Lionsgate and Grupo Televisa. Fees paid by Cinelatino to Lionsgate may be remunerated to Pantelion in accordance with their financial arrangements. Expenses incurred under this agreement are included in cost of revenues and amounted to $0.1 million and $0.0 million for the three months ended September 30, 2017 and 2016, respectively, and $0.2 million and $0.1 million for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017 and December 31, 2016, $0.1 million and $0.3 million, respectively, is included in programming rights.
We entered into an agreement to purchase the rights to motion pictures from Frontera Productions, LLC. One of our former Board members, Gabriel Brenner, holds an equity stake in this entity. The total license fee is $0.1 million. No expenses have been incurred as of September 30, 2017. Refer to Note 12, “Commitments”, of Notes to unaudited condensed consolidated financial statements.
We entered into a services agreement with InterMedia Advisors, LLC (“IMA”) which has officers, directors and stockholders in common with the Company for services including, without limitation, office space and operational support pursuant to a reimbursement agreement with IMA’s affiliate, InterMedia Partners VII, L.P. Expenses incurred under this agreement are included in selling, general and administrative expenses and amounted to $0.0 million for each of the three and nine month periods ended September 30, 2017 and amounted to $0.0 million and $0.1 million for the three and nine month periods ended September 30, 2016. The amounts due from this related party totaled $0.0 million as of September 30, 2017 and December 31, 2016.
Note 3. Property Plant and Equipment
On September 20, 2017, Hurricane Maria made landfall in Puerto Rico, causing damage to WAPA’s infrastructure. WAPA suffered limited damage to its studios and headquarters and to two of its three broadcast transmission towers, but the third transmission tower was completely destroyed. Accordingly, based on our assessment, we have recorded a $0.5 million fixed asset impairment charge related to the net book value of the identified damaged assets in the quarter ended September 30, 2017. A significant portion of the damaged assets have been in service for more than 10 years and, as such, are largely fully depreciated. We anticipate the replacement cost will be well in excess of the net book value, though we expect insurance will cover most of the replacement costs, subject to deductibles and other costs. There can be no assurances of the timing and amount of proceeds we may recover under our insurance policies. We have not recognized any potential insurance recoveries related to these assets.
Note 4.5. Goodwill and intangible assetsIntangible Assets
Goodwill and intangible assets consist of the following atas of September 30, 20172021 and December 31, 20162020 (amounts in thousands):
|
| September 30, |
| December 31, |
| ||||||||
|
| 2017 |
| 2016 |
| ||||||||
| | | | | | | |||||||
| | September 30, | | December 31, | |||||||||
|
| 2021 |
| 2020 | |||||||||
Broadcast license |
| $ | 41,356 |
| $ | 41,356 |
| | $ | 41,356 | | $ | 41,356 |
Goodwill |
| 164,887 |
| 164,887 |
| |
| 236,764 | |
| 165,597 | ||
Other intangibles |
| 54,967 |
| 64,849 |
| |
| 120,879 | |
| 24,761 | ||
Total intangible assets |
| $ | 261,210 |
| $ | 271,092 |
| | $ | 398,999 | | $ | 231,714 |
A summary of changes in the Company’s goodwill and other indefinite-lived intangible assets, on a net basis, for the nine months ended September 30, 20172021 is as follows (amounts in thousands)thousands):
|
| Net Balance at |
| Additions |
| Impairment |
| Net Balance at |
| ||||||||||||||||
| | | | | | | | | | | | ||||||||||||||
| | Net Balance at | | | | | | | | Net Balance at | |||||||||||||||
|
| December 31, 2020 |
| Additions |
| Impairment |
| September 30, 2021 | |||||||||||||||||
Broadcast license |
| $ | 41,356 |
| $ | — |
| $ | — |
| $ | 41,356 |
| | $ | 41,356 | | $ | — | | $ | — | | $ | 41,356 |
Goodwill |
| 164,887 |
| — |
| — |
| 164,887 |
| |
| 165,597 | |
| 71,167 | |
| — | |
| 236,764 | ||||
Brands |
| 15,986 |
| — |
| — |
| 15,986 |
| | | 15,986 | | | — | | | — | | 15,986 | |||||
Other intangibles |
| 700 |
| — |
| — |
| 700 |
| |
| 700 | |
| — | |
| — | |
| 700 | ||||
Total indefinite-lived intangibles |
| $ | 222,929 |
| $ | — |
| $ | — |
| $ | 222,929 |
| | $ | 223,639 | | $ | 71,167 | | $ | — | | $ | 294,806 |
A summary of the changes in the Company’s other amortizable intangible assets for the nine months ended September 30, 20172021 is as follows (amounts in thousands):
|
| Net Balance at |
| Additions |
| Amortization |
| Net Balance at |
| ||||
Affiliate relationships |
| $ | 44,468 |
| $ | — |
| $ | (9,109 | ) | $ | 35,359 |
|
Advertiser relationships |
| 1,792 |
| — |
| (414 | ) | 1,378 |
| ||||
Non-compete agreement |
| 1,784 |
| — |
| (412 | ) | 1,372 |
| ||||
Other intangibles |
| 119 |
| 85 |
| (32 | ) | 172 |
| ||||
Total finite-lived intangibles |
| $ | 48,163 |
| $ | 85 |
| $ | (9,967 | ) | $ | 38,281 |
|
| | | | | | | | | | | | |
| | Net Balance at | | | | | | | | Net Balance at | ||
|
| December 31, 2020 |
| Additions |
| Amortization |
| September 30, 2021 | ||||
Affiliate and customer relationships | | $ | 7,304 | | $ | 56,644 | | $ | (9,728) | | $ | 54,220 |
Programming contracts | | | 427 | | | 29,420 | | | (3,251) | | | 26,596 |
Brand | | | — | | | 24,607 | | | (1,230) | | | 23,377 |
Non-compete agreement | | | 329 | | | — | | | (329) | | | — |
Other intangibles | | | 15 | | | — | | | (15) | | | — |
Total finite-lived intangibles | | $ | 8,075 | | $ | 110,671 | | $ | (14,553) | | $ | 104,193 |
The aggregate amortization expense of the Company’s amortizable intangible assets was $3.3$9.8 million and $3.4$1.6 million for the three months ended September 30, 20172021 and 2016,2020, respectively, and $10.0$14.6 million and $10.1$5.2 million for the nine months ended September 30, 20172021 and 2016,2020, respectively. The weighted average remaining amortization period is 3.66.1 years at September 30, 2017.2021.
20
Future estimated amortization expense is as follows (amounts in thousands):
Year Ending December 31, |
| Amount |
| |
Remainder of 2017 |
| $ | 3,318 |
|
2018 |
| 13,234 |
| |
2019 |
| 8,483 |
| |
2020 |
| 6,057 |
| |
2021 and thereafter |
| 7,189 |
| |
|
| $ | 38,281 |
|
| | | |
Year Ending December 31, |
| Amount | |
Remainder of 2021 | | $ | 6,372 |
2022 | |
| 21,171 |
2023 | |
| 19,733 |
2024 | | | 19,733 |
2025 and thereafter | |
| 37,184 |
Total | | $ | 104,193 |
Note 5.6. Equity method investmentsMethod Investments
The Company makes investments that support its underlying business strategy and enableenables it to enter new markets. The carrying values of the Company’sCompany holds equity method investments are consistent with its ownership in the underlying net assets of the investees. Certain of the Company’s equity investmentsCanal 1 and Snap JV (in each case, as defined and discussed below), which are variable interest entities (“VIEs”), for which the Company is not the primary beneficiary.
On November 3, 2016, we acquired a 25% interest in PANTAYA, a newly formed joint venture The primary beneficiary is the party involved with Lionsgate, to launch a Spanish-language OTT movie service. The service launched on August 1, 2017. The investment is deemed athe VIE that (i) has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The activities of each VIE that most significantly impact the VIE’s economic performance are controlled by the VIE’s board of directors and the Company’s representation on the board of directors of each VIE is accounted for undercommensurate with its voting equity interest. As the equity method. AsCompany does not hold a majority voting interest or disproportionate voting or other rights, it does not have the power to direct the activities that most significantly impact the economic performance of September 30, 2017, we have not funded any capital contributions to PANTAYA. We record income/loss on investment on a one quarter lag. For the three and nine month periods ended September 30, 2017, we have recorded $0.4 million in Loss on equity method investments related to this investment.of these VIEs.
On November 30, 2016, we, in partnership with Colombian content producers, Radio Television Interamericana S.A., Compania de Medios de Informacion S.A.S. and NTC Nacional de Television y Comunicaciones S.A., were awarded a ten (10) year renewable television broadcast concession license for Canal 1 in Colombia the (“Canal 1 Partnership”). Canal 1 is one of only three national broadcast television networks in Colombia. The partnership began operating Canal 1 Partnership began operations of the network through a newly formed joint venture vehicle on May 1, 2017. The Company has a 20% interestOn February 7, 2018, Colombian regulatory authorities approved an increase in our ownership in the JV, whichjoint venture from 20% to 40%. In July 2019, the Colombian government enacted legislation resulting in the extension of the concession license for Canal 1 for an additional ten years for 0 additional consideration. The concession is now due to expire on April 30, 2037 and is renewable for an additional 20-year period. The joint venture is deemed a VIE that is accounted for under the equity method. Additionally, we earn a preferred return on the capital funded, which is recorded quarterly as an offset to the loss on the investment. For the period endedAs of September 30, 2017,2021, we have recorded $21.7funded $124.0 million in Equity method investments, relatedcapital contributions to Canal 1. We record the income/loss on investment on a one quarter lag. For the three and nine month periods ended September 30, 2017, we recorded $2.3 million and $2.2 million, net of preferred return, in Loss on equity method investments, respectively. The Canal 1 Partnership losses to datejoint venture losses-to-date have exceeded the capital contributions of the common equity partners. Inpartners and in accordance with equity method accounting, equity losses in excess of the common equity have been recorded against the next layer of the capital structure, in this case, preferred equity. Accordingly,The Company is currently the sole preferred equity holder in the quarter,Canal 1 and therefore, the Company has recorded nearly 100% of the losses in excess of the common equity, which is greater thanjoint venture. We record the Company’s 20% ownership interest in the Partnership.income or loss on investment on a one quarter lag. For the three and nine month periodsmonths ended September 30, 2017,2021 and 2020, we recorded $0.6$3.2 million and $0.8$1.0 million of income, respectively as an offset to losses incurred in Lossloss on equity method investments.investment in the accompanying Condensed Consolidated Statements of Operations, respectively. For the nine months ended September 30, 2021 and 2020, we recorded $9.3 million and $18.0 million in loss on equity method investment activity in the accompanying Condensed Consolidated Statements of Operations, respectively. The net balance recorded in equity method investments related to the Canal 1 joint venture was $25.0 million and $29.9 million as of September 30, 2021 and December 31, 2020, respectively, and is included in the accompanying Condensed Consolidated Balance Sheets. As of September 30, 2021 and December 31, 2020, we had a receivable balance from Canal 1 of $2.6 million, which is included in other assets in the accompanying Condensed Consolidated Balance Sheets.
On April 28, 2017, we acquired a 25.5% interest in REMEZCLA, an influentiala digital media company targeting English speaking and bilingual U.S. Hispanics aged 18-35Hispanic millennials through innovative content. Forcontent, for $5.0 million. At March 31, 2020, given the negative impacts caused by the COVID-19 pandemic and the associated liquidity and going-concern uncertainties related to REMEZCLA, the Company determined that the investment in REMEZCLA was other-than-temporarily impaired and recorded a non-cash impairment charge of $5.5 million reflecting the write-off of the full carrying amount of our investment. The write-off was recorded in impairment of equity method investment in the Condensed Consolidated Statements of Operations. Due to the write-off of the investment carrying value, we did not record any share of the loss from the investment for the three and nine months ended September 30, 2017, we have2021 and 2020. The net balance recorded $5.0 million in Equityequity method investments related to REMEZCLA.REMEZCLA was $0 million as of September 30, 2021 and December 31, 2020.
21
On November 26, 2018, Snap Media acquired a 50% interest in Snap JV, LLC (“Snap JV”) (as of July 15, 2021, the Company owns 100% of Snap Media), a joint venture with Mar Vista Entertainment, LLC (“MarVista”), to co-produce original movies and series. The Company recordsinvestment is deemed a VIE that is accounted for under the income/equity method. As of September 30, 2021, we have funded $0.4 million into Snap JV. We record the income or loss on investment on a one quarter lag. For each of the three and nine month periodsmonths ended September 30, 2017,2021 and 2020, we have recorded $0.1$0 million in loss on equity method investments in Lossthe accompanying Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2021 and 2020, we recorded $0 million and $0.2 million, respectively, in loss on equity method investments in the accompanying Condensed Consolidated Statements of Operations. The net balance recorded in equity method investments related to thisSnap JV was $0.1 million as of September 30, 2021 and December 31, 2020, and is included in the accompanying Condensed Consolidated Balance Sheets.
On March 31, 2021, the Company acquired the remaining 75% equity interest in Pantaya. As a result of the acquisition, Pantaya is now a wholly owned consolidated subsidiary, and as of April 1, 2021, is no longer treated as an equity method investment. For more information, see Note 3, “Business Combination” of Notes to Condensed Consolidated Financial Statements.
The Company records the income or loss on investments on a one quarter lag. Summary unaudited financial data for our equity investments, in the aggregate as of and for the nine months ended June 30, 2021 are included below (amounts in thousands):
| | | |
|
| Total Equity Investees | |
Current assets | | $ | 14,644 |
Non-current assets | | $ | 24,666 |
Current liabilities | | $ | 70,066 |
Non-current liabilities | | $ | 4,860 |
Net revenue | | $ | 8,129 |
Operating loss | | $ | (9,522) |
Net loss | | $ | (24,972) |
Note 7. Income Taxes
The 2017 Tax Cuts and Jobs Act (“Jobs Act”) was enacted on December 22, 2017. The Jobs Act revised the U.S. corporate income tax by lowering the statutory corporate tax rate from 35% to 21% in 2018. The Company generates income in higher tax rate foreign locations, which result in foreign tax credits. The lower federal corporate tax rate reduces the likelihood of our utilization of foreign tax credits created by income taxes paid in Puerto Rico and Latin America, resulting in a valuation allowance. Additionally, we earnedthe Company evaluated the potential interest limitation established under the Jobs Act and determined that no limitation would affect the 2021 provision for income taxes.
The Company has historically calculated the provision for income taxes during interim periods by applying an estimated annual effective tax rate for the full fiscal year to income (loss) before income taxes for the reporting period. Since the Company determined that relatively small changes in estimated annual income (loss) before income taxes could result in significant changes in the estimated annual effective tax rate, the Company has calculated the income tax provision using a preferred returndiscrete rate of 19.5% based on capital funded. For the three andactual income before income taxes for the nine month periodsmonths ended September 30, 2017, we recorded $0.3 million2021, for all jurisdictions, except for Puerto Rico, as permitted under ASC 740-270-30-36, “Income Taxes - Interim Reporting”. The difference between the discrete income tax rate of 19.5% and the statutory Federal income as an offsettax rate of 21% in the nine month period ended September 30, 2021, is due to the loss incurredimpact of a decrease in LossU.S. based pre-tax income on equity method investments.permanent items and foreign tax credit limitation, and limitations on the deductibility of executive compensation under Internal Revenue Code Section 162(m). Additionally, the gain related to the step acquisition of Pantaya of $30.1 million is not a gain for tax purposes, and is therefore excluded from the provision expense. The losses at Canal 1 are excluded from the provision expense since these losses create a deferred tax asset and due to the uncertainty of the realizability, the Company has recorded a full valuation allowance. The Puerto Rico jurisdiction continues to be computed utilizing an estimated annual effective rate of 25.8%.
22
Note 6. Income taxes
For the nine months ended September 30, 2017 and 2016,2020, our income tax expense has beenwas computed utilizing thean estimated annual effective ratestax rate of 36.1% and 35.8%, respectively.37.4% for all jurisdictions. The difference between the annual effective rate of 36.1%37.4% and the statutory Federal income tax rate of 35% in the nine months ended September 30, 2017, was driven by foreign withholding taxes and foreign permanent differences, which were offset by foreign tax credits. The difference between the annual effective rate of 35.8% and the statutory Federal income tax rate of 35%21% in the nine month period ended September 30, 2016, was2020, is primarily due to statethe impact of the Tax Act, which impacted the valuation allowance on foreign tax credits, and limitations on the deductibility of executive compensation under Internal Revenue Code Section 162(m). The annual effective tax rate related to income generated in the U.S. is 27.1%,and the Company determined that a portion of its foreign income, taxes.which is taxed at a higher rate, will result in the generation of excess foreign tax credits that will not be available to offset U.S. income tax. As a result, 10.3% of the annual effective rate relates to the required valuation allowance against the excess foreign tax credits, bringing the annual effective tax rate for the nine month period ended September 30, 2020 to 37.4%.
Income tax expense was $1.5 million and $4.7 million for the three months ended September 30, 2021 and 2020, respectively. Income tax expense was $4.5 million and $5.9 million for the nine months ended September 30, 2017, was $1.8 million2021 and $6.3 million,2020, respectively. Income tax expense for the three and nine months ended
Note 8. Long-Term Debt
Long-term debt as of September 30, 2016, was $2.3 million and $6.6 million, respectively.
Note 7. Long-term debt
Long-term debt at September 30, 20172021 and December 31, 20162020 consists of the following (amounts in thousands):
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||||
| | | | | | | |||||||
|
| September 30, 2021 |
| December 31, 2020 | |||||||||
Senior Notes due February 2024 |
| $ | 208,030 |
| $ | — |
| | $ | 249,917 | | $ | 202,990 |
Senior Notes due July 2020 |
| — |
| 210,270 |
| ||||||||
Less: Current portion |
| 2,133 |
| — |
| |
| 2,656 | |
| 2,134 | ||
|
| $ | 205,897 |
| $ | 210,270 |
| ||||||
| | $ | 247,261 | | $ | 200,856 | |||||||
On July 31, 2014, certain of our subsidiaries (the “Borrowers”) entered into an amended credit agreement providing for a $225.0 million senior secured term loan B facility (the “Term Loan Facility”), which was due to mature on July 30, 2020. Pricing on the Term Loan Facility was set at LIBOR plus 400 basis points (subject to a LIBOR floor of 1.00%).
On February 14, 2017, (the “Closing Date”Hemisphere Media Holdings, LLC (“Holdings”) and InterMedia Español, Inc. (together with Holdings, the “Borrowers”), both wholly owned, indirect subsidiaries of the BorrowersCompany, amended the Term Loan Facility (the “Second Amended Term Loan Facility”). The Second Amended Term Loan Facility provides for a $213.3 million senior secured term loan B facility, whichand matures on February 14, 2024. The Second Amended Term Loan Facility bore interest at the Borrowers’ option of either (i) London Inter-bank Offered Rate (“LIBOR”) plus a margin of 3.50% or (ii) an Alternate Base Rate (“ABR”) plus a margin of 2.50%.
On March 31, 2021 (the “Closing Date”), the Borrowers amended the Term Loan Facility, as previously amended (the “Third Amended Term Loan Facility”), for the borrowing of a new tranche of term loans in the aggregate principal amount of $50.0 million and matures on February 14, 2024. The Third Amended Term Loan Facility bears interest at the Borrowers’ option of either (i) LIBOR plus a margin of 3.50% (decreased from a margin of 4.00% under the Term Loan Facility) or (ii) or an Alternate Base Rate (“ABR”)ABR plus a margin of 2.50% (decreased from a margin of 3.00% under the Term Loan Facility). There is no LIBOR floor (a decrease from a LIBOR floorfloor. The add-on to the term loan B facility was issued with 4.0% of 1.00% underoriginal issue discount (“OID”).
Additionally, the Term Loan Facility). The SecondThird Amended Term Loan Facility among other terms, provides for an uncommitted incremental loan option (the “Incremental Facility”) allowing for increases for borrowings under the Second Amended Term Loan Facility and borrowing of new tranches of term loans, up to an aggregate principal amount equal to (i) $65.0 million plus (ii) an additional amount (the “Incremental Facility Increase”) provided, that after giving effect to such Incremental Facility Increase (as well as any other additional term loans), on a pro forma basis, the First Lien Net Leverage Ratio (as defined in the Second Amended Term Loan Facility) for the most recent four consecutive fiscal quarters does not exceed 4.00:1.00 and the Total Net Leverage Ratio (as defined in the Second Amended Term Loan Facility) for the most recent four consecutive fiscal quarters does not exceed 6.00:1.00. The First Lien Net Leverage Ratio and the Total Net Leverage Ratio each cap the cash netted against debt up to a maximum amount of $60.0 million (increased from $45.0 million under the Term Loan Facility). Additionally, the Second Amended Term Loan Facility also provides for an uncommitted incremental revolving loan option (the “Incremental Revolving“Revolving Facility”) allowing for an aggregate principal amount of up to $30.0 million, which will bemillion. The Revolving Facility is secured on a pari passu basis by the collateral securing the SecondThird Amended Term Loan Facility.Facility and will mature on November 15, 2023. The Revolving Facility will bear interest at the Borrowers’ option of either (i) LIBOR (which will not be less than 0) plus a margin of 2.75% or (ii) or an ABR plus a margin of 1.75%, in each case, with a 25 basis points (“bps”) step-up at a First Lien Net Leverage Ratio level of 3.50:1.00 and two 25 bps step-downs at a First Lien Net Leverage Ratio level of 2.50:1.00 and 1.50:1.00. The First Lien Net Leverage Ratio limits the amount of cash netted against debt to a maximum amount of $60.0 million. The Borrowers are also required to pay a quarterly commitment fee on the undrawn balance of the Revolving Facility at 37.5 bps per annum. As of September 30, 2021, the Revolving Facility was undrawn.
The SecondThird Amended Term Loan Facility does not have any maintenance covenants. The Revolving Facility will have a springing First Lien Net Leverage Ratio of no greater than 5.00:1.00, tested commencing with the last day of the fiscal quarter ending June 30, 2021, and the last day of each fiscal quarter thereafter, solely to the extent that on such day, the aggregate amount of revolving loans and letter of credit exposure (excluding up to $5.0 million of undrawn letters of credit and cash collateralized or backstopped letters of credit) exceeds 35% of the aggregate commitments under the Revolving Facility.
23
The Third Amended Term Loan Facility requires the Borrowers to make amortization payments (in quarterly installments) equal to 1.00% per annum with respect to the SecondThird Amended Term Loan Facility with any remaining amount due at final maturity. The SecondThird Amended Term Loan Facility principal payments commenced on March 31, 2017,June 30, 2021, with a final installment due on February 14, 2024. Voluntary prepayments are permitted, in whole or in part, subject to certain minimum prepayment requirements.
In addition, pursuant to the terms of the Second Amended Term Loan Facility, withinWithin 90 days after the end of each fiscal year, the Borrowers are required to make a prepayment of the loan principal in an amount equal to a percentage of the excess cash flow of the most recently completed fiscal year. Excess cash flow is generally defined as net income plus depreciation and amortization expense, less mandatory prepayments of the term loan, interest charges, income taxes and capital expenditures, and adjusted for the change in working capital. The percentage of the excess cash flow used to determine the amount of the prepayment of the loan declines from 50% to 25%, and again to 0% at lower leverage ratios. Pursuant to the terms of the Second Amended Term Loan Facility, our net leverage ratioNet Leverage Ratio was 2.6x2.3x at December 31, 2016,2020, resulting in an excess cash flow percentage of 0% and therefore, no excess cash flow payment was required to be paiddue in 2017.March 2021.
In accordance with Accounting Standards Codification (“ASC”)ASC 470 -– Debt, the refinancing arrangementIncremental Facility borrowing was deemed a modification of the Second Term Loan Facility and as such, an additional $1.1$2.0 million of original issue discount (“OID”) incurred in connection with the SecondThird Amended Term Loan Facility was added to the existing OID. As of September 30, 2017,2021, the OID balance was $2.1$2.4 million, net of accumulated amortization of $1.4$3.1 million and was recorded as a reduction to the principal amount of the Second Amended Term Loan Facilitylong-term debt outstanding as presented on the unaudited condensed consolidated balance sheetaccompanying Condensed Consolidated Balance Sheets and will be amortized as a component of interest expense over the term of the SecondThird Amended Term Loan Facility. Financing costs of $1.4$0.6 million incurred in connection with the SecondThird Amended Term Loan Facility were expensed in the period in accordance with ASC 470 —– Debt and are included in Otherother expenses in the unaudited condensed consolidated statementaccompanying Condensed Consolidated Statement of operationsOperations at September 30, 2017.2021. In accordance with ASU 2015-15 Interest — Interest—Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements,deferred financing fees of $1.6$0.6 million, net of
accumulated amortization of $2.3$2.7 million, are presented as a reduction to the SecondThird Amended Term Loan Facility outstanding at September 30, 20172021 as presented on the unaudited condensed consolidated balance sheet,accompanying Condensed Consolidated Balance Sheets, and will be amortized as a component of interest expense over the term of the SecondThird Amended Term Loan Facility. An additional $0.6 million of deferred costs incurred on the Revolving Facility, in connection with the Third Amended Term Loan Facility, was recorded to prepaid and other current assets and other non-current assets in the accompanying Condensed Consolidated Balance Sheets and will be amortized on a straight-line basis through maturity on November 15, 2023. As of September 30, 2021, deferred costs for the Revolving Facility were $0.5 million, net of accumulated amortization of $0.1 million.
The carrying value of the long-term debt approximates fair value at September 30, 20172021 and December 31, 2016,2020, and was derived from quoted market prices by independent dealers (Level 2 in the fair value hierarchy under ASC 820, Fair Value Measurements and Disclosures). The following are the maturities of our long-term debt as of September 30, 20172021 (amounts in thousands):
Year Ending December 31, |
| Amount |
| |
Remainder of 2017 |
| $ | 533 |
|
2018 |
| 2,133 |
| |
2019 |
| 2,133 |
| |
2020 |
| 2,133 |
| |
2021 and thereafter |
| 204,815 |
| |
|
| $ | 211,747 |
|
| | | |
Year Ending December 31, |
| Amount | |
Remainder of 2021 | | $ | 664 |
2022 | |
| 2,656 |
2023 | |
| 2,656 |
2024 | |
| 246,976 |
Total | | $ | 252,952 |
Note 8.9. Derivative instrumentsInstruments
We use derivative financial instruments in the management of our exposure to interest rate.rate exposure. Our strategy is to eliminate the cash flow risk on a portion of the variable rate debt caused by changes in the designated benchmark interest rate, LIBOR. The Company does not enter into or hold derivative financial instruments for speculative trading purposes.
AtOn May 4, 2017, we entered into two identical pay-fixed, receive-variable, interest rate swaps with two different counter parties,counterparties, to hedge the variability in the LIBOR interest payments on an aggregate notional value of $100.0 million of our Second Amended Term Loan Facility beginning May 31, 2017,Senior Notes, through the expiration of the swaps on March 31, 2022. At inception, these interest rate swaps were designated as cash flow hedges of interest rate risk, and as such, the effective portion of unrealized changes in marketfair value isare recorded in Accumulatedaccumulated other comprehensive income (“AOCI”). Any losses from hedge ineffectiveness will be recognized in current earnings.
24
The change in the fair value of the interest rate swap agreements infor the three month periodmonths ended September 30, 2017 was a2021 and 2020, resulted in an unrealized gain of $0.1$0.4 million and $0.5 million, respectively, and was included in AOCI. ForAOCI net of taxes. The change in the nine month period ended September 30, 2017, we have recorded a lossfair value of $0.2 million related to the interest rate swap agreements.agreements for the nine months ended September 30, 2021 and 2020, resulted in an unrealized gain of $1.3 million and an unrealized loss of $1.9 million, respectively, which were included in AOCI net of taxes. The Company paid $0.2$0.5 million and $0.4 million of net interest on the settlement of the interest rate swap agreements for the three month periodmonths ended September 30, 2017.2021 and 2020, respectively. The Company paid $1.4 million and $0.9 million of net interest on the settlement of the interest rate swap agreements for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2017,2021, the Company estimates that none of the unrealized loss included in AOCI related to these interest rate swap agreements will be realized and reported in earningsoperations within the next twelve months. No NaN gain or loss was recorded in earningsthe accompanying Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2017.2021 and 2020.
The aggregate fair value of the interest rate swaps was $0.9 million and $2.2 million as of September 30, 2017 was $0.2 million2021 and December 31, 2020, respectively, and was recorded in Swap liability in non-currentother long-term liabilities on the unaudited condensed consolidated balance sheets.accompanying Condensed Consolidated Balance Sheets.
By entering into derivative instrument contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Our derivative instruments do not contain any credit-risk related contingent features.
Note 9.10. Fair Value Measurements
Our derivatives are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate yield curves, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by us or the counterparty.
The following table presents our assets and liabilities measured at fair value on a recurring basis and the levels of inputs used to measure fair value, which include derivatives designated as cash flow hedging instruments, as well as their location on our unaudited condensed consolidated balance sheetsaccompanying Condensed Consolidated Balance Sheets as of September 30, 20172021 and December 31, 2020 (amounts in thousands):
|
|
|
| Estimated Fair Value |
| ||||||||
|
|
|
| September 30, 2017 |
| ||||||||
Category |
| Balance Sheet Location |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
| ||
Swap Liability |
| Other non-current liabilities |
| — |
| $ | 208 |
| — |
| $ | 208 |
|
| | | | | | | | | | | | |
| | | | Estimated Fair Value | ||||||||
| | | | September 30, 2021 | ||||||||
Category |
| Balance Sheet Location |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||
Cash flow hedges: | |
|
|
|
| |
|
|
|
| |
|
Interest rate swap | | Other long-term liabilities |
| — | | $ | 907 |
| — | | $ | 907 |
| | | | | | | | | | | | |
| | | | Estimated Fair Value | ||||||||
| | | | December 31, 2020 | ||||||||
Category |
| Balance Sheet Location |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||
Cash flow hedges: | |
| | | | | | | | | |
|
Interest rate swap | | Other long-term liabilities |
| — | | $ | 2,231 |
| — | | $ | 2,231 |
Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. These items primarily include long-lived assets, goodwill, and other intangible assets.assets, and equity method investments. On March 31, 2021, the Company acquired the remaining 75% equity interest in Pantaya. The Company accounted for the acquisition of the remaining 75% equity interest of Pantaya as a step acquisition, which required remeasurement of the Company’s existing 25% equity interest to fair value prior to completing the acquisition method of accounting. The Company utilized a market-based valuation approach to determine the fair value of the existing equity interest by adjusting for a control premium, which was based on comparable market transactions. As a result, the Company increased the value of its existing equity interest to its fair value resulting in the recognition of a non-cash gain of $30.1 million, which was included in (loss) gain on equity method investment activity in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2021. For more information, see Note 3, “Business Combination” of Notes to Condensed Consolidated Financial Statements. There were no other changes to the fair value of non-financial assets and liabilities measured on a nonrecurring basis.
25
The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of these items. The carrying value of the long-term debt approximates fair value because this instrument bears interest at a variable rate, is pre-payable, and is at terms currently available to the Company.
Note 10.11. Stockholders’ equityEquity
Capital stock
As of September 30, 2021, the Company had 20,550,862 shares of Class A common stock, and 19,720,381 shares of Class B common stock, issued and outstanding.
On November 18, 2020, the Company announced that its Board of Directors authorized the repurchase of up to $20.0 million of the Class A common stock. Under the Company’s stock repurchase program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases at prevailing prices, subject to stock price, business and market conditions and other factors. The expiration date for the repurchase plan is November 19, 2021. For the nine months ended September 30, 2021, the Company repurchased 129,735 shares of Class A common stock under the repurchase program for an aggregate purchase price of $1.3 million. As of September 30, 2021, the Company repurchased 0.2 million shares of Class A common stock under the repurchase program for an aggregate purchase price of $1.7 million, and the repurchased shares were recorded as treasury stock on the accompanying Condensed Consolidated Balance Sheets. As of September 30, 2021, the Company had $18.3 million remaining for future repurchases under the existing stock repurchase program.
Equity incentive plans
Effective May 16, 2016,25, 2021, the stockholders of all classes of capital stock of the Company approved at the annual stockholder meeting the Hemisphere Media Group, Inc. Amended and Restated 2013 Equity Incentive Plan (the “2013 Equity“Equity Incentive Plan”) to increase the number of shares of Class A common stock that may be delivered under the 2013 Equity Incentive Plan to an aggregate of 7.210.2 million shares of our Class A common stock. At September 30, 2017, 2.92021, 3.1 million shares remained available for issuance of stock options or other stock-based awards under our 2013 Equity Incentive Plan (including shares of restricted Class A common stock surrendered to the Company in payment of taxes required to be withheld in respect of vested shares of restricted Class A common stock, which are available for re-issuance). The expiration date of the 2013 Equity Incentive Plan, on and after which date no awards may be granted, is April 4, 2023. The Company’s Board of Directors, or a committee thereof, administers the 2013 Equity Incentive Plan and has the sole and plenary authority to, among other things: (i) designate participants; (ii) determine the type, size, and terms and conditions of awards to be granted; and (iii) determine the method by which an award may be settled, exercised, canceled, forfeited or suspended.
The Company’s time-based restricted stock awards and option awards generally vest in three3 equal annual installments beginning on the first anniversary of the grant date, subject to the grantee’s continued employment or service with the Company. The Company’s event-basedperformance-based restricted stock awards and option awards generally vest upon the Company’s Class A common stock attaining a $15.00 closing price per share, as quotedbased on the NASDAQ Global Market, on at least 10 trading days,achievement of certain non-market-based performance metrics of the Company, subject to the grantee’s continued employment or service with the Company. OtherThe event-based restricted stock awards granted to certain members of our Board vest on the day preceding the Company’s annual stockholder meeting.
Stock-based compensation
Stock-based compensation expense related to stock options and restricted stock was $1.0$1.7 million and $0.5$1.3 million for the three months ended September 30, 20172021 and 2016,2020, respectively, and $3.1$4.5 million and $2.5$4.0 million for the nine months ended September 30, 20172021 and 2016,2020, respectively. AtAs of September 30, 2017,2021, there was $2.1$3.7 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.52.5 years. AtAs of September 30, 2017,2021, there was $2.5$4.8 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.31.7 years.
26
Stock options
The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option pricing model for time-based options and performance-based options, and the Monte Carlo simulation model for event-based options. The expected term of options granted is derived using the simplified method under ASC 718-10-S99-1/SEC Topic 14.D for “plain vanilla” options and the Monte Carlo simulation for event-based options. Expected volatility is based on the historical volatility of the Company’s competitors given its lack of trading history. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has estimated forfeitures of 1.5%, as the awards are granted to management for which the Company expects lower turnover, and has assumed no0 dividend yield, as dividends have never been paid to stock or option holders and will not be paid for the foreseeable future.
|
|
| |||
|
|
| |||
|
|
| |||
|
|
| |||
|
|
|
| | | | | | |
| | Nine Months Ended | | Year Ended | | |
Black-Scholes Option Valuation Assumptions |
| September 30, 2021 |
| December 31, 2020 | | |
Risk-free interest rate | | 0.94% – 1.08 | % | | 0.42% - 0.50 | % |
Dividend yield | | — | | | — | |
Volatility | | 37.3% - 40.6 | % | | 44.2% - 46.1 | % |
Weighted-average expected term (years) | | 6.0 | | | 6.0 | |
The following table summarizes stock option activity for the nine months ended September 30, 20172021 (shares(shares and intrinsic value in thousands):
|
| Number of shares |
| Weighted-average |
| Weighted-average |
| Aggregate intrinsic |
| ||||||||||||
Outstanding at December 31, 2016 |
| 2,920 |
| $ | 11.64 |
| 7.6 |
| $ | 1,274 |
| ||||||||||
| | | | | | | | | | | |||||||||||
| | | | Weighted- | | Weighted- average | | | |||||||||||||
| | | | average | | remaining contractual | | Aggregate intrinsic | |||||||||||||
|
| Number of shares |
| exercise price |
| term |
| value | |||||||||||||
Outstanding at December 31, 2020 | | 3,935 | | $ | 11.69 |
| 5.1 | | $ | 291 | |||||||||||
Granted |
| — |
| — |
| — |
| — |
| | 600 | | | 12.02 | | 6.0 | | | — | ||
Exercised |
| — |
| — |
| — |
| — |
| | (50) | | | 10.20 | | — | | | — | ||
Forfeited |
| (37 | ) | 13.26 |
| — |
| — |
| | (8) | | | 14.00 | | — | | | — | ||
Expired |
| (40 | ) | 11.51 |
| — |
| — |
| | (40) | | | 14.78 | | — | | | — | ||
Outstanding at September 30, 2017 |
| 2,843 |
| $ | 11.62 |
| 6.7 |
| $ | 2,311 |
| ||||||||||
Vested at September 30, 2017 |
| 1,875 |
| $ | 11.67 |
| 6.0 |
| $ | 1,760 |
| ||||||||||
Exercisable at September 30, 2017 |
| 1,875 |
| $ | 11.67 |
| 6.0 |
| $ | 1,760 |
| ||||||||||
Outstanding at September 30, 2021 | | 4,437 | | $ | 11.67 | | 5.0 | | $ | 3,411 | |||||||||||
Vested at September 30, 2021 | | 3,412 | | $ | 11.60 | | 3.9 | | $ | 3,047 | |||||||||||
Exercisable at September 30, 2021 | | 3,412 | | $ | 11.60 |
| 3.9 | | $ | 3,047 | |||||||||||
NoThe weighted average grant date fair value of options were granted duringfor the nine months ended September 30, 2017.2021 was $4.72. At September 30, 2017, 0.32021, 0.5 million options granted and included in the table above are unvested event-basedperformance-based options.
Restricted stock
Certain employees and directors have been awarded restricted stock under the 2013 Equity Incentive Plan. The time-based restricted stock grants vest primarily over a period of three years. Performance-based restricted stock grants vest over a period of three years upon satisfaction of the performance condition. The fair value and expected term of event-based restricted stock grants is estimated at the grant date using the Monte Carlo simulation model.
The following table summarizes restricted share activity for the nine months ended September 30, 20172021 (shares in thousands):
|
| Number of shares |
| Weighted-average |
| ||||||
Outstanding at December 31, 2016 |
| 561 |
| $ | 10.58 |
| |||||
| | | | | | ||||||
| | | | Weighted-average | |||||||
|
| Number of shares |
| grant date fair value | |||||||
Outstanding at December 31, 2020 | | 499 | | $ | 11.26 | ||||||
Granted |
| 99 |
| 11.10 |
| | 582 | | | 11.95 | |
Vested |
| (204 | ) | 11.80 |
| | (522) | | | 11.30 | |
Forfeited |
| (8 | ) | 13.38 |
| | — | | | — | |
Outstanding at September 30, 2017 |
| 448 |
| $ | 10.09 |
| |||||
Outstanding at September 30, 2021 | | 559 | | $ | 11.95 | ||||||
27
At September 30, 2017, 0.22021, 0.0 million sharesrestricted awards granted and included in the table above are unvested performance-based restricted awards.
Non-controlling interest
Effective July 15, 2021, the Company entered into an omnibus modification agreement with Snap Distribution, Inc., a British Virgin Islands company, pursuant to which Snap Distribution, Inc. relinquished the non-controlling 25% interest in Snap Media, at which point Snap Media became a wholly owned subsidiary of restricted stock issued were unvested, event-based shares.
Warrants
At September 30, 2017, 12.1the Company. The Company recorded the relinquishment of this non-controlling interest by Snap Distribution, Inc. as a transaction between shareholders with no gain or loss reported, which is reflected as acquisition of non-controlling interest in the accompanying Condensed Consolidated Statement of Changes in Stockholders’ Equity. Additionally, Snap Distribution, Inc. waived the remaining consideration payment of $0.5 million, warrants, exercisable into 6.0 million shareswhich would have been payable in the fourth quarter of our Class A common stock, were issued2021, and outstanding. Each warrant entitles the holder to purchase one-half of one share of our Class A common stock at a price of $6.00 per half share. Warrants may be exercised only through the date of expiration and are only exercisable for a whole number of shares of common stock (i.e. only an even number of warrants may be exercised at any given time by a registered holder). Asas a result a holder must exercise a least two warrants at an effective exercise price of $12.00 per share. At the option of the Company 7.6 million warrants may be calledrecognized a gain in other income (expense), net in the accompanying Condensed Consolidated Statement of Operations for redemption, provided that the last sale price of our Class A common stock reported has been at least $18.00 per share on each of 20 trading days within the 30-day period ending on the third business day prior to the date on which notice of redemption is given. The warrants expire on April 4, 2018. During thethree and nine months ended September 30, 2017, no warrants were repurchased. There were 190,749 warrants exercised during the nine months ended September 30, 2017, in connection with such exercises 23,911 shares of Class A common stock were issued and the Company received $0.2 million in cash proceeds, as some of the warrant exercises were done on a cashless basis.2021.
Note 11.12. Contingencies
We are involved in various legal actions, generally related to our operations. Management believes, based on advice from legal counsel, that the outcomes of such legal actions will not adversely affect our financial condition.
Note 12. Commitments13. Leases
We have entered into certain rental property contractsThe Company is a lessee under leases for land, office space and equipment with third parties, all of which are accounted for as operating leases. Rental expenseThese leases generally have an initial term of one to seven years and provide for fixed monthly payments. Some of these leases provide for future rent escalations and renewal options and certain leases also obligate us to pay the cost of maintenance, insurance and property taxes. Total lease cost was $0.3 million and $0.2 million for each of the three months ended September 30, 20172021 and 2016,2020, respectively, and $0.6$0.8 million and $0.5$0.6 million for the nine months ended September 30, 20172021 and 2016,2020, respectively. Leases with a term of one year or less are classified as short-term and are not recognized in the Condensed Consolidated Balance Sheets.
We have certainA summary of the classification of operating leases on our Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (amounts in thousands):
| | | | | | | | |
| | |
| September 30, |
| December 31, | ||
|
| | | 2021 | | 2020 | ||
Operating lease right-of-use assets | |
| | $ | 1,425 | | $ | 1,820 |
Operating lease liability, current | | (Other accrued expenses) | |
| 654 |
| | 609 |
Operating lease liability, non-current | | (Other long-term liabilities) | | $ | 986 | | $ | 1,400 |
Components of lease cost reflected in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
| | | | | | |
| | Three months ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Operating lease cost | | $ | 168 | | $ | 168 |
Short-term lease cost | |
| 134 | |
| 6 |
Total lease cost | | $ | 302 | | $ | 174 |
| | | | | | |
| | Nine months ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Operating lease cost | | $ | 505 | | $ | 488 |
Short-term lease cost | |
| 312 | |
| 92 |
Total lease cost | | $ | 817 | | $ | 580 |
28
A summary of weighted-average remaining lease term and weighted-average discount rate as of September 30, 2021:
| | | |
Weighted-average remaining lease term | 3.2 | years | |
Weighted average discount rate | 6.1 | % |
Supplemental cash flow and other non-cash information for the nine months ended September 30, 2021 and 2020 (amounts in thousands):
| | | | | | |
| | Nine months ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Operating cash flows from operating leases | | $ | 471 | | $ | 444 |
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | |
| 23 | |
| 541 |
Future annual minimum lease commitments includingas of September 30, 2021 were as follows (amounts in thousands):
| | | |
|
| September 30, 2021 | |
Remainder of 2021 | | $ | 241 |
2022 | |
| 621 |
2023 | |
| 500 |
2024 | |
| 232 |
2025 | |
| 205 |
Total minimum payments | | $ | 1,799 |
Less: amount representing interest | |
| (159) |
Lease liability | | $ | 1,640 |
Note 14. Commitments
The Company has other commitments in addition to the various operating leases included in Note 13, “Leases” of Notes to Condensed Consolidated Financial Statements, primarily related to programming and funding obligations for certain equity investments.marketing.
Future minimum payments for these commitments and other commitments, primarily programming,as of September 30, 2021, are as follows (amounts in thousands):
Nine months Ending September 30, |
| Operating Leases |
| Other |
| Total |
| |||
Remainder of 2017 |
| $ | 235 |
| $ | 4,734 |
| $ | 4,969 |
|
2018 |
| 503 |
| 9,325 |
| 9,828 |
| |||
2019 |
| 449 |
| 5,833 |
| 6,282 |
| |||
2020 |
| 358 |
| 2,118 |
| 2,476 |
| |||
2021 and thereafter |
| 997 |
| 1,242 |
| 2,239 |
| |||
Total |
| $ | 2,542 |
| $ | 23,252 |
| $ | 25,794 |
|
| | | |
|
| September 30, 2021 | |
Remainder of 2021 | | $ | 17,386 |
2022 | |
| 36,531 |
2023 | |
| 5,142 |
2024 | |
| 1,715 |
2025 and thereafter | |
| 575 |
Total | | $ | 61,349 |
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our Company
We are a leading U.S. Spanish-language media company serving the fast growing and highly attractive U.S. Hispanic and Latin American markets. Headquartered in Miami, Florida, we ownmarkets with streaming, broadcast and operate a variety of media businesses. Our portfolio consists of:
·Cinelatino: the leading Spanish-language cable movie network with over 20 million subscribers across the U.S., Latin America and Canada. Cinelatino is programmed with a lineup featuring the best contemporary films and original television series from Mexico, Latin America, the U.S. and Spain. Driven by the strength of its programming and distribution, Cinelatino is the #2-Nielsen ratedplatforms including five Spanish-language cable television networknetworks distributed in the U.S. overall, based on coverage ratings.
·WAPA: the leading broadcast, two Spanish-language cable television network and television content producernetworks distributed in Puerto Rico. WAPA has beenLatin America, the #1-rated broadcast television network in Puerto Rico, for the last eight years. WAPA is Puerto Rico’s news leader and the largest local producer of news and entertainment programming, producing approximately 70 hours in the aggregate each week. Through its multicast signal, WAPA distributes WAPA2 Deportes, a leading sports television network in Puerto Rico, featuring Major League Baseball (“MLB”), National Basketball Association (“NBA”) and professional sporting events from Puerto Rico. Additionally, we operate WAPA.TV, the leading broadband news and entertainment website in Puerto Rico featuring news and content produced by WAPA.
·WAPA America: a cable television network serving primarily Puerto Ricans and other Caribbean Hispanics in the U.S. WAPA America’s programming includes approximately 70 hours per week of news and entertainment programming produced by WAPA. WAPA America is distributed in the U.S. to approximately 5.0 million subscribers.
·Pasiones: a cable television network dedicated to showcasing the most popular telenovelas and serialized dramas, distributed in the U.S. and Latin America. Pasiones features many of the best telenovelas licensed from top producers throughout the world. Pasiones has over 18 million subscribers across the U.S. and Latin America.
·Centroamerica TV: a cable television network targeting Central Americans, the third largest U.S. Hispanic group and the fastest growing segment of the U.S. Hispanic population. Centroamerica TV features the most popular news and entertainment from Central America, as well as soccer programming from the top professional soccer leagues in the region. Centroamerica TV is distributed in the U.S. to approximately 4.1 million subscribers.
·Television Dominicana: a cable television network targeting Dominicans livingSpanish-language subscription streaming service in the U.S., the fourth largest U.S. Hispanic group. Television Dominicana features the most popular newsa leading distributor of content to television and entertainment from the Dominican Republicdigital media platforms in Latin America, and is distributedhave an ownership interest in the U.S. to over 3.4 million subscribers.
·Canal 1:a partnership with leading Colombian content producers, is the #3 rated broadcast television network in Colombia. The partnership was awarded a 10-year renewable broadcast television concession for Canal 1
Headquartered in 2016. The partnership began operating the network on May 1, 2017 and launched a new programming lineup on August 14, 2017.
·PANTAYA: a cross-platform Spanish-language digital subscription service that is well positioned to be the dominant player in the Spanish-language OTT space. The service, which launched in August 2017, allows audiences to access manyMiami, Florida, our portfolio consists of the best and most current Spanish-language films and includes content from our movie library, Pantelion’s U.S. theatrical titles, Lionsgate’s movie library, and Grupo Televisa’s theatrical releases in Mexico.following:
| ● | Cinelatino: the leading Spanish-language cable movie network with approximately 3.6 million(1) subscribers in the U.S. and 13.9 million(1) subscribers across Latin America and Canada. Cinelatino is programmed with a lineup featuring the best contemporary films and original television series from Mexico, Latin America, and the United States. Driven by the strength of its programming and distribution, Cinelatino is the highest rated Spanish-language original movie network in the U.S. |
| ● | WAPA: the leading broadcast television network and television content producer in Puerto Rico. WAPA has been the #1-rated broadcast television network in Puerto Rico since the start of Nielsen audience measurement eleven years ago. WAPA is Puerto Rico’s news leader and the largest local producer of news and entertainment programming, producing over 67 hours in the aggregate each week. Additionally, we operate WAPA.TV, a leading news and entertainment website in Puerto Rico, as well as mobile apps, featuring content produced by WAPA. |
| ● | WAPA Deportes: through its multicast signal, WAPA distributes WAPA Deportes, a leading sports television network in Puerto Rico, featuring MLB, NBA and professional sporting events from Puerto Rico. |
| ● | WAPA America: a cable television network serving primarily Puerto Ricans and other Caribbean Hispanics living in the U.S. WAPA America’s programming features news and entertainment programming produced by WAPA. WAPA America is distributed in the U.S. to approximately 3.4 million(1) subscribers, excluding digital basic subscribers. |
| ● | Pasiones: a cable television network dedicated to showcasing the most popular telenovelas and serialized dramas, distributed in the U.S. and Latin America. Pasiones features top-rated telenovelas from Latin America, Turkey, India, and South Korea (dubbed into Spanish), and is currently the highest rated telenovela cable television network in primetime. Pasiones has approximately 3.8 million(1) subscribers in the U.S. and 15.6 million(1) subscribers in Latin America. |
| ● | Centroamerica TV: a cable television network targeting Central Americans living in the U.S., the third largest U.S. Hispanic group and the fastest growing segment of the U.S. Hispanic population. Centroamerica TV features the most popular news and entertainment from Central America, as well as soccer programming from the top professional soccer leagues in the region. Centroamerica TV is distributed in the U.S. to approximately 3.3 million(1) subscribers. |
| ● | Television Dominicana: a cable television network targeting Dominicans living in the U.S., the fifth largest U.S. Hispanic group. Television Dominicana airs the most popular news and entertainment programs from the Dominican Republic, as well as the Dominican Republic professional baseball league, featuring current and former players from MLB. Television Dominicana is distributed in the U.S. to over 2.2 million(1) subscribers. |
30
·REMEZCLA: an influential digital media company targeting English speaking and bilingual U.S. Hispanics aged 18-35 through innovative digital content.Table of Contents
| ● | Pantaya: the first ever premium subscription streaming service of Spanish-language offering the largest selection of current and classic, commercial free blockbusters and critically acclaimed movies and series from Latin America and the U.S. including original productions from Pantaya’s production arm, Pantelion, and titles from our library, as well as titles from third party providers such as Lionsgate and Grupo Televisa. The Company formed Pantaya in partnership with Lionsgate and launched the service in August 2017. On March 31, 2021, the Company acquired the remaining 75% equity interest from Lionsgate, and Pantaya is now a consolidated subsidiary of the Company. As of September 30, 2021, Pantaya had 1.0 million subscribers. |
| ● | Snap Media: a distributor of content to broadcast and cable television networks and OTT, SVOD and AVOD platforms in Latin America. On November 26, 2018, we acquired a 75% interest in Snap Media, and in connection with the acquisition, Snap Media entered into a joint venture with MarVista, an independent entertainment studio and a shareholder of Snap Media, to produce original movies and series. Snap Media is responsible for the distribution of content owned and/or controlled by our Networks, as well as content to be produced by the production joint venture between Snap Media and MarVista. On July 15, 2021, the Company entered into an omnibus agreement, pursuant to which, minority shareholders relinquished the 25% non-controlling interest in Snap Media, at which point Snap Media became a wholly owned subsidiary of the Company. |
| ● | Canal 1: the #3-rated broadcast television network in Colombia. We own a 40% interest in Canal 1 in partnership with leading producers of news and entertainment content in Colombia. The partnership was awarded a 10-year renewable broadcast television concession in 2016. The partnership began operating Canal 1 on May 1, 2017 and launched a new programming lineup on August 14, 2017. In July 2019, the Colombian government enacted legislation resulting in the extension of the concession license for an additional ten years for no additional consideration. The concession is now due to expire on April 30, 2037 and is renewable for an additional 20-year period. |
| ● | REMEZCLA: a digital media company targeting English speaking and bilingual U.S. Hispanic millennials through innovative content. On April 28, 2017, we acquired a 25.5% interest in REMEZCLA. |
(1) | Subscriber amounts are based on most recent remittances received from our Distributors as of the period end date, which are typically two months prior to the period end date. |
Our two primary sources of revenues are advertising revenuesrevenue and retransmission/subscriber fees.revenue. All of our Networks derive revenues from advertising. Advertising revenues arerevenue is generated from the sale of advertising time, which is typically sold pursuant to advertising orders with advertisers providing for an agreed upon advertising commitment and price per spot.advertisers. Our advertising revenues arerevenue is tied to the success of our programming, including the popularity of our programming as measured by Nielsen.with our target audience. Our advertising is variable in nature and tends to reflect seasonal patterns of our advertisers’ demand, which is generally greatest during the fourth quarter of each year, driven by the holiday buying season. In addition, Puerto Rico’s political election cycle occurs every four years and we benefit from increasedpolitical advertising sales in an election year. For example, in 2016,2020, we experienced higher advertising sales as a result of political advertising spending during the 20162020 Puerto Rico gubernatorial elections. The next election in Puerto Rico will be in 2020.2024.
31
All of our Networks receive fees paid by distributors,Distributors, including cable, satellite and telecommunications service providers. These revenues are generally based on a per subscriber fee pursuant to multi-year contracts, commonly referred to as “affiliation agreements,” which typically provide for annual rate increases. The specific retransmission/subscriber feesrevenue we earn varyvaries from period to period, distributorDistributor to distributorDistributor and also varyvaries among our Networks, but areis generally based upon the number of each distributor’sDistributor’s paying subscribers who receive our Networks. The terms of certain non-U.S. affiliation agreements provide for payment of a fixed contractual monthly fee. Changes in retransmission/subscriber feesrevenue are primarily derived from changes in contractual affiliation rates charged for our Networks and changes in the number of subscribers. Accordingly, we continually review the quality of our programming to ensure that it is maximizing our Networks’ viewership and giving our Networks’ subscribers a premium, high-value experience. The continued growth in our retransmission/subscriber feesrevenue will, to a certain extent, be dependent on the growth in subscribers of the cable, satellite and telecommunication service providers distributing our Networks, new system launches and continued carriage of our channels by our distribution partners. OurAdditionally, our revenues also benefit from contractual rate increases stipulated in most of our affiliation agreements. We also generate subscriber revenue from subscriptions to Pantaya, our subscription video on demand (“SVOD”) service. The SVOD service is available directly to consumers through our web application as well as through distribution partners. Certain distribution partners charge a fee, which is recorded in cost of revenues. Subscribers are billed at the start of their monthly or annual membership and revenue is recognized ratably over each applicable membership period. Subscriber revenue varies from period to period and is generally based upon the number of paying subscribers to our SVOD service. Estimates of revenue generated but not yet reported by the Company’s third party Distributors of our Networks and Pantaya are made based on the estimated number of subscribers using the most recently received remittance reporting from each Distributor, which is consistent with our past practice and industry practice.
WAPA has been the #1-rated broadcast television network in Puerto Rico forsince the last eightstart of Nielsen audience measurement eleven years ago and management believes it is highly valued by its viewers and Distributors.cable, satellite and telecommunications service providers. WAPA is distributed by all pay-TV distributorsDistributors in Puerto Rico and has been successfully growing retransmission fees.subscriber revenue. WAPA’s primetime household rating in 20162020 was nearly fourfive times higher than the most highly rated English-language U.S. broadcast network in the U.S., CBS, and higher than the combined ratings of CBS, NBC, ABC, FOX and the CW. As a result of its ratings success insince the last eight years,start of Nielsen audience measurement, management believes WAPA is well positioned for future growth in retransmission fees, similar to the growth in retransmission fees that the four major U.S. networks (ABC, CBS, NBC and Fox) have experienced in the U.S.subscriber revenue.
WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana occupy a valuable and unique position, as they are among the small group of Hispanic cable networks to have achieved broad distribution in the U.S. As a result, management believes our U.S. cable networks are well-positioned to benefit from growth in both the growing national advertising spend targeted at the highly sought-after U.S. Hispanic cable television audience, and significant growth in subscribers, as the U.S. Hispanic population, continueswhich is expected to continue its long-term growth. Cinelatino is presently rated by Nielsen.upward trajectory.
Hispanics represent over 18% of the total U.S. population and approximately 10%11% of the total U.S. buying power, but the aggregate media spend targeted at U.S. Hispanics significantly under-indexes both of these metrics. As a result, advertisers have been allocating a higher proportion of marketing dollars to the Hispanic market, but U.S. Hispanic cable advertising still under-indexes relative to its consumption. U.S. Hispanic cable network advertising revenue grew at a 14% CAGR from 2009 to 2016, more than doubling from $204 million to $520 million. Going forward, U.S. Hispanic cable advertising is expected to continue to grow at a 11% CAGR from 2016 to 2019, outpacing forecasted growth for U.S. cable advertising, U.S. Hispanic broadcast advertising and U.S. general market broadcast advertising.
Management expects Pantaya and our U.S. television networks to benefit from significant growth in subscribers, as the U.S. Hispanic population, as it continues its long-term growth. The U.S. Census Bureau estimated that 57nearly 60.5 million Hispanics resided in the United States in 2015,2019, representing an increase of approximately 21more than 25 million people between 2000 and 2015,2019, and that number is projected to grow to 7075 million by 2025.2030. U.S. Hispanic television households grew by 34%36% during the period from 20072010 to 2017,2021, from 11.612.9 million households to 15.617.6 million households. Similarly, Hispanic pay-TV subscribers increased 39% since 2007 to 12.2 million subscribers in 2017. The continued long-term growth of Hispanic television households and pay-TV subscribers creates a significant opportunity for all of our Networks.
Similarly, management expects Cinelatino and Pasiones to benefit from significant growth in Latin America. Fueled by a sizeable and growing population, a strong macroeconomic backdrop, rising disposable incomes and investments in network infrastructure resulting in improved service and performance, pay-TVPay-TV subscribers in Latin America (excluding Brazil) grew by 44% from 2012 to 2016, and are projected to grow an additional 15 million from 5355 million in 20162020 to 6960 million by 2021 representing projected growth2025. Furthermore, as of over 28%. Furthermore,December 31, 2020, Cinelatino and Pasiones arewere each presently distributed to only 29% and 25%, respectively,26% of total pay-TV subscribers throughout Latin America. Accordingly, growth through new system launches representsAmerica (excluding Brazil).
32
Colombia, where we own 40% of Canal 1, the #3-rated broadcast television network, is a significant growth opportunity. Management believes Cinelatinolarge and Pasiones have widespread appeal throughoutattractive market for broadcast television. Colombia had a population of 51 million as of December 31, 2020, the second largest in Latin America and therefore will be able(excluding Brazil). According to expand distribution throughoutIBOPE, the region.three major broadcast networks in Colombia receive a 59% share of overall television viewing. These factors resulted in an annual market for free-to-air television advertising of approximately $207 million for 2020 (as converted from Colombian Pesos to U.S. dollars utilizing the average foreign exchange rate during the period).
MVS, one of our stockholders, provides operational, technical and distribution services to Cinelatino pursuant to several agreements. Anagreements, including an agreement pursuant to which MVS provides satellite and technical support and other administrative support services, an agreement that had grantedgrants MVS the non-exclusive right to distribute the Cinelatino service throughout Latin America was terminated by MVS effective February 29, 2016. We continued to operate under the terms of the agreement through December 31, 2016. As of January 1, 2017, we assumed the management of all of the rights for Latin American third party distributors in Mexico, and MVS retained the non-exclusive right in Mexico.
Anan agreement between Cinelatino and Dish Mexico (an affiliate of MVS), pursuant to which Dish Mexico distributes Cinelatino and pays subscriber fees to Cinelatino.
COVID-19 Pandemic
In March 2020, the networkWorld Health Organization characterized the coronavirus (“COVID-19”) as a pandemic, and Cinelatino receives revenue, expired on August 1, 2017. We continue to operate under the termsPresident of the expired agreement.
Hurricanes IrmaUnited States declared the COVID-19 outbreak a national emergency. The impact of COVID-19 and Maria
On September 6, 2017, Hurricane Irma resultedmeasures to prevent its spread have continued to affect our businesses in a lossnumber of powerways. Beginning in March 2020, the Company experienced adverse advertising revenue impacts. Operationally, most non-production and programming personnel are working remotely, and the Company has restricted business travel. The Company has managed the remote workforce transition effectively and there have been no material adverse impacts on operations through September 30, 2021. However, the Company is unable to over 70% ofreasonably predict the homesimpact that a significant change in Puerto Rico. Two weeks later, on September 20, 2017, Hurricane Maria made landfall in Puerto Rico causing widespread devastation and loss of power to 100% ofcircumstances, including the island. Additionally, the high sustained winds of Hurricane Maria caused oneability of our three transmission towersworkforce and/or key personnel to fall, completely destroyingwork effectively because of illness, government actions or other restrictions in connection with the towerCOVID-19 pandemic, may have on our businesses in the future. The nature and the transmission equipment housed on the tower. Since the storm, we have been transmitting WAPA’s signal via the multicast spectrum of another broadcast television network. At the same time, we have been evaluating alternate long-term transmission solutions, and have identified several acceptable solutions.
The back-to-back hurricanes in Puerto Rico adversely affected WAPA’s business in September, and given the timing of the restoration of power and possible declines of television households, will have an adverse effect on both advertising revenue and retransmission fees, for several months. We are still estimating the replacement cost of the damaged property, but we do expect insurance will cover most of the cost, subject to deductibles and other costs. We also anticipate that a portion of the lost income will be mitigated through business interruption insurance, although it will not offset the full extent of the income loss. There canimpact of the COVID-19 pandemic on our future operations will depend on numerous factors, all of which are highly uncertain and cannot be no assurancesreasonably predicted. These factors include the length and severity of the outbreak, including the extent of surges in positive cases related to variants of COVID-19, such as the Delta variant, as well as the availability and efficacy of vaccines and treatments for the disease and whether individuals choose to vaccinate themselves, the responses of private sector businesses and governments, including the timing and amount of government stimulus, the proceeds we may recover underimpact on economic activity and the impact on our insurance policies.customers, employees and suppliers.
The Company has evaluated and continues to evaluate the potential impact of the COVID-19 pandemic on its Condensed Consolidated Financial Statements, including the impairment of goodwill and indefinite-lived intangible assets and the fair value of equity method investments. The ultimate impact of the COVID-19 pandemic, including the extent of any adverse impact on our business, results of operations and financial condition, remains uncertain. The Company believes it has substantial liquidity to satisfy its financial commitments.
Given the global nature of the COVID-19 pandemic, our investment in Canal 1, which operates in Colombia, has also been negatively impacted. Colombia’s President Ivan Duque declared a state of emergency, locking down the country on March 20, 2020. Since then, most restrictions have been lifted allowing services to work at full capacity including schools, retail, and mass transportation, however some limitations are still in place for massive public events and the state of emergency declaration has been extended to November 25, 2021. COVID-19 has had a material adverse impact on advertising spending, and accordingly, has had a material adverse impact on Canal 1’s advertising revenue. Since the third wave of the pandemic hit Colombia severely in May of 2021, the situation has been progressively improving with positivity rates around 4% through September of 2021. As of September 30, 2021, 44 million vaccine doses have arrived, and 48% of the population target have received the full vaccination cycle.
33
Comparison of Consolidated Operating Results for the Three and Nine Months Ended September 30, 20172021 and 20162020
(Unaudited)
(amounts in thousands)
|
| Three Months Ended |
| $ Change |
| % Change |
| Nine Months Ended |
| $ Change |
| % Change |
| ||||||||||
|
| September 30, |
| Favorable/ |
| Favorable/ |
| September 30, |
| Favorable/ |
| Favorable/ |
| ||||||||||
|
| 2017 |
| 2016 |
| (Unfavorable) |
| (Unfavorable) |
| 2017 |
| 2016 |
| (Unfavorable) |
| (Unfavorable) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net revenues |
| $ | 32,173 |
| $ | 33,116 |
| $ | (943 | ) | (2.8 | )% | $ | 100,512 |
| $ | 99,118 |
| $ | 1,394 |
| 1.4 | % |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of revenues |
| 9,883 |
| 9,826 |
| (57 | ) | (0.6 | )% | 30,426 |
| 30,647 |
| 221 |
| 0.7 | % | ||||||
Selling, general and administrative |
| 9,510 |
| 8,999 |
| (511 | ) | (5.7 | )% | 28,845 |
| 27,775 |
| (1,070 | ) | (3.9 | )% | ||||||
Depreciation and amortization |
| 4,041 |
| 4,083 |
| 42 |
| 1.0 | % | 12,223 |
| 12,500 |
| 277 |
| 2.2 | % | ||||||
Other expenses |
| 332 |
| 638 |
| 306 |
| 48.0 | % | 3,056 |
| 770 |
| (2,286 | ) | NM |
| ||||||
(Gain) loss on disposition of assets |
| — |
| (9 | ) | (9 | ) | NM |
| 2 |
| 6 |
| 4 |
| 66.7 | % | ||||||
Total operating expenses |
| 23,766 |
| 23,537 |
| (229 | ) | (1.0 | )% | 74,552 |
| 71,698 |
| (2,854 | ) | (4.0 | )% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating income |
| 8,407 |
| 9,579 |
| (1,172 | ) | (12.2 | )% | 25,960 |
| 27,420 |
| (1,460 | ) | (5.3 | )% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest expense, net |
| (2,863 | ) | (2,954 | ) | 91 |
| 3.1 | % | (8,089 | ) | (8,779 | ) | 690 |
| 7.9 | % | ||||||
Loss on equity method investments, net |
| (2,571 | ) | — |
| (2,571 | ) | NM |
| (2,450 | ) | — |
| (2,450 | ) | NM |
| ||||||
Loss on impairment of assets |
| (533 | ) | — |
| (533 | ) | NM |
| (533 | ) | — |
| (533 | ) | NM |
| ||||||
Total Other, net |
| 5,967 |
| (2,954 | ) | (3,013 | ) | (102.0 | )% | (11,072 | ) | (8,779 | ) | (2,293 | ) | (26.1 | )% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income before income taxes |
| 2,440 |
| 6,625 |
| (4,185 | ) | (63.2 | )% | 14,888 |
| 18,641 |
| (3,753 | ) | (20.1 | )% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income tax expense |
| (1,758 | ) | (2,276 | ) | 518 |
| 22.8 | % | (6,280 | ) | (6,563 | ) | 283 |
| 4.3 | % | ||||||
Net Income |
| $ | 682 |
| $ | 4,349 |
| $ | (3,667 | ) | (84.3 | )% | $ | 8,608 |
| $ | 12,078 |
| $ | (3,470 | ) | (28.7 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | $ Change | | % Change |
| Nine Months Ended | | $ Change | | % Change |
| ||||||||||
| | September 30, | | Favorable/ | | Favorable/ |
| September 30, | | Favorable/ | | Favorable/ |
| ||||||||||
|
| 2021 |
| 2020 |
| (Unfavorable) |
| (Unfavorable) |
| 2021 |
| 2020 |
| (Unfavorable) |
| (Unfavorable) |
| ||||||
Net revenues | | $ | 50,791 | | $ | 37,172 |
| $ | 13,619 |
| 36.6 | % | $ | 138,828 | | $ | 104,316 |
| $ | 34,512 |
| 33.1 | % |
Operating expenses: | |
| | |
|
|
| |
|
| | |
| | |
|
|
| | |
| | |
Cost of revenues | |
| 16,024 | |
| 10,994 |
| | (5,030) |
| (45.8) | % |
| 42,601 | |
| 34,521 |
| | (8,080) |
| (23.4) | % |
Selling, general and administrative | |
| 31,164 | |
| 10,819 |
| | (20,345) |
| NM | |
| 67,463 | |
| 32,260 |
| | (35,203) |
| NM | |
Depreciation and amortization | |
| 10,861 | |
| 2,771 |
| | (8,090) |
| NM | |
| 17,863 | |
| 8,696 |
| | (9,167) |
| NM | |
Other expenses | |
| 413 | |
| 172 |
| | (241) |
| NM | |
| 8,504 | |
| 3,220 |
| | (5,284) |
| NM | |
Gain from FCC spectrum repack and other | |
| (309) | |
| (1,004) |
| | (695) |
| (69.2) | % |
| (2,485) | |
| (831) |
| | 1,654 |
| NM | |
Total operating expenses | |
| 58,153 | |
| 23,752 |
| | (34,401) |
| NM | |
| 133,946 | |
| 77,866 |
| | (56,080) |
| (72.0) | % |
Operating (loss) income | |
| (7,362) | |
| 13,420 |
| | (20,782) |
| NM | |
| 4,882 | |
| 26,450 |
| | (21,568) |
| (81.5) | % |
Other (expense) income: | | | | |
| |
| | |
| | |
| | |
|
|
| |
|
| | |
Interest expense and other, net | |
| (3,278) | |
| (2,551) |
| | (727) |
| (28.5) | % |
| (8,801) | |
| (7,833) |
| | (968) |
| (12.4) | % |
(Loss) gain on equity method investment activity | |
| (3,222) | |
| (988) |
| | (2,234) |
| NM | |
| 20,818 | |
| (18,196) |
| | 39,014 |
| NM | |
Impairment of equity method investment | |
| — | |
| — |
| | — |
| — | |
| — | |
| (5,479) |
| | 5,479 |
| 100.0 | % |
Other income (expense), net | | | 540 | | | — | | | 540 | | NM | | | (128) | | | — | | | (128) | | NM | |
Total other (expense) income | |
| (5,960) | |
| (3,539) |
| | (2,421) |
| (68.4) | % |
| 11,889 | |
| (31,508) | | | 43,397 |
| NM | |
(Loss) income before income taxes | |
| (13,322) | |
| 9,881 |
| | (23,203) |
| NM | |
| 16,771 | |
| (5,058) |
| | 21,829 |
| NM | |
Income tax expense | |
| (1,479) | |
| (4,664) |
| | 3,185 |
| 68.3 | % |
| (4,532) | |
| (5,873) |
| | 1,341 |
| 22.8 | % |
Net (loss) income | |
| (14,801) | |
| 5,217 |
| | (20,018) |
| NM | |
| 12,239 | |
| (10,931) |
| | 23,170 |
| NM | |
Net loss attributable to non-controlling interest | |
| — | |
| 80 |
| | (80) |
| (100.0) | % |
| 32 | |
| 118 |
| | (86) |
| (72.9) | % |
Net (loss) income attributable to Hemisphere Media Group, Inc. | | $ | (14,801) | | $ | 5,297 |
| $ | (20,098) |
| NM | | $ | 12,271 | | $ | (10,813) | | $ | 23,084 |
| NM | |
NM = Not meaningful
Net Revenues
Net revenues decreased $0.9were $50.8 million or 3%, for the three months ended September 30, 2017, due to a decline in advertising revenue, partially offset by growth in subscriber and retransmission fees and other revenues. Advertising revenue decreased $2.32021, an increase of $13.6 million, or 16%37%, as compared to $37.2 million for the comparable period in 2020. Subscriber revenue increased $13.4 million, or 70%, primarily due to the negative impactinclusion of Hurricanes IrmaPantaya, which the Company acquired on March 31, 2021, as well as contractual rate increases and Maria on the television advertising market in Puerto Rico in September. Subscriber and retransmission fees increased $0.9 million, or 5%, driven by subscriber growth, new launches and annual rate increases.of our television Networks, offset in part by a decline in U.S. cable subscribers. Other revenues, which arerevenue increased $0.7 million, driven primarily related toby the timing of the licensing of our content grew $0.5and theatrical releases. Advertising revenue decreased $0.4 million, or 2%, primarily due to the timing and availability of content we licensed to third parties. Excluding political advertising revenue in the prior year period, netperiod. Excluding political advertising, advertising revenue decreased $0.8increased $0.9 million, or 3%, for the three months ended September 30, 2017.6%.
34
Net revenues increased $1.4were $138.8 million or 1%, for the nine months ended September 30, 2017,2021, an increase of $34.5 million, or 33%, as compared to $104.3 million for the comparable period in 2020. Subscriber revenue increased $26.4 million, or 45%, primarily due to the inclusion of Pantaya, which the Company acquired on March 31, 2021, as well as contractual rate increases and new launches of our television Networks, offset in part by a decline in U.S. cable subscribers. Advertising revenue increased $8.6 million, or 21%, primarily due to growth in subscriber and retransmission fees and other revenue, which were partially offset by a declinethe Puerto Rico television advertising market, coupled with an increase in WAPA’s share of the market, as well as an increase in advertising revenue. Subscriber and retransmission fees increased $4.1 million, or 8%, due to subscriber growth, new launches and annual rate increases. Advertising revenue decreased $3.7 million, or 8%, due primarily to the impact of Hurricanes Irma and Maria, political advertising revenue generatedat our Cable Networks, offset in 2016 of $0.8 million. Other revenues increased $0.9 million, due to the timing and availability of content licensed to third parties. Excludingpart by political advertising revenue in the prior year period, netperiod. Other revenue increased $2.2decreased $0.5 million, or 7%11%, fordriven primarily by the nine months ended September 30, 2017.
The following table presents estimated subscriber information:
|
| Subscribers (a) |
| ||||
|
| September 30, 2017 |
| December 31, 2016 |
| September 30, 2016 |
|
U.S. Cable Networks: |
|
|
|
|
|
|
|
WAPA America (b) |
| 4,330 |
| 4,189 |
| 4,096 |
|
Cinelatino |
| 4,563 |
| 4,588 |
| 4,581 |
|
Pasiones |
| 4,602 |
| 4,620 |
| 4,530 |
|
Centroamerica TV |
| 4,125 |
| 4,063 |
| 4,055 |
|
Television Dominicana |
| 3,468 |
| 3,249 |
| 3,159 |
|
Total |
| 21,088 |
| 20,709 |
| 20,421 |
|
|
|
|
|
|
|
|
|
Latin America Cable Networks: |
|
|
|
|
|
|
|
Cinelatino |
| 16,139 |
| 15,430 |
| 13,003 |
|
Pasiones |
| 13,504 |
| 13,235 |
| 11,126 |
|
Total |
| 29,643 |
| 28,665 |
| 24,129 |
|
(a) Amounts presented are based on most recent remittances received from our Distributors astiming of the respective dates shown above, which are typically two months prior to the dates shown above.licensing of content.
(b) Excludes digital basic subscribers. Subscribers to WAPA America including digital basic subscribers decreased 3.2% from September 30, 2016 to September 30, 2017, and decreased by 5.0% from December 31, 2016 to September 30, 2017.
Operating Expenses
Cost of Revenues: Cost of revenues consists primarily of programming and production costs, programming amortization, technical and streaming delivery costs and distribution costs.fees. Cost of revenues increased $0.1 million, or 1%, for the three months ended September 30, 2017, and decreased $0.22021, were $16.0 million, an increase of $5.0 million, or 1%46%, compared to $11.0 million for the comparable period in 2020. Cost of revenues for the nine months ended September 30, 2017. The2021, were $42.6 million, an increase of $8.1 million, or 23%, compared to $34.5 million for the comparable period in 2020. These increases were due to the inclusion of Pantaya, and were primarily comprised of programming and technical costs and third party distribution fees. Additionally, programming and production costs increased due to certain programming and sporting events produced and broadcast in the three months ended September 30, 2017, was driven bycurrent year periods that were postponed or cancelled in the timing of certain sports rights, which shifted from the second quarter in 2016prior year periods due to the third quarter in 2017, offset in part by lower programming amortization. The decrease in the nine months ended September 30, 2017, was driven by lower news costs, due to coverage of the political elections in 2016, and to the cancellation of certain programs, offset in part by higher programming
amortization and costs for events incurred in 2017, but not in 2016, including the World Baseball Classic, Miss Universe and Miss Puerto Rico.COVID-19 pandemic.
Selling, General and Administrative:Selling, general and administrative expenses consist principally of promotion, marketing, and research, employee costs, stock-based compensation, employee costs, rent and other general administrative costs. Selling, general, and administrative expenses increased $0.5 million, or 6%, for the three months ended September 30, 2017,2021, were $31.2 million, an increase of $20.4 million, compared to $10.8 million for the comparable period in 2020. Selling, general, and increased $1.1 million, or 4%,administrative expenses for the nine months ended September 30, 2017. The2021, were $67.5 million, an increase of $35.2 million, compared to $32.3 million for the comparable period in 2020. These increases were primarily due to the inclusion of Pantaya, and were primarily comprised of marketing and personnel expenses, and higher stock compensation expense.stock-based compensation. The increase in the nine monthnine-month period ended September 30, 2021, was also due to consulting fees incurredhigher advertising sales commissions as a result of the increase in connection with our equity method investmentsadvertising revenue. Additionally, these increases were due to cost reductions implemented in the prior year periods in response to the pandemic, including voluntary salary reductions and higher corporate and legal expenses.employee retention credits, which the Company did not have in the current year periods.
Depreciation and Amortization:Depreciation and amortization expense consists of depreciation of fixed assets and amortization of intangibles. Depreciation and amortization expense was flat for the quarterthree months ended September 30, 2017,2021, was $10.9 million, an increase of $8.1 million, compared to $2.8 million for the comparable period in 2020. Depreciation and decreased $0.3 million, or 2%,amortization for the nine months ended September 30, 2017. The decrease2021, was $17.9 million, an increase of $9.2 million, compared to $8.7 million for the comparable period in the nine month period, was2020. These increases were due to the expirationamortization of intangible assets recognized as part of the useful livesPantaya Acquisition, offset in part by the amortization of certain fixedintangible assets whichthat were reflected in depreciation and amortization expense infully amortized during the prior year period.year.
Other Expenses: Other expenses include legal, financial advisory and other fees incurred in connection with acquisitions and corporate finance activities, including debt and equity financings, and acquisition activities.financings. Other expenses for the three months ended September 30, 2017, decreased2021, were $0.4 million, an increase of $0.2 million, compared to $0.2 million in the comparable period in 2020, due to expenses incurred in connection with the pursuit of strategic transactions. Other expenses for the nine months ended September 30, 2021, were $8.5 million, an increase of $5.3 million, compared to $3.2 million in the comparable period in 2020, primarily due to expenses incurred in connection with the Pantaya Acquisition and the incremental borrowing on our Third Amended Term Loan Facility.
Gain from FCC repack and other: Gain from FCC spectrum repack and other primarily reflects reimbursements we have received from the FCC for equipment purchased as a result of the FCC mandated spectrum repack, and gain or loss from the sale of assets no longer utilized in the operations of the business. Gain from FCC spectrum repack and other for the three months ended September 30, 2021, was $0.3 million, as compared to $1.0 million in the comparable period of 2020. Gain from FCC spectrum repack and other for the nine months ended September 30, 2021, was $2.5 million, as compared to $0.8 million in the comparable period of 2020. These increases were due to reimbursements received from the FCC for equipment purchases required as a result of the FCC mandated spectrum repack and the disposal of assets no longer utilized in the operations of the business during the prior year period.
35
Other Expenses
Interest Expense and other, net: Interest expense and other, net for the three and nine months ended September 30, 2021, increased $0.7 million, or 29% and $1.0 million, or 12%, respectively. These increases were due to incremental borrowing on our Third Amended Term Loan Facility, offset in part by lower average interest rates due to the decline in LIBOR.
(Loss) Gain on Equity Method Investment Activity: Loss on equity method investment activity for the three months ended September 30, 2021, was $3.2 million, an increase of $2.2 million compared to $1.0 million for the comparable period in 2020, due to higher losses at Canal 1, primarily as a result of the unfavorable comparison to the prior year period impact of unrealized foreign currency gains on U.S. dollar denominated obligations. Gain on equity method investment activity for the nine months ended September 30, 2021, was $20.8 million, as compared to a loss of $18.2 million for the comparable period in 2020, primarily due to a $30.1 million one-time non-cash gain recognized on the existing 25% equity interest in Pantaya upon the step acquisition of the remaining 75% equity interest in Pantaya on March 31, 2021. The improvement was also due to lower losses at Canal 1. For more information, see Note 3, “Business Combination” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Impairment of Equity Method Investment: In March 2020, we deemed our investment in REMEZCLA to be impaired given the uncertainty caused by the COVID-19 pandemic and the associated going-concern risks. As a result, we recorded a non-cash impairment charge of $5.5 million reflecting the write-off of the full valuation of our investment in REMEZCLA. For more information, see Note 6, “Equity Method Investments” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Other income (expense), net: Other income for the three months ended September 30, 2021, was $0.5 million due to the entry into an omnibus modification agreement by the Company and Snap Media’s minority holder, whereby the 25% minority holder agreed to waive the remaining consideration due from the Company in respect of the acquisition of Snap Media and relinquish its non-controlling interest. Other expense, net for the nine months ended September 30, 2021, was $0.1 million due to the write-off of the net book value of programming rights at the Company for content licensed from Pantaya prior to the Acquisition Date, which was offset in part by the waiver of the remaining consideration due from the Company in respect of the acquisition of Snap Media. For more information, see Note 11, “Stockholders’ Equity” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Income Tax Expense
Income tax expense for the three months ended September 30, 2021, was $1.5 million as compared to $4.7 million for the comparable period in 2020. Income tax expense for the nine months ended September 30, 2021, was $4.5 million as compared to income tax expense of $5.9 million for the comparable period in 2020. These decreases were due to lower taxable income in the current year periods. For more information, see Note 7, “Income Taxes” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Net (Loss) Income
Net loss for the three months ended September 30, 2021, was $14.8 million as compared to net income of $5.2 million for the comparable period in 2020. Net income for the nine months ended September 30, 2021, was $12.2 million as compared to net loss of $10.9 million for the comparable period in 2020, as the current year period benefitted from a one-time non-cash gain of $30.1 million recognized on the existing 25% equity interest in Pantaya upon the step acquisition of the remaining 75% equity interest. For more information, see Note 3, “Business Combination” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
36
Net Loss Attributable to Non-controlling Interest
Net loss attributable to non-controlling interest related to the 25% interest in Snap Media held by minority shareholders. On July 15, 2021, the Company obtained the non-controlling 25% interest in Snap Media that was previously held by minority shareholders, and as a result there is no longer a non-controlling interest in Snap Media for the three months ended September 30, 2021. Net loss attributable to non-controlling interest for the three months ended September 30, 2020, was $0.1 million and for the nine months ended September 30, 2017, increased $2.3 million. The decrease in2021 and 2020, was $0.0 million and $0.1 million, respectively.
Net (Loss) Income Attributable to Hemisphere Media Group, Inc.
Net loss attributable to Hemisphere Media Group, Inc. for the three months ended September 30, 20172021, was due primarily$14.8 million as compared to higher costs in the prior year related to the liquidity transactionnet income of our controlling stockholder. The increase in the nine month period ended September 30, 2017 was primarily due to costs incurred in connection with the refinancing of our Second Amended Term Loan Facility in the first quarter of this year.
Loss on Disposition of Assets: Loss on disposition of assets reflects loss on disposal of equipment no longer used in our operations.
Interest Expense, net
For the three and nine months ended September 30, 2017, interest expense decreased $0.1 million, or 3%, and $0.7 million, or 8%, due to lower interest rates as a result of refinancing our Second Amended Term Loan Facility in February 2017, and a lower outstanding principle balance.
Other expense net
Other expense, net increased $3.1 million and $3.0$5.3 million for the three and nine months ended September 30, 2017, respectively. The increasescomparable period in both the three and nine month periods were driven by the loss on equity method investments and on the impairment of assets that were written off due2020. Net income attributable to damage sustained from Hurricane Maria. For the quarter, our share of losses from our equity method investments of $3.4 million was partially offset by the preferred return on capital funding related to our Colombian joint venture of $0.8 million. ForHemisphere Media Group, Inc. for the nine months ended September 30, 2017, our share2021, was $12.3 million as compared to net loss of losses from our equity method investments of $3.5 million was partially offset by the preferred return on capital funding related to our Colombian joint venture of $1.0 million. See Note 5, “Equity method investments”, and Note 3, “Property, Plant and Equipment” of the Notes to unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report.
Income Tax Expense
Income tax expense decreased by $0.5 million and $0.3$10.8 million for the three and nine months ended September 30, 2017, respectively, driven by lower pretax income. For more information, see Note 6, “Income taxes” of Notes to unaudited condensed consolidated financial statements, included elsewherecomparable period in this Quarterly Report.2020.
Net Income
Net income decreased by $3.7 million and $3.5 million in the three and nine months ended September 30, 2017, respectively due to the loss on equity method investments and on the impairment of assets damaged by Hurricane Maria.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our principal sources of cash are cash on hand, capacity under our Revolving Facility and cash flows from operating activities. At September 30, 2017,2021, we had $140.3$54.7 million of cash on hand.hand and $30.0 million undrawn and available under our Revolving Facility. Our primary uses of cash include the production and acquisition of programming, operational costs, personnel costs, equipment purchases, principal and interest payments on our outstanding debt and income tax payments, and cash may be used to fund investments, acquisitions and repurchases of common stock.
On June 20, 2017, the Company announced a stock repurchase program. Under the Company’s stock repurchase program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases, privately negotiated transactions at prevailing prices, subject to stock price, business and market conditions and other factors. As of September 30, 2017, the total amount authorized under the stock repurchase program was $25 million, and the Company had $14.3 million of remaining authorization for future repurchases under the existing stock repurchase program, which will expire on July 17, 2018.
Management believes cash on hand and cash flow from operations will be sufficient to meet our current contractual financial obligations and to fund anticipated working capital and capital expenditure requirements for existing operations. Our current financial obligations include maturities of debt, operating lease obligations and other commitments from the ordinary course of business that require cash payments to vendors and suppliers.
Cash Flows
|
| Nine Months Ended September 30, |
| ||||||||||
| | | | | | | |||||||
| | Nine Months Ended September 30, | |||||||||||
Amounts in thousands: |
| 2017 |
| 2016 |
|
| 2021 |
| 2020 | ||||
Cash provided by (used in): |
|
|
|
|
|
| |
|
| |
| ||
Operating activities |
| $ | 19,589 |
| $ | 14,470 |
| | $ | 5,848 | | $ | 36,137 |
Investing activities |
| (28,835 | ) | (2,917 | ) | |
| (127,829) | |
| (8,435) | ||
Financing activities |
| (13,523 | ) | (40,525 | ) | |
| 42,190 | |
| (2,112) | ||
Net decrease in cash |
| $ | (22,769 | ) | $ | (28,972 | ) | ||||||
Net (decrease) increase in cash | | $ | (79,791) | | $ | 25,590 | |||||||
Comparison for the Nine Months Ended September 30, 20172021 and September 30, 20162020
Operating Activities
Operating Activities
Cash provided by operating activities was primarily driven by our net income or loss, adjusted for non-cash items and changes in working capital. Non-cash items consist primarily of depreciation of property and equipment, amortization of intangibles, programming amortization, amortization of deferred financing costs, stock-based compensation expense, andgain or loss on equity method investment activity, impairment of equity method investments, amortization of operating lease right-of-use assets, provision for bad debts.debts, and other non-cash acquisition charges.
37
Net cash provided by operating activities of $19.6 million for the nine months ended September 30, 2017, an increase2021 was $5.8 million, a decrease of $5.1$30.3 million, as compared to $36.1 million in the prior year period, was primarily due to an increasea decrease in non-cash items of $5.8$38.2 million an increaseand a decrease in net working capital of $2.8$15.3 million, offset in part by a decreasean improvement in net income of $3.5$23.2 million. The increasedecrease in non-cash items was driven by lower deferred taxes of $2.6is due to a $39.0 million lossesimprovement in gain on equity method investmentsinvestment activity primarily due to a $30.1 million one-time gain recognized on the existing 25% equity interest in Pantaya upon the step acquisition of $2.5the remaining 75% equity interest, a $5.5 million increased stock-based compensationimpairment of $0.6 million,equity method investment related to REMEZCLA in the prior year period, an increase in programgain from FCC spectrum repack and other of $1.7 million, and decreases in deferred tax expense of $1.4 million, programming amortization of $0.6$1.2 million and the loss on impairmentprovision for bad debt of assets of $0.5$0.9 million, offset in part by a decreaseincreases in depreciation and amortization expense of $0.3$9.2 million, lower bad debt expenseother non-cash acquisition related charges of $0.2 million, lower amortization of deferred financing costs of $0.2$1.3 million, and lower excess tax benefitsstock-based compensation of $0.2$0.5 million. The increasedecrease in net working capital was driven by a decreaseis due to increases in Prepaid expensesprepaids and other current assets of $3.1$11.2 million, an increase in Accounts payableprogramming rights of $1.6$6.7 million, an increase in Program rights payable of $1.5 million, an increase in Due toand due to/from related parties net of $0.9 million, offset by a decrease in Accrued expenses of $2.8 million, an increase in Accounts receivable of $0.6 million, an increase in Programming rights of $0.7 million, and a decrease in Other liabilitiesprogramming rights payable of $0.4$10.5 million, offset in part by a decrease in accounts receivable of $9.1 million and increases in accounts payable of $2.9 million, other accrued expenses of $1.1 million, and income taxes payable of $0.7 million.
For more information, see Note 3, “Business Combination” and Note 6, “Equity Method Investments” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2017,2021, was $28.8$127.8 million, an increase of $25.9$119.4 million as compared to $2.9$8.4 million in the prior year period. The increase was primarily due to the net cash paid for the Pantaya Acquisition of $122.6 million and an increase in capital expenditures of $1.2 million, offset in part by a decline in funding of equity investments of $3.0 million and increased proceeds received from the FCC related to the spectrum repack of $1.4 million.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2021, was $42.2 million, an increase of $44.3 million as compared to net cash used of $2.1 million in the prior year period. The increase is primarily due to the fundingnet proceeds of equity method investments totaling $26.9$47.4 million offset in part by lower capital expenditures.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2017, was $13.5 million, a decrease of $27.0 million, as compared to $40.5 million in the prior year period. The decrease is primarily due to a $21.8 million decrease in repurchases of common stock and warrants made in the current year period as compared to the level of repurchases made in the 2016 period. The decrease is also due to higher principal debt payments made in the 2016 period of $6.7 million, which was driven by an excess cash flow payment of $8.3 million made in 2016 pursuant to the terms of the Term Loan Facility, which the Company was not obligated to make in the current year period. The decreases were offset in part by $1.1 million of financing fees incurred in connection with the Secondreceived from incremental borrowing under our Third Amended Term Loan Facility in connection with the current period. Pantaya Acquisition, offset in part by an increase in repurchases of our Class A common stock of $2.8 million.
For more information, see Note 7, “Long-term debt” and Note 10, “Stockholders’ equity”8, “Long-Term Debt” of Notes to unaudited condensed consolidated financial statements,Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We finance our capital needs through our Second Amended Term Loan Facility at our indirect wholly-owned subsidiary, Hemisphere Media Holdings, LLC.
The variable rate of interest on the Second Amended Term Loan Facility exposes us to market risk for changes in interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market rates. As of September 30, 2017, our exposure to changing market rates with respect to the Term Loan Facility was as follows (amounts in thousands):
|
| September 30, 2017 |
| |
Variable rate debt |
| $ | 211.7 |
|
Interest rate |
| 4.7 | % | |
As of September 30, 2017, the total outstanding balance on the Second Amended Term Loan Facility was approximately $211.7 million. In the event of an increase in the interest rate of 100 basis points, assuming a principal of $211.7 million, we would incur an increase in interest expense of approximately $2.1 million per year. Such potential increases or decreases in interest expense are based on certain simplifying assumptions, including a constant level of debt, no interest rate swap or hedge in place, and an immediate, across-the-board increase in the level of interest rates with no other subsequent changes for one year.
Interest Rate Risk
We use derivative financial instruments in the management of our exposure to interest rate. Our strategy is to eliminate the cash flow risk on a portion of the variable rate debt caused by changes in the designated benchmark interest rate, LIBOR. The Company does not enter into or hold derivative financial instruments for speculative trading purposes and we only enter into interest rate swap contracts with financial institutions that we believe are creditworthy counterparties. We monitor the financial institutions that are counterparties to our interest rate swap contracts and to the extent necessary, may diversify our swap contracts among various counterparties to mitigate exposure to any single financial institution.Not applicable.
As of September 30, 2017, we have interest rate swap contracts outstanding with notional amounts aggregating $100.0 million. The aggregate fair values of interest rate swap contracts at September 30, 2017, was a net liability of $0.2 million. Cumulative unrealized losses, on the portion of floating-to-fixed interest rate swaps designated as cash flow hedges was $0.2 million and is included in accumulated other comprehensive loss. At September 30, 2017, our interest rate swap contracts designated as cash flow hedges were highly effective, in all material respects.
Foreign Currency Exchange Risk
Although we currently conduct business in various countries outside the United States, we are not subject to any material currency risk because our cash flows are collected primarily in U.S. dollars. Reported earnings and assets may be reduced in periods in which the U.S. dollar increases in value relative to those currencies.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that change in value as foreign exchange rates change, such as foreign currency forward contracts or foreign currency options. Any gains and losses on the fair value of derivative contracts would be largely offset by gains and losses on the underlying assets being hedged. We held no foreign currency derivative financial instruments at September 30, 2017.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures, as of September 30, 2017.2021. Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017,2021, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.
38
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Changes in Internal Controls
No change in ourThere were no changes to the Company’s internal controlcontrols over financial reporting (as defined in RulesExchange Act Rule 13a-15(f) and 15d-15(f) under the Exchange Act) occurred) during the fiscal quarter ended September 30, 2017period covered by this report that hashave materially affected, or isare reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
From time to time, we or our subsidiaries may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and determination as to the amount of the accrual required for such contingencies is highly subjective and requires judgments about future events. An adverse result in these or other matters may arise from time to time that may harm our Business. Neither we nor any of our subsidiaries are presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us or our subsidiaries, which may materially affect us.
YouThe following risk factors and the forward-looking statements disclaimer elsewhere herein should be read carefully considerin connection with evaluating our Business and our subsidiaries. These risks and uncertainties could cause actual results and events to differ materially from those anticipated. Many of the risk factors includeddescribed under one heading below may apply to more than one section in which we have grouped them for the purpose of this presentation. As a result, you should consider all of the following factors, together with all of the other information presented herein, in evaluating our Annual ReportBusiness and our subsidiaries and the joint ventures and investments they enter into. These risk factors may be amended, supplemented or superseded from time to time in future filings and reports that we file with the Commission in the future.
Risk Factors Related to the COVID-19 Pandemic
The ongoing COVID-19 pandemic had a negative effect on Form 10-Kthe Company’s Business for the year ended December 31, 2016, in addition2020, which was significant and the adverse impact of COVID-19 could be material to other information included in this Quarterly Report on Form 10-Q, including under the section entitled, “Forward-Looking Statements,”Company’s future operating results, and in other documents we file with the SEC, in evaluating our Company and our Business. If any of theposes risks occur,to our Business, financial condition, liquidity and results of operations and financial position, as well as our investment in Canal 1, the nature and extent of which are highly uncertain, rapidly changing and unpredictable.
The continuing global spread of the coronavirus disease 2019, commonly called “COVID-19,” has created significant worldwide operational volatility, uncertainty and disruption.
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In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. During 2020, the rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. Countries throughout the world have imposed stringent restrictions on social and commercial activity in an effort to slow the spread of the illness. These restrictions vary by location and have had a significant adverse impact upon many sectors, including the media industry in which we operate. The extent of the impact to our Business, viewers, employees, vendors, and our Distributors, advertisers and programming suppliers will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19 and the actions to contain the virus or treat its impact, among others. Any negative effect on these third parties could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environmentimpact us.
The impact of COVID-19 pandemic and new risks emerge from timemeasures to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our Business or the extentprevent its spread have continued to which any factor or combination of factors may impact our Business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our Business financial condition and/in a number of ways. Beginning in March 2020, we have experienced adverse advertising revenue impacts. As a result of the COVID-19 pandemic, television viewing audiences around the globe have increased dramatically and we have experienced an increase in ratings and delivery across our Networks as many people are self-isolating at home. However, as our viewers face layoffs and other negative economic impacts from the COVID-19 pandemic, their disposable income for discretionary purchases and their actual or operating results.
Except as set forth in this Item 1A,perceived wealth may be negatively impacted, potentially having a material and adverse impact on affiliate revenue for our Networks and subscribers for our Pantaya service. Operationally, most non-production and programming personnel are working remotely, and the Company has restricted business travel. We have managed the remote workforce transition effectively and there have not been anyno material changes during the quarter endedadverse impacts on operations through September 30, 2017 from2021. Although there was growth in the risk factors disclosedPuerto Rico television advertising market the second part of the year ended December 31, 2020, the global pandemic has and may continue to have a material and adverse impact on advertising in the near and medium term as expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns.
We have evaluated and continues to evaluate the potential impact of the COVID-19 pandemic on our Annual Report on Form 10-Kconsolidated financial statements, including the impairment of goodwill and indefinite-lived intangible assets and the fair value of equity method investments. For example, the result of our annual impairment test indicated that the carrying amount of the Snap reporting unit exceeded the fair value primarily due to the economic downturn related to the COVID-19 pandemic, the expected timing of recovery, and the expected growth of the business. As a result, for the year ended December 31, 2016.2020, we recorded a goodwill impairment charge of $1.7 million, which was presented as impairment of goodwill and intangibles in our consolidated statements of operations. We also performed a recoverability test for the other finite lived intangible assets of Snap to determine whether an impairment loss should be measured. The undiscounted cash flows in the recoverability test of Snap’s other finite lived intangible assets was less than the carrying value. As a result, for the year ended December 31, 2020, we calculated the fair value of the other finite lived intangible assets using a discounted cash flow model and recorded an impairment charge of $1.1 million to the customer relationships intangible asset, which was presented as impairment of goodwill and intangibles in our consolidated statements of operations. Additionally, at March 31, 2020, given the negative impacts caused by the COVID-19 pandemic and the associated liquidity and going-concern uncertainties related to REMEZCLA, we determined that the investment in REMEZCLA was other-than-temporarily impaired. As a result, we recorded a non-cash impairment charge of $5.5 million reflecting the write-off of the full carrying amount of our investment. This write-off was recorded in impairment of equity method investment in the consolidated statements of operations.
Given the global nature of the COVID-19 pandemic, our investment in Canal 1, which operates in Colombia, has also been negatively impacted. Colombia’s President declared a state of emergency, locking down the country on March 20, 2020. Since then, most restrictions have been lifted allowing services to work at full capacity including schools, retail, and mass transportation, however some limitations are still in place for massive public events and the state of emergency declaration has been extended to November 25, 2021. COVID-19 pandemic has had a material adverse impact on advertising spending, and accordingly, has had a material adverse impact on Canal 1’s advertising revenue. Since the third wave of the pandemic hit Colombia severely in May of 2021, the situation has been progressively improving with positivity rates around 4% through September of 2021. However, it is unclear when advertising spending will return to pre-COVID-19 levels.
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The magnitude of the impact will depend on the duration and extent of the global pandemic, including recent increases in, and any additional waves of, COVID-19 cases, new variants of the virus, and the availability and efficacy of a vaccine and treatments for the disease and the impact of federal, state, local and foreign governmental actions, including measures taken by governmental authorities to address the pandemic, which may precipitate or exacerbate other risks and/or uncertainties, and consumer behavior in response to the pandemic and such governmental actions. Due to the evolving and uncertain nature of this situation, we are not able to estimate the full extent of the negative impact on our operating results and financial position particularly over the near to medium term, including: the severity of the virus; the duration of the pandemic and how long it will take for normal business operations to resume; governmental, business and other actions (which could include travel restrictions and quarantine requirements, limitations on our operations); the promotion of social distancing and the adoption of shelter-in-place orders; the impacts on our supply chain of programming and international border closings preventing immigration to the U.S.; the impact of the pandemic on economic activity; and the health of and the effect on our workforce, particularly when members of our work force are quarantined as a result of exposure. Additionally, some of our employees are working remotely. An extended period of remote work arrangements could introduce operational risks, including but not limited to cybersecurity risks and risks to our internal controls and financial reporting, and impair our ability to manage our Business. Delays in the widespread distribution, or lack of public acceptance, of vaccines could lead people to continue to self-isolate, which could perpetuate the adverse effects of COVID-19 pandemic on economic conditions. Further, even if vaccines are widely distributed and used, there can be no assurance that vaccines will ultimately be successful in limiting or stopping the spread of COVID-19 or mitigating the impact of COVID-19 pandemic on economic conditions.
The negative effect of the pandemic on the Company’s Business for the year ended December 31, 2020 was significant and the adverse impact of COVID-19 pandemic could be material to the Company’s future operating results. The Company believes it has substantial liquidity to satisfy its financial commitments. The ultimate impact of the COVID-19 pandemic, including the extent of any adverse impact on our Business, results of operations and financial condition, remains uncertain.
Risk Factors Related to our Business
Service providers could discontinue or refrain from carrying our Networks, decide not to renew their distribution agreements or renew on less favorable terms, which could substantially reduce the number of viewers and harm our Business and operating results.
Consolidation among cable and satellite operators has given the largest operators considerable leverage in their relationships with programmers, including our Networks. Some of our largest Distributors are combining and have gained, or may gain, market power, which could affect our ability to maximize the value of our content through those platforms. In addition, many of the countries and territories in which we distribute our Networks also have a small number of dominant Distributors. The success of each of our Networks is dependent, in part, on our ability to enter into new carriage agreements and maintain or renew existing agreements or arrangements with Distributors. Although our Networks currently have arrangements or agreements with, and are being carried by, many of the largest Distributors, having such a relationship or agreement with a Distributor does not always ensure that the Distributors will continue to carry our Networks. Additionally, under our Cable Networks’ current contracts and arrangements, we typically offer Distributors the right to transmit the programming services comprising our Cable Networks to their subscribers, but not all such contracts or arrangements require that the programming services comprising our Cable Networks be offered to all subscribers of, or any specific tiers of, or to a specific minimum number of subscribers of a Distributor. Also, WAPA is dependent on its retransmission consent agreements that provide for per subscriber fees with annual rate escalators. No assurances can be provided that WAPA will be able to renegotiate all such agreements on favorable terms, on a timely basis, or at all. A failure to secure a renewal of our Networks’ agreements, or a renewal on less favorable terms may result in a reduction in our Business’s affiliate revenue and advertising revenue, and may have a material adverse effect on our results of operations and financial position.
The success of our Business is dependent upon advertising revenue, which is seasonal and cyclical, and will also fluctuate as a result of a number of other factors, some of which are beyond our control.
The success of our Business is dependent upon our advertising revenues. Our Networks’ ability to sell advertising time and space depends on, among other things:
· | economic conditions in the markets in which our Networks operate; |
· | the popularity of the programming offered by our Networks; |
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· | changes in the population demographics in the markets in which our Networks operate; |
· | advertising price fluctuations, which can be affected by the popularity of programming, the availability of programming, and the relative supply of and demand for commercial advertising; |
· | our competitors’ activities, including increased competition from other advertising-based mediums, particularly MVPD operators, digital platforms, and the internet; |
· | decisions by advertisers to withdraw or delay planned advertising expenditures for any reason; |
· | labor disputes or other disruptions at major advertisers; |
· | changes in audience ratings, including Nielsen’s ability to provide ratings; and |
· | other factors beyond our control. |
Audience ratings may be impacted by a number of factors outside of our control, including a decline in viewership, changes in ratings technology or methodology or changes in household sampling. For example, as a result of the impact of Hurricanes Irma and Maria, Nielsen suspended reporting of ratings data in Puerto Rico in September 2017 through May 1, 2018. Any decline in audience ratings could cause revenue to decline, adversely impacting our Business and our operating results. Our advertising revenue and results are also subject to seasonal and cyclical fluctuations that we expect to continue. Seasonal fluctuations typically result in higher operating income in the fourth quarter than in the first, second, and third quarters of each year. This seasonality is primarily attributable to advertisers’ increased expenditures in anticipation of the holiday season spending. In addition, we typically experience an increase in revenue every four years as a result of advertising sales in respect of local government elections in Puerto Rico. The year ended December 31, 2020 was a political election year in Puerto Rico. The next political election year will occur in 2024. As a result of the seasonality and cyclicality of our revenue, and the historically significant increase in our revenue during election years, investors are cautioned that it has been, and is expected to remain, difficult to engage in period-over-period comparisons of our revenue and results of operations.
If our Networks’ viewership declines for any reason, or our audience ratings decline for any reason or our Networks fail to develop and distribute popular programs, our advertising and subscriber fee revenues could decrease.
Our Networks’ viewership and audience ratings, as applicable, are critical factors affecting both (i) the advertising revenue that we receive, and (ii) the extent of affiliate revenue we receive, as applicable, under agreements with our Distributors. Our ratings are dependent, in part, on our ability to consistently create and acquire programming that meets the changing preferences of viewers in general and viewers in our Networks’ target demographic category.
Our Networks’ viewership is also affected by the quality and acceptance of competing programs and other content offered by other networks, the availability of alternative forms of entertainment and leisure time activities, including general economic conditions, piracy, digital and on-demand distribution and growing competition for consumer discretionary spending. In particular, consumer preference for over-the-top sources for viewing and purchasing content, including through increasing number of companies that offer subscription video on demand (“SVOD”) services has been and may continue adversely affect viewership of our Networks. Audience ratings may be impacted by a number of factors outside of our control, including a decline in viewership through traditional linear distribution model, intensifying audience fragmentation, changes in ratings technology or methodology or changes in household sampling. Any decline in our Networks’ viewership or audience ratings could cause advertising revenue to decline, subscription revenues to fall, and adversely impact our Business and operating results.
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Our Networks may not be able to grow their subscribers and/or affiliate revenue, or such subscribers and/or revenues may decline and, as a result, our revenues and profitability may not increase and could decrease.
The growth of our Networks’ subscriber base depends upon many factors, such as overall growth in cable, satellite and telco subscribers, competition from streaming services, the popularity of our Networks’ programming, our ability to negotiate new carriage agreements, or amendments to, or renewals of, current carriage agreements, maintenance of existing distribution, and the success of our marketing efforts in driving consumer demand for their content, as well as other factors that are beyond our control, including temporary and permanent migration shifts in Puerto Rico.
A major component of our financial growth strategy is based on our ability to increase our Cable Networks’ subscriber base. If our Cable Networks’ programming services are required by the FCC to be offered on an “à la carte” basis, our Cable Networks could experience higher costs, reduced distribution of our program service, perhaps significantly, and lose viewers. There can be no assurance that we will be able to maintain or increase our Cable Networks’ subscriber base on cable, satellite and telco systems or that our current carriage will not decrease as a result of a number of factors or that we will be able to maintain or increase our Cable Networks’ current subscriber fee rates.
In particular, negotiations for new carriage agreements, or amendments to, or renewals of, current carriage agreements, are lengthy and complex, and our Networks are not able to predict with any accuracy when such increases in our subscriber bases may occur, if at all, or if we can maintain or increase our current affiliate fees, as applicable. If our Networks are unable to grow our subscriber bases or if we reduce our affiliate fees, as applicable, our revenues may not increase and could decrease.
Demand for our programming and our Business, financial condition and results of operations are affected by changes that impact Hispanics living in the United States.
We believe one of our growth drivers will result from projected increases in the U.S. Hispanic population and projected increases in their buying power. Factors that impact the U.S. Hispanic population, including a slowdown in immigration into the U.S. in the future, the impact of federal and state immigration legislation and policies on both the U.S. Hispanic population and persons emigrating from Latin America could affect the growth of the U.S. Hispanic population and, as a result, the demand for our programming. Immigration reform has been a continued area of focus for the last and current U.S. presidential administration, as highlighted in the Presidential election in 2020. Although the details and timing of potential changes to immigration law are difficult to predict, restrictions on travel and eligibility for U.S. visa programs may lead to a slowdown of projected immigration levels in the U.S. Hispanic population. Furthermore, U.S. Hispanics might have chosen not to participate in the census, which would result in the U.S. Hispanic population to be underreported. If the U.S. Hispanic population grows more slowly than anticipated, the projected buying power of the U.S. Hispanic population may not grow as anticipated. In addition, economic conditions, such as unemployment, that disproportionately impact the U.S. Hispanic population could slow the growth of, or reduce, the projected buying power of U.S. Hispanics. If the U.S. Hispanic population or its buying power grows more slowly than anticipated, it could have a material adverse effect on our Business, financial condition and results of operations.
In addition, in the U.S. we exclusively target our Hispanic audience through Spanish-language programming. As U.S. Hispanics become bilingual or English-dominant, demand for our Spanish-language programming could be adversely impacted by competing English-language programming, including programming primarily in English-language targeting the bilingual or English-dominant U.S. Hispanic population. In addition, a shift in policy towards encouraging English-language fluency among U.S. Hispanic immigrants could also impact demand for Spanish-language programming. If we are unable to create more programming and networks targeted to this audience, we may lose audience share to competing English-language or bilingual programming which could lead to lower ratings and consequently, lower advertising revenues, which could have a material adverse effect on our Business, financial condition and results of operations.
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If our efforts to attract and retain subscribers to our Pantaya platform are not successful, our Business will be adversely affected.
Pantaya’s future success is subject to inherent uncertainty. The video streaming market is intensely competitive and our ability to attract and retain subscribers to our pay streaming service as well as the subscription revenue they enable us to generate, will depend on our ability to consistently provide appealing and differentiated content, effectively market our service and provide a quality experience for selecting and viewing that content. Furthermore, the relative service levels, content offerings, promotions and pricing, and related features of competitors to Pantaya may adversely impact our ability to attract and retain subscribers. If consumers do not perceive our offerings to be of value, including if we introduce new or adjust existing features, adjust pricing or offerings, terminate or modify promotional or trial period offerings, experience technical issues, or change the mix of content in a manner that is not favorably received by them, we may not be able to attract and retain subscribers. In addition, many subscribers to these types of offerings originate from word-of-mouth advertising from then existing subscribers. If our efforts to satisfy subscribers are not successful, including because we terminate or modify promotional or trial-period offerings or because of technical issues with the platform, we may not be able to attract or retain subscribers, and as a result, our ability to maintain and/or grow our business will be adversely affected.
Subscribers may cancel our service for many reasons, including a perception that they do not use the service sufficiently, the need to cut household expenses, our content is unsatisfactory, competitive services provide a better value or experience and customer service issues are not satisfactorily resolved. We must continually add new subscribers both to replace canceled subscriptions and to grow our business beyond our current subscription base.
Pantaya has numerous competitors who offer SVOD services, including Netflix, Discovery, Viacom, Disney, Amazon and AT&T. Additionally, Univision has announced that they are launching their own streaming service in 2022. Some of these competitors have long operating histories, large customer bases, strong brand recognition, exclusive rights to certain content and significant financial, marketing and other resources. They may secure better terms from suppliers, adopt more aggressive pricing and devote more resources to product development, technology, infrastructure, content acquisitions and marketing. New entrants may enter the market or existing providers may adjust their services with unique offerings or approaches to providing entertainment video. Companies also may enter into business combinations or alliances that strengthen their competitive positions. We also compete with providers of advertising-based video on demand, which offer consumers free content in exchange for viewing advertisements. If we are unable to successfully or profitably compete with current and new competitors, our Business will be adversely affected, and we may not be able to increase or maintain market share, revenues or profitability.
If studios, content providers or other rights holders refuse to license streaming content or other rights upon terms acceptable to us, our Pantaya service could be adversely affected.
Although we produce a substantial portion of the content available on Pantaya, some of the content that we offer to Pantaya subscribers is sourced from third parties, including studios, content providers and other rights holders. The license periods and the terms and conditions of such licenses vary. As content providers develop their own video streaming services, they may be unwilling to provide us with access to certain content, including popular series or movies. If the studios, content providers and other rights holders are not or are no longer willing or able to license us content upon terms acceptable to us, our ability to stream content to our subscribers may be adversely affected and/or our costs could increase. As competition increases, we may or are likely to see the cost of certain programming increase. As we seek to differentiate our service, we are often focused on securing certain exclusive rights when obtaining content. We are also focused on programming an overall mix of content that delights our subscribers in a cost efficient manner. If we do not maintain a compelling mix of content, our subscriber acquisition and retention may be adversely affected.
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The television markets in which our Networks operate is highly competitive, and we may not be able to compete effectively, particularly against competitors with greater financial resources, brand recognition, marketplace presence and relationships with service providers.
Our Networks compete with other television channels for the distribution of their programming, development and acquisition of content, audience viewership and advertising sales. With respect to audiences, television stations compete primarily based on program popularity. We cannot provide any assurances as to the acceptability by audiences of any of the programs our Networks broadcast. Further, because our Networks compete for the rights to produce or license certain programming, we cannot provide any assurances that we will be able to produce or obtain any desired programming at costs that we believe are reasonable. Our inability or failure to broadcast popular programs on our Networks, or otherwise maintain viewership for any reason, including as a result of significant increases in programming alternatives and the failure to compete with new technological innovations could result in a lack of advertisers, or a reduction in the amount advertisers are willing to pay us to advertise, which could have a material adverse effect on our Business, financial condition, and results of operations.
Our Networks compete with other Spanish-language broadcast and cable television networks, and digital media companies for the acquisition of programming, viewership, the sale of advertising, and creative talent. Our Networks also compete for the development and acquisition of programming, selling of commercial time on our Networks and on-air and creative talent. It is possible that our competitors, many of which have substantially greater financial and operational resources than our Networks, could revise their programming to offer more competitive programming which is of interest to our Networks’ viewers.
Additionally, our Cable Networks compete with other television channels to be included in the offerings of each video service provider and for placement in the packaged offerings having the most subscribers. For example, our Cable Networks’ ability to secure distribution is dependent upon the production, acquisition and packaging of programming, audience viewership, and the prices charged for carriage. Our Cable Networks’ contractual agreements with Distributors are renewed or renegotiated from time to time in the ordinary course of business. With respect to WAPA, OTT and cable network programming, combined with increased access to cable and satellite TV, has become a significant competitor for broadcast television programming viewers.
Our Networks also compete for advertising revenue with general-interest television and other forms of media, including magazines, newspapers, radio and digital media. Our ability to secure additional advertising accounts relating to our Networks’ operations depends upon the size of each Networks’ audience, the popularity of our programming and the demographics of our viewers, as well as strategies taken by our Networks’ competitors, strategies taken by advertisers and the relative bargaining power of advertisers. Competition for advertising accounts and related advertising expenditures is intense. We face competition for such advertising expenditures from a variety of sources, including other networks and other media. We cannot provide assurance that our Networks’ advertising sponsors will pay advertising rates for commercial air time at levels sufficient for us to make a profit, that we will maintain relationships with our current advertising sponsors or that we will be able to attract new advertising sponsors or increase advertising revenues. Changes in ratings technology, or methodology or metrics used by advertisers or other changes in advertisers’ media buying strategies also could have a material adverse effect on our financial condition and results of operations. If we are unable to attract advertising accounts in sufficient quantities, our revenues and profitability may be harmed.
Certain technological advances, including the increased deployment of fiber optic cable, are expected to allow cable and telecommunication video service providers to continue to expand both their channel and broadband distribution capacities and to increase transmission speeds. In addition, the ability to deliver content via new methods and devices is expected to increase substantially. The impact of such added capacities is hard to predict, but the development of new methods of content distribution could dilute our Networks’ market share and lead to increased competition for viewers by facilitating the emergence of additional channels and mobile and internet platforms through which viewers could view programming that is similar to that offered by our Networks.
If any of our existing competitors or new competitors, many of which have substantially greater financial and operational resources than our Networks, significantly expand their operations or their market penetration, our Business could be harmed. If any of these competitors were able to invent improved technology, or our Networks were not able to prevent them from obtaining and using their own proprietary technology and trade secrets, our Business and operating results, as well as our Networks’ future growth prospects, could be negatively affected. There can be no assurance that our Networks will be able to compete successfully in the future against existing or new competitors, or that increasing competition will not have a material adverse effect on our Business, financial condition or results of operations.
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We rely upon a number of partners to make our service available on their devices.
Pantaya offers its subscribers the ability to receive streaming content through a host of internet-connected devices, including TVs, digital video players, television set-top boxes, and mobile devices, as well as through third party services, such as Apple TV, Amazon, Google and ROKU. The third party service providers may increase the distribution fees that they charge us for each subscriber, which would adversely affect our revenue. In addition, the devices are manufactured and sold by entities other than Pantaya, and third party services are provided by entities other than Pantaya, and while these entities should be responsible for the devices’ and services’ performance, the connection between these devices and services and Pantaya may nonetheless result in consumer dissatisfaction toward Pantaya and such dissatisfaction could result in claims against us or otherwise adversely impact our Business. In addition, technology changes to our streaming functionality may require that partners update their devices or services, or may lead to us to stop supporting the delivery of our service on certain devices. If partners do not update or otherwise modify their devices, or if we discontinue support for certain devices, our service and our subscribers’ use and enjoyment could be negatively impacted.
We have agreements with various cable and satellite and telecommunications operators to make our service available through the television set-top boxes of these service providers or through internet delivery, some of whom may have investments in competing streaming content providers. In many instances, our agreements also include provisions by which the partner bills consumers directly for the Pantaya service or otherwise offers services or products in connection with offering our service. We intend to continue to broaden our relationships with existing partners and to increase our capability to stream our content to other platforms and partners over time. If we are not successful in maintaining existing and creating new relationships, or if we encounter technological, content licensing, regulatory, business or other impediments to deliver our streaming content to our subscribers via these devices, our ability to retain subscribers and grow our business could be adversely impacted. Our Business could be adversely affected if, upon expiration of agreements with our partners, a number of our partners do not continue to provide access to our service or are unwilling to do so on terms acceptable to us, which terms may include the degree of accessibility and prominence of our service.
Interpretation of certain terms of our distribution agreements may have an adverse effect on the distribution payments we receive under those agreements.
Many of our distribution agreements contain “most favored nation” clauses. These clauses typically provide that if we enter into an agreement with another Distributor which contains certain more favorable terms, we must offer some of those terms to our existing Distributors. While we believe that we have appropriately complied with the most favored nation clauses included in our distribution agreements, these agreements are complex and other parties could reach a different conclusion that, if correct, could have a material adverse effect on our results of operations and financial position.
Our results may be adversely affected if long-term programming contracts are not renewed on sufficiently favorable terms.
Our Networks enter into long-term contracts for acquisition of programming, including movies, television series, sporting rights and other programs. As these contracts expire, our Networks must renew or renegotiate these contracts, and if our Networks are unable to renew them on acceptable terms, we may lose programming rights. Even if these contracts are renewed, the cost of obtaining programming rights may increase (or increase at faster rates than our historical experience) or the revenue from distribution of programs may be reduced (or increase at slower rates than our historical experience). With respect to the acquisition of programming rights, the impact of these long-term contracts on our results over the term of the contracts depends on a number of factors, including effectiveness of marketing efforts, the size of audiences and the strength of advertising markets. There can be no assurance that revenues from programming based on these rights will exceed the cost of the rights plus the other costs of distributing the programming.
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There has been a shift in consumer behavior as a result of technological innovations and changes in the distribution of content, which may affect our viewership and the profitability of our Business in unpredictable ways. Our Networks’ failure to acquire or maintain state-of-the-art technology or adapt our business models may harm our Business and competitive advantage.
Technology in the video, telecommunications and data services industry is changing rapidly. Consumer behavior related to changes in content distribution and technological innovation affect our economic model and viewership in ways that are not entirely predictable. Consumers are increasingly viewing streaming content from subscription, advertising and free video on demand services, on a time-delayed or on-demand basis from traditional distributors, and from connected apps and websites and on a wide variety of screens, such as televisions, tablets, mobile phones and other devices. Additionally, devices that allow users to view television programs on a time-shifted basis and technologies that enable users to fast-forward or skip programming, including commercials, such as DVRs and portable digital devices and systems that enable users to store or make portable copies of content may affect the attractiveness of our offerings to advertisers and could therefore adversely affect our revenues. There is increased demand for short-form, user-generated and interactive content, which have different economic models than our traditional content offerings. Digital downloads, rights lockers, rentals and subscription services are competing for consumer preferences with each other and with traditional physical distribution of our content. Each distribution model has different risks and economic consequences for us, so the rapid evolution of consumer preferences may have an economic impact that is not completely predictable. Distribution windows are also evolving, potentially affecting revenues from other windows. We may be required to incur substantial capital expenditures to implement new technologies, or, if we fail to do so, may face significant new challenges due to technological advances adopted by competitors, which in turn could result in harm to our Business and operating results. Additionally, the development of new methods of content distribution could dilute our Networks’ market share and lead to increased competition for viewers. If we cannot ensure that our distribution methods and content are responsive to our target audiences, our Business could be adversely affected.
Certain digital video recording technologies offered by cable and satellite systems allow viewers to digitally record, store and play back television programming at a later time and may impact our advertising revenue. Most of these technologies permit viewers to fast forward through advertisements; or, in certain cases, skip them entirely. The use of these technologies may decrease viewership of commercials as recorded by media measurement services such as Nielsen and, as a result, lower the advertising revenues of our television stations. The current ratings provided by Nielsen for use by linear content providers are limited to live viewing plus viewing of a digitally recorded program in the same week as the original air date and give broadcasters no credit for delayed viewing that occurs after the same week as the original air date. The effects of new ratings system technologies including people meters and set-top boxes, and the ability of such technologies to be a reliable standard that can be used by advertisers is currently unknown.
We face cybersecurity and similar risks, which could result in the disclosure of confidential information, disruption of our programming services, damage to our brands and reputation, legal exposure and financial losses.
We and our partners rely on various technology systems, including those used in connection with the production, distribution and broadcast of our programming, and our online, mobile and app offerings, the Pantaya streaming services, as well as our internal systems which store proprietary information, are susceptible to security breaches, operational data loss, general disruptions in functionality, and may not be compatible with new technology. These risks have been exacerbated by the COVID-19 pandemic as some of our employees are working remotely. We depend on our and our service providers’ information technology systems for the effectiveness of our operations, for streaming Pantaya’s content and to interface with our Networks’ customers, as well as to maintain financial records and accuracy. Any theft or misuse of confidential, personally identifiable or proprietary information could disrupt our Business and result in, among other things, unfavorable publicity, damage to our reputation, loss of competitive information, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of such information, as well as fines and other sanctions resulting from any related breaches of data privacy regulations, any of which could have a material adverse effect on our Business, profitability and financial condition. Interruptions in our operations and services or disruptions to the functionality provided by our Networks and Pantaya could adversely impact our revenues or cause customers to cease doing business with us. In addition, our Business would be harmed if any of the events of this nature caused our customers and potential customers to believe our services are unreliable. Our operations are dependent upon our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations.
Although we have systems in place to monitor our security measures, disruption or failures of our, our subsidiaries’ or our service providers’ information technology systems, due to employee error, computer malware, viruses, hacking and phishing attacks, or otherwise, could impair our ability to effectively and timely provide services and products and maintain our financial records.
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Additionally, outside parties may attempt to fraudulently induce employees or users to disclose sensitive or confidential information in order to gain access to data. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any such breach or unauthorized access could result in a loss of our proprietary information, which may include user data, a disruption of our services or a reduction of the revenues we are able to generate from such services, damage to our brands and reputation, a loss of confidence in the security of our offerings and services, and significant legal and financial exposure, each of which could potentially have a material adverse effect on our Business.
Cable, satellite and telco television programming signals have been stolen or could be stolen in the future, which reduces our potential revenue from subscriber fees and advertising.
The delivery of subscription programming requires the use of conditional access technology to limit access to programming to only those who subscribe to programming and are authorized to view it. Conditional access systems use, among other things, encryption technology to protect the transmitted signal from unauthorized access. It is illegal to create, sell or otherwise distribute software or devices to circumvent conditional access technologies. However, theft of programming has been widely reported, and the access or “smart” cards used in service providers’ conditional access systems have been compromised and could be further compromised in the future. When conditional access systems are compromised, our Networks do not receive the potential subscriber fee revenues from the service providers. Further, measures that could be taken by service providers to limit such theft are not under our control. While we take proactive steps to combat piracy through the encryption of our signal and other measures, there can be no assurances that these or other steps are effective. Piracy of our Networks’ copyrighted materials could reduce our revenue and negatively affect our Business and operating results.
We face risks, such as unforeseen costs and potential liability in connection with content we acquire, produce, license and/or distribute through our Business.
As a producer and distributor of content, we face potential liability for negligence, copyright and trademark infringement, or other claims based on the nature and content of materials that we acquire, produce, license and/or distribute. We also may face potential liability for content used in promoting our service, including marketing materials. We are devoting more resources toward the development, production, marketing and distribution of original programming. To the extent our original programming does not meet our expectations, in particular, in terms of costs, viewing and popularity, our Business, including our brand and results of operations may be adversely impacted. As we expand our original programming, we have become responsible for production costs and other expenses. We also take on risks associated with production, such as completion and key talent risk. We contract with third parties related to the development, production, marketing and distribution of our original programming. We may face potential liability or may suffer losses in connection with these arrangements, including but not limited to if such third parties violate applicable law, become insolvent or engage in fraudulent behavior. To the extent we create and sell physical or digital merchandise relating to our original programming, and/or license such rights to third parties, we could become subject to product liability, intellectual property or other claims related to such merchandise. We may decide to remove content from our service, not to place licensed or produced content on our service or discontinue or alter production of original content if we believe such content might not be well received by our viewers, or could be damaging to our brand or Business. To the extent we do not accurately anticipate costs or mitigate risks, including for content that we obtain but ultimately does not appear on or is removed from our service, or if we become liable for content we acquire, produce, license and/or distribute, our Business may suffer. Litigation to defend these claims could be costly and the expenses and damages arising from any liability or unforeseen production risks could harm our results of operations. We may not be indemnified against claims or costs of these types and we may not have insurance coverage for these types of claims.
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We have operations, properties and viewers that are located in Puerto Rico and Florida and could be adversely affected in the event of a hurricane or other extreme weather conditions.
WAPA’s corporate office and production facilities are located in Puerto Rico, where major hurricanes have occurred, as well as other extreme weather conditions, such as earthquakes, tornadoes, floods, fires, unusually heavy or prolonged rain, droughts and heat waves. Additionally, our corporate office and certain of our operations provided by our service providers are located in Miami, Florida, where similar weather conditions have occurred, including major hurricanes. Depending on where any particular hurricane, earthquake or other weather event makes landfall, our properties or those of our service providers could experience significant damage. Such event could have an adverse effect on our ability to broadcast our programming or produce new shows, which could have an adverse effect on our Business and results of operations. Additionally, many of WAPA’s regular viewers may be left without power and unable to view our programming which could have an adverse effect on our Business and results of operations.
Recently,In recent years, Puerto Rico has been affected by natural disasters, including earthquakes in early 2020 and Hurricanes Irma and Maria in 2017. As a result, business may be reluctant to establish or expand their operations in Puerto Rico and/or reduce spending on advertising. Such extreme weather conditions can also have impacts on our operations and properties. For example, Hurricanes Irma and Maria caused substantial damage to property and infrastructure in Puerto Rico, including limited damage to our studios and offices and to two of our three transmission towers and significant damage beyond repair to the third of our transmission towers. While WAPA-TV is not currently operating from its FCC-licensed facilities, we have modified the WAPA-TV facilities to broadcast over-the-air, and have received authorization from the FCC to construct modified facilities for WAPA-TV at a new transmitter site. WAPA-TV is operating from the new site with interim facilities until construction of the permanent facilities is completed. The hurricanes destroyed residential and commercial buildings, agriculture, communications networks and most of Puerto Rico’s electric grid. Although we expect that insurance will cover most of the replacement costs, we are still estimating the impact of property damage. Beyond physical damage, the extraordinary situation in Puerto Rico will adversely affect WAPA’s businessThere can be no assurances in the coming months.future that we have adequate insurance coverage to mitigate future losses from such extreme weather conditions. Following the hurricanes, there was a steep drop off in advertising revenue in Puerto Rico. WeThere was also expect that there will be a significant impact on retransmission and subscriber feeaffiliate revenue in Puerto Rico for the fourth quarter. Generally, for both advertisingyear ended December 31, 2017 and retransmission and subscriber fee revenues in Puerto Rico, we do not expect significant improvement until power is more widely restored. While we anticipate that a portion of the adversecontinued impact to the operations of our business will be mitigated through business interruption insurance, it will likely not offset the full extent of the revenue loss. Furthermore, there can be no assurances of the timing and amount of proceeds we may recover under our insurance policies.advertising market in 2018. Finally, as a result of the hurricanes and earthquakes, a significant number of citizens have left, or may leave, Puerto Rico, and there can be no assurance about when they will return, if at all. As a result, the disruption from the storms and earthquakes, coupled with the uncertainty regarding the timing of the recovery and possible declines in television households, could have a material adverse effect on our results of operations and financial position.
Puerto Rico’s continuing economic hardships may have a negative effect on the overall performance of our Business, financial condition and results of operations.
Financial and economic conditions in Puerto Rico have deteriorated in recent years and continue to be uncertain. The continuation or worsening of such conditions could have an adverse effect on our Business, results of operations, and/or financial condition.
The Puerto Rican economy has been and continues to be in a recession since 2006, and has been burdened by limited economic activity, lower-than-estimated revenue collections, high government debt levels relative to the size of the economy and other potential fiscal challenges. On June 30, 2016, President Obama signed HR 5278 Bill, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which, among other things, established a seven-member Federal Oversight and Management Board of Puerto Rico (the “Planning Board”) with broad powers over the finances of the Commonwealth and its instrumentalities and provides to the Commonwealth, its public corporations and municipalities, broad-based restructuring authority, including through a bankruptcy-type process similar to that of Chapter 9 of the U.S. Bankruptcy Code. The Commonwealth’s inability to access financing in the capital markets or from private lenders, has resulted in the Commonwealth and various public corporations defaulting on their public debt and entering into bankruptcy proceedings under PROMESA.
Moreover, Hurricane Maria caused a significant disruption to the island’s economic activity and GNP. Hurricane Maria also accelerated the outmigration trends that Puerto Rico was experiencing, with increased numbers of residents moving to the mainland United States, either on a temporary or permanent basis and recent earthquakes and the COVID-19 pandemic may trigger further outflows in 2020.
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Puerto Rico’s gross national product (GNP) has contracted in real terms every year between fiscal year 2007 and fiscal year 2018. The Planning Board estimates real GNP increased approximately 1.5% in fiscal year 2019 due to the influx of federal funds and private insurance payments to repair damage caused by Hurricanes Irma and María, and that it decreased approximately 5.4% in fiscal year 2020 due primarily to the adverse impact of the COVID-19 pandemic and the measures taken by the government in response to the same. The Planning Board projected that the negative effects of COVID-19 would continue through fiscal year 2021, resulting in a contraction in real GNP of approximately -2% in the current fiscal year. Additionally, Puerto Rico’s track record of poor budget controls and high poverty levels compared to the U.S. average presents ongoing challenges.
On January 7, 2020, a 6.4 magnitude earthquake impacted the southwestern part of Puerto Rico, which caused island-wide power outages and significant damage to infrastructure and property in the southwest region of the island. The Commonwealth’s government estimates total earthquake-related damages at approximately $1 billion. In March 2020, the World Health Organization declared COVID-19 a pandemic. On March 15, 2020, the Puerto Rico Governor issued an executive order declaring a health emergency, ordering residents to shelter in place, implementing a mandatory curfew, and requiring the closure of all businesses, except for businesses that provide essential services, including banking and financial institutions with respect to certain services. While many of the restrictions have been gradually lifted, a mandatory curfew is still in effect and most businesses have had to make significant adjustments to protect customers and employees, including transitioning to telework and suspending or modifying certain operations in compliance with health and safety guidelines.
Stimulus packages passed by Congress managed to contain some of the damage caused by the pandemic and saved many businesses from bankruptcy. The CARES act established the PUA (Pandemic Unemployment Assistance) and PPP (Pandemic Payroll Protection) programs. More than $16 billion in federal funds were assigned to the island. Combined with funds received due to damages from Irma and María, the past 4 years have seen more than $76 billion in federal funds assigned to the island, out of which approximately 43% have been disbursed. The extent and duration of such aid is inherently uncertain. Furthermore, there can be no assurance that any past or new actions taken by any governmental or regulatory body for the purpose of stabilizing the economy or financial markets will achieve their intended effect.
The extent to which the COVID-19 pandemic will continue to have an adverse effect on economic activity in Puerto Rico in the long-term will depend on future developments, which are highly uncertain and is difficult to predict, including the scope and duration of the pandemic, the restrictions imposed by governmental authorities and other third parties in response to the pandemic and the amount of federal and local assistance offered to offset the impact of the pandemic. However, there can be no assurance that measures taken by governmental authorities will be sufficient to offset the pandemic’s economic impact.
In addition to any negative direct consequences to our Business or results of operations arising from these financial, economic, pandemic and climate developments, some of these actions may adversely affect our distribution partners, advertisers or other consumers on whom we rely. Our Business and results of operations could be negatively affected as of result.
Certain of our Cable Network, Snap and the Canal 1 joint venture have international operations and exposures that incur certain risks not found in doing business in the United States.
Doing business in foreign countries carries with it certain risks that are not found in doing business in the United States. The risks of doing business in foreign countries that could result in losses against which our Cable Networks are not insured include:
· | exposure to local economic conditions; |
· | potential adverse changes in the diplomatic relations of foreign countries with the United States; |
· | hostility from local populations; |
· | significant fluctuations in foreign currency value; |
· | the adverse effect of currency exchange controls or other restrictions; |
· | restrictions on the withdrawal of foreign investment and earnings; |
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· | the transition away from the London Inter-bank Offered Rate (“LIBOR”); |
· | government policies against businesses owned by foreigners; |
· | investment restrictions or requirements; |
· | expropriations of property; |
· | the potential instability of foreign governments and economies; |
· | the risk of insurrections; |
· | difficulties in collecting revenues and seeking recourse against third parties owing payments to us; |
· | withholding and other taxes on remittances and other payments by subsidiaries; |
· | changes in taxation structure; and |
· | shifting consumer preferences regarding the viewing of video programming. |
For example, Canal 1 operates solely in Colombia. Although Colombia has a long-standing tradition respecting the rule of law, which has been bolstered in recent years by the present and former government’s policies and programs, no assurances can be given that our joint venture’s plans and operations will not be adversely affected by future developments in Colombia. Canal 1’s operations and activities in Colombia are subject to political, economic and other uncertainties, including the risk of expropriation, nationalization, renegotiation or nullification of existing contracts, broadcast licenses or other agreements, changes in laws or taxation policies, currency exchange restrictions, and changing political conditions and international monetary fluctuations. Future government actions concerning the economy, taxation, or the operation and regulation of national over-the-air broadcast concessions, could have a significant effect on the joint venture. Colombia was home to South America’s largest and longest running insurgency, which ended on December 1, 2016 following the government’s ratification of a peace treaty with the Revolutionary Armed Forces of Colombia (“FARC”). While the situation has improved dramatically in recent years, there can be no guarantee that the situation will not again deteriorate. Any increase in kidnapping, gang warfare, homicide and/or terrorist activity in Colombia generally may disrupt supply chains and discourage qualified individuals from being involved with the joint venture’s operations. Any changes in regulations or shifts in political attitudes are beyond our control and may adversely affect the joint venture’s business.
Furthermore, some foreign markets where we operate may be more adversely affected by current economic conditions than the U.S. For example, in Colombia, decreases in the growth rate, periods of negative growth, increases in inflation, changes in law, regulation, policy, or future, judicial rulings and interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, interest rates, taxation and other political or economic developments in or affecting Colombia may affect the overall business environment and may, in turn, adversely impact our joint venture’s financial condition and results of operations in the future. Colombia’s fiscal deficit and growing public debt could adversely affect the Colombian economy. Snap maintains a minor presence in Argentina, whose economy further contracted in 2020, affected by the COVID-19 pandemic, two years of recession, depreciation of its currency and many other macroeconomic factors.
We also may incur additional expenses as a result of changes, including the imposition of new restrictions, in the existing economic or political environment in the regions where we do business. Acts of terrorism, hostilities, or financial, political, economic or other uncertainties could lead to a reduction in revenue or loss of investment, which could adversely affect our results of operations.
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Our Networks are subject to interruptions of distribution as a result of our reliance on broadcast towers, satellites and Distributors for transmission of its programming. A significant interruption in transmission ability could seriously affect our Business and results of operations, particularly if not fully covered by its insurance.
Our Networks could experience interruptions of distribution or potentially long-term increased costs of delivery if the ability of broadcast towers, satellites or satellite transponders, or Distributors to transmit our Networks’ content is disrupted because of accidents, weather interruptions, governmental regulation, terrorism, or other third party action. For example, see risk factor above, “We have operations, properties and viewers that are located in Puerto Rico and Florida and could be adversely affected in the event of a hurricane or other extreme weather conditions.”
As protection against these hazards, we maintain insurance coverage against some, but not all, such potential losses and liabilities. We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may increase substantially. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. For example, coverage for hurricane damage can be limited, and coverage for terrorism risks can include broad exclusions. If our Networks were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.
The success of much of our Business is dependent upon the retention and performance of on-air talent and program hosts and other key employees.
Our Business depends upon the continued efforts, abilities and expertise of our corporate executive team. There can be no assurance that these individuals will remain with us. Our Business, financial condition and results of operations could be materially adversely affected if we lose any of these persons and are unable to attract and retain qualified replacements. Additionally, our Networks independently contract with several on-air personalities and hosts with significant loyal audiences in their respective markets. Although our Networks have entered into long-term agreements with some of their key on-air talent and program hosts to protect their interests in those relationships, we can give no assurance that all or any of these persons will remain with our Networks or will retain their audiences. Competition for these individuals is intense and many of these individuals are under no legal obligation to remain with our Networks. Our competitors may choose to extend offers to any of these individuals on terms which our Networks may be unable or unwilling to meet. Furthermore, the popularity and audience loyalty of our Networks’ key on-air talent and program hosts is highly sensitive to rapidly changing public tastes. A loss of such popularity or audience loyalty is beyond our control and could limit our Network’ ability to generate revenue and could have a material adverse effect on our Business, financial condition and results of operations.
Changes in how network operators handle and charge for access to data that travel across their networks could adversely impact our Pantaya service.
We rely upon the ability of consumers to access our Pantaya service through the internet. If network operators block, restrict or otherwise impair access to our Pantaya service over their networks, our service and business could be negatively affected. To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our subscriber acquisition and retention could be negatively impacted. Furthermore, to the extent network operators create tiers of internet access service and either charge us for or prohibit us from being available through these tiers, our Business could be negatively impacted.
Most network operators that provide consumers with access to the internet also provide these consumers with multichannel video programming. As such, many network operators have an incentive to use their network infrastructure in a manner adverse to our continued growth and success. While we believe that consumer demand, regulatory oversight and competition will help check these incentives, to the extent that network operators are able to provide preferential treatment to their data as opposed to ours or otherwise implement discriminatory network management practices, our Business could be negatively impacted.
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We are subject to payment processing risk.
Our subscribers pay for our service using a variety of different payment methods, including credit and debit cards, gift cards, prepaid cards, direct debit, online wallets, direct carrier and partner billing. We rely on third parties to process payment. Acceptance and processing of these payment methods are subject to certain rules and regulations, including additional authentication requirements for certain payment methods, and require payment of interchange and other fees. To the extent there are increases in payment processing fees, material changes in the payment ecosystem, such as large re-issuances of payment cards, delays in receiving payments from payment processors, changes to rules or regulations concerning payments, loss of payment partners and/or disruptions or failures in partner systems or payment products, including products we use to update payment information, our revenue, operating expenses and results of operation could be adversely impacted. For example, to extent that our subscribers’ credit and debit cards expire and we are unable to secure updated payment information within the applicable grace period due to delays or disruptions in our partner systems or otherwise, the subscription to our services expires, which leads to the loss of the subscriber. In certain instances, we leverage third parties to bill subscribers on our behalf. If these third parties become unwilling or unable to continue processing payments on our behalf, we would have to transition subscribers or otherwise find alternative methods of collecting payments, which could adversely impact subscriber acquisition and retention. The termination of our ability to process payments on any major payment method would significantly impair our ability to operate our Business.
We could be adversely affected by strikes or other union job actions.
A majority of our employees in Puerto Rico are highly specialized union members who are essential to the production of television programs and news. These employees are covered by our CBAs. Our main CBA expires on May 31, 2022 and covers all of our unionized employees except for two employees covered by the other CBA which expired on June 27, 2019 and we continue to operate under the terms of the expired CBA while we continue to engage in active and good faith negotiations on its renewal. While we believe that we will maintain good working relations with our employees on acceptable terms, there can be no assurance that we will be able to negotiate the terms of the expired CBA in a manner acceptable to either party. A strike by, or a lockout of, UPAGRA, which provides personnel essential to the production of television programs, could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of time, could cause a delay or interruption in the programming schedule of certain of our Networks, which could have a material adverse effect on our Business, financial condition and results of operations.
We could become obligated to pay additional contributions due to the unfunded vested benefits of a multiemployer pension plan. A future incurrence of withdrawal liability could have a material effect on our results of operations.
WAPA makes contributions to the Newspaper Guild International Pension Plan (the “Plan” or “TNGIPP”), a multiemployer pension plan with a plan year end of December 31 that provides defined benefits to certain employees covered by our two CBAs. WAPA’s contribution rates to the Plan are generally determined in accordance with the provisions of the CBAs and a rehabilitation plan that was adopted by the TNGIPP.
The risks in participating in such a plan are different from the risks of single-employer plans, in the following respects:
· | Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of any other participating employer. |
· | If a participating employer ceases to contribute to a multiemployer plan, the unfunded obligation of the plan allocable to such withdrawing employer may be borne by the remaining participating employers. |
WAPA has received Annual Funding Notices, Report of Summary Plan Information, Critical Status Notices (“Notices”) and the above-noted Rehabilitation Plan, as defined by the Pension Protection Act of 2006 (“PPA”), from the Plan. The Notices indicate that the Plan actuary has certified that the Plan is in critical and declining status, the “Red Zone”, as defined by the PPA and the Multiemployer Pension Reform Act of 2014 (“MPRA”), due to the projected insolvency of the Plan within the next 19 years. A plan of rehabilitation (“Rehabilitation Plan”) was adopted by the Trustees of the Plan (“Trustees”) on May 1, 2010 and then updated on November 17, 2015.
On May 29, 2010, the Trustees sent WAPA a Notice of Reduction and Adjustment of Benefits Due to Critical Status explaining all changes adopted under the Rehabilitation Plan, including the reduction or elimination of benefits referred to as “adjustable
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benefits.” In connection with the adoption of the Rehabilitation Plan, most of the Plan participating unions and contributing employers (including the Newspaper Guild International and WAPA), agreed to one of the “schedules” of changes as set forth under the Rehabilitation Plan. In 2015, the Plan’s Trustee’s reviewed the Rehabilitation Plan and the financial projections under the Plan and determined that is was not prudent to continue benefit accruals under the current Plan and that implementation of an updated plan with a new benefit design would be in the best interest of the Plan’s participants.
WAPA elected the “Preferred Schedule” and executed a Memorandum of Agreement, effective May 27, 2010 (the “MOA”) and agreed to the following contribution rate increases: 3.0% beginning on January 1, 2013; an additional 3.0% beginning on January 1, 2014; and an additional 3% beginning on January 1, 2015. On July 14, 2017 WAPA executed an updated MOA under which it agreed to remain a contributing employer to the Plan through May 31, 2022 and to make contributions to the Plan at a fixed rate of $18.03 per week for each WAPA covered employee during such period (i.e., its contributions per employee will not increase during the term of its CBA or through any period during which a new CBA is entered into, if any).
The future cost of the Plan depends on a number of factors, including the funding status of the Plan and the ability of other participating companies to meet ongoing funding obligations. Assets contributed to the Plan are not segregated or otherwise restricted to provide benefits only to the employees of WAPA. While WAPA’s pension cost for the Plan is established by the CBA and is fixed for the term of the CBA, the Plan may revise the Rehabilitation Plan to impose additional increased contribution rates and surcharges that could be applicable to future CBAs based on the funded status of the plan and in accordance with the provisions of the Rehabilitation Plan and the PPA. Factors that could impact the funded status of the Plan include investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions.
The contributions required under the terms of the CBA and the effect of the Rehabilitation Plan as described above are not anticipated to have a material effect on our results of operations. However, in the event other contributing employers are unable to, or fail to, meet their ongoing funding obligations, the financial impact on WAPA to make future contributions towards any plan underfunding may be material. In addition, if a United States multiemployer defined benefit plan fails to satisfy certain minimum funding requirements, the Internal Revenue Service may impose a nondeductible excise tax of 5% on the amount of the accumulated funding deficiency for those employers contributing to the fund.
If WAPA completely or partially withdrew from the Plan, it would be obligated to pay complete or partial withdrawal liability (which could be material). Under the statutory requirements applicable to withdrawal liability with respect to a multiemployer pension plan, in the event of a complete withdrawal from the Plan, WAPA would be obligated to make withdrawal liability payments to fund its proportionate share of the Plan’s unfunded vested benefits (“UVBs”). WAPA’s payment amount for a given year would be determined based on its highest contribution rate (as limited by MPRA) and its highest average contribution hours over a period of three consecutive plan years out of the ten-year period preceding the date of withdrawal. To the extent that the prescribed payment amount was not sufficient to discharge WAPA’s share of the Plan’s UVBs, WAPA’s payment obligation would nevertheless end after 20 years of payments (absent a withdrawal that is part of a mass withdrawal, in which case the annual payments would continue indefinitely or until WAPA paid its share of the Plan’s UVBs at the time of withdrawal).
Pursuant to the last available notice (for the Plan year ended December 31, 2019), WAPA’s contributions to the Plan exceeded 5% of total contributions made to the Plan. For more information, see Note 15, “Retirement Plans” of notes to consolidated financial statements, included the Annual Report on Form 10-K.
A large portion of our revenue is generated from a limited number of customers, and the loss of these customers could adversely affect our Business.
Our Networks depend upon agreements with a limited number of Distributors. For the year ended December 31, 2020, one of our Distributors accounted for more than 10% of our total net revenues. The loss of channel carriage with any significant Distributor, or our inability to renew an affiliation agreement with any significant Distributor on acceptable terms, would have a materially adverse effect on our Business, financial condition and results of operations.
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If our goodwill or intangibles become impaired, we will be required to recognize a non-cash charge which could have a significant effect on our reported net earnings.
A significant portion of our assets consist of goodwill and intangibles. We test our goodwill and intangibles for impairment each year. A significant downward revision in the present value of estimated future cash flows for a reporting unit could result in an impairment of goodwill and intangibles and a noncash charge would be required. Such a charge could have a significant effect on our reported net earnings.
Our equity method investments’ past financial performance may not be indicative of future results.
We have equity investments in several entities and the accounting treatment applied for these investments varies depending on a number of factors, including, but not limited to, our percentage ownership and the level of influence or control we have over the relevant entity. Any losses experienced by these entities could adversely impact our results of operations and the value of our investment. In addition, if these entities were to fail and cease operations, we may lose the entire value of our investment and the stream of any shared profits. Some of our ventures may require additional uncommitted funding.
Our use of joint ventures may limit our flexibility with jointly owned investments.
We have and may continue in the future to develop and/or acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Our participation in joint ventures is subject to risks that may not be present with other methods of ownership, including but not limited to:
· | difficulties integrating acquired businesses, technologies and personnel into our business; |
· | we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources to resolve such impasses or potential disputes, including litigation or arbitration; |
· | our joint venture partners could have investment and financing goals that are not consistent with our objectives, including the timing, terms and strategies for any investments, and what levels of debt to incur or carry; |
· | our ability to transfer our interest in a joint venture to a third party may be restricted and the market for our interest may be limited; |
· | our joint venture partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for such capital; and |
· | our joint venture partners may have competing interests in our markets that could create conflict of interest issues. |
Any of the foregoing risks could materially adversely affect our Business, results of operations and financial condition.
Our officers, directors, stockholders and their respective affiliates may have a pecuniary interest in certain transactions in which we are involved, and may also compete with us.
We have not adopted a policy that expressly prohibits our directors, officers, stockholders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. We may, subject to the terms of our Second Amended Term Loan Facility and applicable law, enter into transactions in which such persons have an interest. In addition, such parties may have an interest in certain transactions such as strategic partnerships or joint ventures in which we may become involved, and may also compete with us.
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Future acquisitions and dispositions may not require a stockholder vote and may be material to us.
Any future acquisitions could be material in size and scope, and our stockholders and potential investors may have virtually no substantive information about any new business upon which to base a decision whether to invest in our Class A common stock. In any event, depending upon the size and structure of any acquisitions, stockholders are generally expected to not have the opportunity to vote on the transaction, and may not have access to any information about any new business until the transaction is completed and we file a report with the Commission disclosing the nature of such transaction and/or business. Similarly, we may effect material dispositions in the future. Even if a stockholder vote is required for any of our future acquisitions, under our amended and restated certificate of incorporation and our amended and restated bylaws, our stockholders are allowed to approve such transactions by written consent, which may effectively result in only our controlling stockholder having an opportunity to vote on such transactions.
Future acquisitions or business opportunities, including investments in complementary businesses could involve unknown risks that could harm our Business and adversely affect our financial condition.
From time to time, we have acquired or invested in complementary businesses and entered into joint ventures/investments. For example, we recently acquired Pantaya. In the future we may make other acquisitions, invest in complementary businesses including joint ventures that involve unknown risks, and may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our Business, financial condition, results of operations and cash flows. Such transactions involve numerous other risks including:
· | difficulties integrating acquired businesses, technologies and personnel into our business, including our recent acquisition of Pantaya; |
· | difficulties in obtaining and verifying the financial statements and other business information of acquired businesses; |
· | inability to obtain required regulatory approvals on favorable terms; |
· | potential loss of key employees, key contractual relationships or key customers of either acquired businesses or our business; |
· | assumption of the liabilities and exposure to unforeseen or undisclosed liabilities of acquired businesses; |
· | dilution of interests of holders of our common shares through the issuance of equity securities or equity-linked securities; |
· | the failure to realize the expected strategic and other benefits from the transactions; and |
· | in the case of joint ventures and other investments, interests that diverge from those of our partners without the ability to direct the management and operations of the joint venture or investment in the manner we believe most appropriate. |
Although we intend to conduct extensive business, financial and legal due diligence in connection with the evaluation of future business or acquisition opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such businesses, acquisitions or joint ventures. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the businesses or acquisitions, which could adversely affect our financial condition and liquidity. In addition, our Business, financial condition, results of operations and the ability to service our debt may be adversely impacted depending on specific risks applicable to any business or company we acquire.
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Unrelated third parties may bring claims against us based on the nature and content of information posted on websites maintained by our Networks and Pantaya.
Our Networks and Pantaya host, or may host in the future, internet sites that enable individuals to exchange information, generate content, comment on content, and engage in various online activities. The law relating to the liability of providers of these online services for activities of their users is currently unsettled both within the United States and internationally. Claims may be brought against us for defamation, negligence, copyright or trademark infringement, unlawful activity, tort, including personal injury, fraud, or other theories based on the nature and content of information that may be posted online or generated by users of our internet sites. Defenses of such actions could be costly and involve significant time and attention of our management and other resources.
The success of our Business is highly dependent on the existence and maintenance of intellectual property rights in the entertainment products and services we create.
The value to us of our intellectual property rights is dependent on the scope and duration of our rights as defined by applicable laws in the U.S. and abroad and the manner in which those laws are construed. If those laws are drafted or interpreted in ways that limit the extent or duration of our rights, or if existing laws are changed, our ability to generate revenue from our intellectual property may decrease, or the cost of obtaining and maintaining rights may increase. There can be no assurance that our efforts to enforce our rights and protect our products, services and intellectual property will be successful in preventing content piracy or signal theft. Content piracy and signal theft present a threat to our revenues.
The unauthorized use of our intellectual property rights may increase the cost of protecting these rights or reduce our revenues. New technologies such as the convergence of computing, communication, and entertainment devices, the falling prices of devices incorporating such technologies, and increased broadband internet speed and penetration have made the unauthorized digital copying and distribution of our programming content easier and faster and enforcement of intellectual property rights more challenging. The unauthorized use of intellectual property in the entertainment industry generally continues to be a significant challenge for intellectual property rights holders. Inadequate laws or weak enforcement mechanisms to protect intellectual property in one country can adversely affect the results of our operations worldwide, despite our efforts to protect our intellectual property rights. COVID-19 pandemic may increase incentives and opportunities to access content in unauthorized ways, as negative economic conditions coupled with a shift in government priorities could lead to less enforcement. These developments may require us to devote substantial resources to protecting our intellectual property against unlicensed use and present the risk of increased losses of revenue as a result of unlicensed distribution of our content.
With respect to intellectual property developed by us and rights acquired by us from others, we are subject to the risk of challenges to our copyright, trademark and patent rights by third parties. Successful challenges to our rights in intellectual property may result in increased costs for obtaining rights or the loss of the opportunity to earn revenue from the intellectual property that is the subject of challenged rights. We are not aware of any challenges to our intellectual property rights that we currently foresee having a material effect on our operations.
If we are unable to protect our domain names, our reputation and brands could be adversely affected.
We currently hold various domain name registrations relating to our brands. The registration and maintenance of domain names generally are regulated by governmental agencies and their designees. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to register or maintain relevant domain names. We may be unable, without significant cost or at all, to prevent third parties from registering domain names that are similar to, infringe upon or otherwise decrease the value of, our and our subsidiaries trademarks and other proprietary rights. Failure to protect our domain names could adversely affect our reputation and brands, and make it more difficult for users to find our Business’s websites and services.
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We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in loss of significant rights.
Other parties may assert intellectual property infringement claims against us, and our Networks’ and Pantaya’s products may infringe the intellectual property rights of third parties. From time to time, our Business receives letters alleging infringement of intellectual property rights of others. Intellectual property litigation can be expensive and time-consuming and could divert management’s attention from our Business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement or enter into royalty or license agreements that may not be available on acceptable or desirable terms, if at all. Our failure to license proprietary rights on a timely basis would harm our Business.
Changes in accounting standards can significantly impact reported operating results.
Generally accepted accounting principles, accompanying pronouncements and implementation guidelines for many aspects of our Business, including those related to intangible assets and income taxes, are complex and involve significant judgments. Changes in these rules or their interpretation could significantly change our reported operating results.
Our Second Amended Term Loan Facility may limit our financial and operating flexibility.
Our Second Amended Term Loan Facility includes financial covenants restricting our subsidiaries ability to incur additional indebtedness, pay dividends or make other payments, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets. These covenants limit our ability to fund future working capital and capital expenditures, engage in future acquisitions or development activities, or otherwise realize the value of our assets and opportunities fully because of the need to dedicate a portion of cash flow from operations to payments on debt. In addition, such covenants limit our flexibility in planning for, or reacting to, changes in the industries in which we operate.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our long-term debt are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness could increase even though the amount borrowed remained the same, and our net income could decrease. In order to manage our exposure to interest rate risk, we have entered into and may in the future enter into derivative financial instruments, typically interest rate swaps and caps, involving the exchange of floating for fixed rate interest payments. If we are unable to enter into interest rate swaps, it may adversely affect our cash flow and may impact our ability to make required principal and interest payments on our indebtedness.
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Our LIBOR-based Second Amended Term Loan Facility, financing agreements and interest rate swaps may need to be renegotiated if LIBOR ceases to exist, which may affect our interest expense.
Our Second Amended Term Loan Facility and interest rate swaps bears interest at a variable rate based on LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. On March 5, 2021, the ICE Benchmark Administration (“IBA”) released the LIBOR cessation statement, pursuant to which the IBA publicly announced that it intends to cease publication of euro, sterling, Swiss franc and Japanese yen and 1 week and 2 month USD LIBOR settings on December 31, 2021 and the remaining USD LIBOR settings on June 30, 2023. In accordance with recommendations from the Alternative Reference Rates Committee, U.S. dollar LIBOR is expected to be replaced with the Secured Overnight Financing Rate (“SOFR”), a new index that measures the cost of borrowing cash overnight, backed by U.S. Treasury securities. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. As a result, parties may seek to adjust the spreads relative to such reference rate in underlying contractual arrangements. These reforms may cause LIBOR to perform differently than in the past or to disappear entirely. The consequences of these developments with respect to LIBOR cannot be entirely predicted but may result in the level of interest payments on the portion of our indebtedness that bears interest at variable rates and our interest rate swaps to be affected, which may adversely impact the amount of our interest payments under such debt and payments under our interest rate swaps. We and the administrative agent for the Second Amended Term Loan Facility may seek to amend the credit agreement governing the Second Amended Term Loan Facility to replace LIBOR with a different benchmark index that is expected to mirror what is happening in the rest of the debt markets at the time and make certain other conforming changes to the agreement. As such, the interest rate on borrowings under our Second Amended Term Loan Facility may change. The new rate may not be as favorable as those in effect prior to any LIBOR phase-out. In addition, the overall financial market may be disrupted as a result of the phase-out or replacement of LIBOR. Disruption in the financial market could have a material adverse effect on our Business, financial condition and results of operations.
Risk Factors Related to Governmental Regulation
We are subject to restrictions on foreign (non-U.S.) ownership.
Under the Communications Act, a broadcast license may not be granted to or held by any corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives, or by non-U.S. corporations.
Furthermore, the Communications Act provides that no FCC broadcast license may be granted to or held by any corporation that is directly or indirectly controlled by any other corporation of which more than 25% of the capital stock is owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives, or by non-U.S. corporations, if the FCC finds the public interest will be served by the refusal or revocation of such license. These restrictions apply in modified form to other forms of business organizations, including partnerships and limited liability companies. The FCC has interpreted this provision of the Communications Act to require an affirmative public interest finding before a broadcast license may be granted to or held by any entity exceeding the 25% non-U.S. equity or voting thresholds.
On January 18, 2017, the FCC granted our request to allow non-U.S. investors to own up to 49.99% of our capital stock and hold 49.99% of our voting power. Subsequently, on September 18, 2018, the FCC granted approval of additional specific non-U.S. equity and/or voting ownership interests in excess of 5%. On November 19, 2019, the FCC approved up to 100% aggregate non-U.S. ownership of our equity and voting interests and approved the ownership by any one of a list of specifically approved non-U.S. persons of up to 49.99 percent of our capital stock and/or voting power. However, we remain subject to the requirement to obtain specific approval from the FCC before any other non-U.S. person, in addition to the non-U.S. persons that the FCC has previously approved in the series of declaratory rulings identified above, acquires more than 5% of our capital stock or more than 5% voting rights. We are also required to notify the FCC and take remedial actions as necessary, if we determine that any unapproved non-U.S. person has acquired more than 5% of our capital stock or voting rights, and we may be subject to FCC enforcement action, including monetary forfeitures, if such a circumstance occurs.
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To the extent necessary to comply with the Communications Act, FCC rules and policies, and the FCC’s declaratory ruling, our board of directors may (i) prohibit the ownership, voting or transfer of any portion of our outstanding capital stock to the extent the ownership, voting or transfer of such portion would cause us to violate or would otherwise result in violation of any provision of the Communications Act, FCC rules and policies, or the FCC’s declaratory ruling; (ii) convert shares of our Class B common stock into shares of our Class A common stock to the extent necessary to bring us into compliance with the Communications Act, FCC rules and policies, or the FCC’s declaratory ruling; and (iii) redeem capital stock to the extent necessary to bring us into compliance with the Communications Act, FCC rules and policies, or the FCC’s declaratory ruling or to prevent the loss or impairment of any of our FCC licenses.
Federal regulation of the broadcasting industry limits WAPA’s operating flexibility.
The ownership, operation and sale of broadcast television stations, such as WAPA, are subject to the jurisdiction of the FCC under the Communications Act. Matters subject to FCC oversight include the assignment of frequency bands for broadcast television; the approval of a television station’s frequency, location and operating power; the issuance, renewal, revocation or modification of a television station’s FCC license; the approval of changes in the ownership or control of a television station’s licensee; the regulation of equipment used by television stations; and the adoption and implementation of regulations and policies concerning the ownership, operation, programming and employment practices of television stations.
WAPA depends upon maintaining its broadcast licenses, which are issued by the FCC for a term of eight years and are renewable. Generally, the FCC renews a broadcast license upon a finding that (i) the broadcast station has served the public interest, convenience and necessity; (ii) there have been no serious violations by the licensee of the Communications Act or the FCC’s rules; and (iii) there have been no other violations by the licensee of the Communications Act or other FCC rules, which, taken together, indicate a pattern of abuse. Interested parties may challenge a renewal application. The FCC has the authority to revoke licenses, not renew them, or renew them with conditions, including renewals for less than a full term. All television stations licensed to communities in Puerto Rico were required to file renewal applications by October 1, 2020. We filed renewal applications for each of our Puerto Rico television stations on October 1, 2020. The deadline for the filing of petitions to deny our renewal applications was January 1, 2021, and no party filed an objection to any of our applications. Our renewal applications are pending. Historically, our FCC licenses have been renewed and we are not aware of any reason why the currently pending renewal applications would not be granted; however, it cannot be assured that our pending or future license renewal applications for WAPA will be approved, or that the renewals, if granted, will not include conditions or qualifications that could adversely affect our operations. If WAPA’s licenses are not renewed in the future, or are renewed with substantial conditions or modifications (including renewing one or more of our licenses for a term of fewer than eight years), it could prevent us from operating WAPA and generating revenue from it.
Furthermore, WAPA’s ability to successfully negotiate and renegotiate future retransmission consent agreements may be hindered by potential legislative or regulatory changes to the framework under which these agreements are negotiated. In March 2011, the FCC issued a Notice of Proposed Rulemaking to consider changes to its rules governing the negotiation of retransmission consent agreements. The FCC concluded that it lacked statutory authority to impose mandatory arbitration or interim carriage obligations in the event of a dispute between broadcasters and pay television operators. In accordance with the STELA Reauthorization Viewer Act of 2014, in 2015, the FCC eliminated the rules which had precluded cable operators from deleting or repositioning local television stations during “sweeps” rating periods. The Further Consolidated Appropriations Act, 2020 enacted in December 2019 made permanent the statutory requirement that broadcasters and MVPDs negotiate retransmission consent agreements in good faith, which had been scheduled to expire at the end of 2019.
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Our Networks are subject to FCC sanctions or penalties if they violate the FCC’s rules or regulations.
If we or any of our officers, directors, or attributable interest holders materially violate the FCC’s rules and regulations or are convicted of a felony or are found to have engaged in unlawful anticompetitive conduct or fraud upon another government agency, the FCC may, in response to a petition by a third party or on its own initiative, in its discretion, commence a proceeding to impose sanctions upon us that could involve the imposition of monetary penalties, the denial of a license renewal application, revocation of a broadcast license or other sanctions. In addition, the FCC has recently emphasized more vigorous enforcement of certain of its regulations, including indecency standards, sponsorship identification requirements, improper use of EAS alert signals, and children’s programming requirements, which impact broadcasters, and also rules that relate to the emergency alert system and closed captioning, and equal employment opportunity outreach and recordkeeping requirements, which impact broadcasters and MVPDs. The FCC has also recently increased enforcement of requirements regarding online public inspection files, which are now maintained on an FCC website and are therefore widely accessible by members of the public and the FCC. In 2020, the statutory maximum fine for broadcasting indecent material increased from $414,454 to $419,353 per incident and the maximum forfeiture for any continuing violation arising from a single act or failure to act increased to $3,870,946. In recent years, the FCC issued fines against cable network owners and broadcast licensees, with the fines ranging from $280,000 to $1,120,000, for violating FCC rules relating to the improper use of the emergency alert system attention signal. These enhanced enforcement efforts could result in increased costs associated with the adoption and implementation of stricter compliance procedures at our Business facilities or FCC fines. Additionally, the effect of recent judicial decisions regarding the FCC’s indecency enforcement practices remain unclear and we are unable to predict the impact of these decisions on the FCC’s enforcement practices, which could have a material adverse effect on our Business.
The cable, satellite and telco-delivered television industry is subject to substantial governmental regulation for which compliance may increase our Networks’ costs, hinder our growth and possibly expose us to penalties for failure to comply.
The multichannel video programming distribution industry is subject to extensive legislation and regulation at the federal level, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Operating in a regulated industry increases our cost of doing business as video programmers, and such regulation may also hinder our ability to increase and/or maintain our revenues. The regulation of programming services is subject to the political process and continues to be under evaluation and subject to change. Material changes in the law and regulatory requirements are difficult to anticipate and our Business may be harmed by future legislation, new regulation, deregulation and/or court decisions interpreting such laws and regulations.
The following are examples of the types of currently active legislative, regulatory and judicial inquiries and proceedings that may impact our Cable Networks. The FCC may adopt rules which would require cable and satellite providers to make available programming channels on an a la carte basis. A major component of our financial growth strategy is based on our ability to increase our Cable Networks’ subscriber base. If our Cable Networks’ programming services are required by the FCC to be offered on an “a la carte” basis, our Cable Networks could experience higher costs, reduced distribution of our program service, perhaps significantly, and loss of viewers. There can be no assurance that we will be able to maintain or increase our Cable Networks’ subscriber base on cable, satellite and telco systems or that our current carriage will not decrease as a result of a number of factors or that we will be able to maintain or increase our Cable Networks’ current subscriber fee rates.
Further, the FCC and certain courts are examining the types of technologies that will be considered “multichannel video programming systems” under federal regulation and the rules that will be applied to distribution of television programming via such technologies. We cannot predict the outcome of any of these inquiries or proceedings or how their outcome would impact our ability to have our Cable Networks’ content carried on multichannel programming distribution and the value of our advertising inventories.
Our Cable Networks are subject to Program Access restrictions.
Because certain of our directors are also directors of cable companies, we are considered to be a vertically integrated cable programmer and are subject to the program access rules. The other holdings of entities that acquire an interest in our capital stock may be attributable to our Cable Networks and could further subject us to the program access rule restrictions. While we do not believe our status as a vertically integrated cable programmer will materially limit or impair the activities of our Cable Networks, the program access rules could have a material adverse effect on our Business, financial condition and results of operations.
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“Must-carry” regulations reduce the amount of channel space that is available for carriage of the Cable Networks cable offerings.
The Cable Act of 1992 imposed “must carry” or “retransmission consent” regulations on cable systems, requiring them to carry the signals of local broadcast television stations that choose to exercise their must carry rights rather than negotiate a retransmission consent arrangement. DBS systems are also subject to their own must carry rules. The FCC’s implementation of these “must-carry” obligations requires cable and DBS operators to give certain broadcasters preferential access to channel space. This reduces the amount of channel space that is available for carriage of our Cable Networks offerings by cable television systems and DBS operators in the U.S. Congress, the FCC or any other foreign government may, in the future, adopt new laws, regulations and policies regarding a wide variety of matters which could affect our Cable Networks.
The broadcast incentive auction has resulted in the modification of our broadcast licenses for WAPA by requiring us to operate on other channels.
As a result of the FCC spectrum auction which was concluded in January 2017, the FCC is engaged in a “repack” of television stations that did not relinquish spectrum in the auction in remaining television broadcast spectrum, which requires certain television stations that did not relinquish spectrum to modify their transmission facilities, including requiring such stations to operate on other channel designations. The FCC is authorized to reimburse stations for reasonable relocation costs. The original reimbursement limit across all stations was $1.75 billion. In March 2018 Congress authorized an additional $1 billion to be used for reimbursements related to repacking and directed that a portion of the additional funds be used to reimburse low power television stations, television translator stations and FM stations that are required to modify their facilities on a temporary or permanent basis to accommodate changes made by television stations being repacked as well as for consumer education efforts. The FCC, when repacking the television broadcast spectrum, will use reasonable efforts to preserve a station’s coverage area and population served. The FCC has assigned new channels to stations that are required to be “repacked” and stations are in the process of moving to their new channels. We did not relinquish any of our spectrum in the auction. Two of our licenses, WNJX-TV and WTIN-TV, were reassigned new channels as a result of the incentive auction, have transitioned to new channels using interim facilities and we are in the process of completing the construction of permanent facilities for WNJX-TV and WTIN-TV on their post-auction channels.
We cannot predict whether following the repacking the coverage area and population served by our stations will be completely preserved or whether the $2.75 billion set aside for reimbursing repacking expenses will be sufficient to cover all repacking expenses. Nevertheless, we do not believe that the auction will have a material negative impact on our Business, because with post-auction channel assignments our stations will remain in the more desirable UHF band; our three television stations have overlapping coverage areas, so it is unlikely that we will lose service to a significant portion of the households that we serve. If the FCC is unable to reimburse all of our repacking expenses, the amount of the shortfall is unlikely to be material to our Business as a whole.
Risks Related to Our Securities and Corporate Structure
If securities or industry analysts do not publish or cease publishing research or reports about us, our Business, or our market, or if they change their recommendations regarding our Class A common stock adversely, the price and trading volume of our Class A common stock could decline.
If securities or industry analysts do not publish or cease publishing research or reports about us, our Business, or our market, or if they change their recommendations regarding our Class A common stock adversely, the price and trading volume of our Class A common stock could decline. The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts may publish about our Business, our market, or our competitors. As of December 31, 2020, only two industry analysts published research on our Business. If any of the analysts who may cover our Business change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our Class A common stock would likely decline. If any analyst who may cover our Business were to cease coverage of Hemisphere or fail to regularly publish reports about us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
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The stock price of our Class A common stock may be volatile.
The stock price of our Class A common stock may be volatile and subject to wide fluctuations. In addition, the trading volume of our Class A common stock may fluctuate and cause significant price variations to occur. Some of the factors that could cause fluctuations in the stock price or trading volume of our Class A common stock include:
· | market and economic conditions, including market conditions in the cable television programming and broadcasting industries; |
· | actual or expected variations in quarterly operating results; |
· | liquidity of our Class A common stock; |
· | differences between actual operating results and those expected by investors and analysts; |
· | changes in recommendations by securities analysts; |
· | operations and stock performance of our competitors; |
· | accounting charges, including charges relating to the impairment of goodwill; |
· | significant acquisitions or strategic alliances by us or by our competitors; |
· | sales of our Class A common stock, including sales by our directors and officers or significant investors; |
· | recruitment or departure of key personnel; |
· | loss of key advertisers; and |
· | changes in reserves for professional liability claims. |
We cannot assure you that the price of our Class A common stock will not fluctuate or decline significantly in the future. In addition, the stock market in general can experience considerable price and volume fluctuations that may be unrelated to our performance.
The market liquidity for our Class A common stock is relatively low and may make it difficult to purchase or sell our Class A common stock.
The average daily trading volume in our Class A common stock during nine months ended September 30, 2021 was approximately 53,286 shares. Although a more active trading market may develop in the future, there can be no assurance as to the liquidity of any markets that may develop for our Class A common stock or the prices at which holders may be able to sell our Class A common stock and the limited market liquidity for our securities could affect a holder’s ability to sell at a price satisfactory to that holder.
We are a “controlled company” within the meaning of NASDAQ rules and, as a result, we qualify for, and choose to rely on, exemptions from certain corporate governance requirements.
Our controlling stockholder, Gato Investments LP, controls the majority of the voting power of all of our outstanding capital stock. As a result of the concentration of the voting rights in our Company, we are a “controlled company” within the meaning of the rules and corporate governance standards of NASDAQ. Under the NASDAQ rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain NASDAQ corporate governance requirements, including:
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· | the requirement that a majority of our board of directors consists of independent directors; |
· | the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors; |
· | the requirement that we have a compensation committee that is composed entirely of independent directors; and |
· | the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees. |
We have elected not to comply with the above corporate governance requirements. Accordingly, our stockholders are not afforded the same protections generally as stockholders of other NASDAQ-listed companies for so long as we remain a “controlled company” and rely upon such exemptions. The interests of our controlling stockholder may conflict with the interests of our other stockholders, and the concentration of voting power in such stockholder will limit our other stockholders’ ability to influence corporate matters.
Our controlling stockholder exercises significant influence over us and their interests in our Business may be different from the interests of our stockholders; future sales of substantial amounts of our Class A common stock may adversely affect our market price.
Our controlling stockholder, Gato Investments LP, controls the majority of the voting power of all of our outstanding capital stock. The controlling stockholders’ Class B common stock vote on a 10 to 1 basis with our Class A common stock, which means that each share of our Class B common stock has 10 votes and each share of our Class A common stock has 1 vote. All shares of our capital stock vote together as a single class. Accordingly, our controlling stockholder generally has the ability for the foreseeable future to influence the outcome of any of our corporate actions which require stockholder approval, including, but not limited to, the election of directors, significant corporate transactions, such as a merger or other sale of the Company or the sale of all or substantially all of our assets. This concentrated voting control will limit your ability to influence corporate matters and could adversely affect the market price of our Class A common.
Our controlling stockholder may delay or prevent a change in control in our Business. In addition, the significant concentration of stock ownership may adversely affect the value of our Class A common stock due to a resulting lack of liquidity of our Class A common stock or a perception among investors that conflicts of interest may exist or arise. If our controlling stockholder sells a substantial amount of our Class A common stock (upon conversion of their Class B common stock, which may be converted at any time in their sole discretion) in the public market, or investors perceive that these sales could occur, the market price of our Class A common stock could be adversely affected.
The interests of our controlling stockholder, which has investments in other companies, may from time to time diverge from the interests of our other stockholders, particularly with regard to new investment opportunities. Our controlling stockholder is not restricted from investing in other businesses involving or related to programming, content, production and broadcasting. Our controlling stockholder may also engage in other businesses that compete or may in the future compete with our Business.
We have entered into a registration rights agreement and joinders thereto with certain parties, including our controlling stockholder. If requested properly under the terms of the registration rights agreement, certain of these stockholders have the right to require us to register the offer and sale of all or some of their Class A common stock (including upon conversion of their Class B common stock) under the Securities Act in certain circumstances and also have the right to include those shares in a registration initiated by us. If we are required to include the shares of capital stock held by these stockholders pursuant to these registration rights in a registration initiated by us, sales made by such stockholders may adversely affect the price of our Class A common stock and our ability to raise needed capital. In addition, if these stockholders exercise their demand registration rights and cause a large number of shares to be sold in the public market or demand that we include their shares for registration on a shelf registration statement, such sales or shelf registration may have an adverse effect on the market price of our Class A common stock.
Any other future sales of substantial amounts of our Class A common stock into the public market, or perceptions in the market that such sales could occur, may adversely affect the prevailing market price of our Class A common stock and impair our ability to raise capital through the sale of additional equity securities.
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We have a staggered board of directors and other anti-takeover provisions, which may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of our stockholders.
Our amended and restated certificate of incorporation provides that our board of directors will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. As a result, at any annual meeting only a minority of the board of directors will be considered for election. Since this “staggered board” would prevent our stockholders from replacing a majority of our board of directors at any annual meeting, it may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of our stockholders. Some of the provisions of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could, together or separately, discourage potential acquisition proposals or delay or prevent a change in control. In particular, our board of directors is authorized to issue up to 50,000,000 shares of preferred stock with rights and privileges that might be senior to either class of our common stock and, without the consent of the holders of either class of our common stock.
The Company’s amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between the Company and its stockholders, which could increase costs to bring a claim, discourage claims or limit the ability of the Company’s stockholders to bring a claim in a judicial forum viewed by the stockholders as more favorable for disputes with the Company or the Company’s directors, officers or other employees.
The Company’s amended and restated bylaws provide that unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee or stockholder of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim against the Company, its directors, officers or other employees, or stockholders arising pursuant to any provision of the General Corporation Law of the State of Delaware (the “DGCL”) or the Company’s Certificate of Incorporation or Bylaws (as each may be amended from time to time), and (iv) any action asserting a claim against the Company, its directors, officers or other employees, or stockholders governed by the internal affairs doctrine. The choice of forum provision may increase costs to bring a claim, discourage claims or limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or the Company’s directors, officers or other employees, or stockholders which may discourage such lawsuits against the Company or the Company’s directors, officers and other employees or stockholders. Alternatively, if a court were to find the choice of forum provision contained in the Company’s amended and restated bylaws to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving such action in other jurisdictions. The exclusive forum provision in the Company’s amended and restated bylaws will not preclude or contract the scope of exclusive federal or concurrent jurisdiction for actions brought under the federal securities laws including the Exchange Act, or the Securities Act, or the respective rules and regulations promulgated thereunder.
Our dependence on subsidiaries for cash flow may negatively affect our Business.
We are a holding company with no business operations of our own. Our only significant asset is the outstanding capital stock and membership interests of our subsidiaries. We conduct, and expect to continue conducting, all of our business operations through our subsidiaries. Accordingly, our ability to pay our obligations is dependent upon dividends and other distributions from our subsidiaries to us. Although our term loan facility permits certain restricted payments from our subsidiaries to us to pay for our administrative expenses corporate overhead, franchise taxes, public company costs, directors’ fees and certain insurance premiums and deductibles, it restricts our subsidiaries ability to remit dividends to us in other instances at certain leverage ratios. Additionally, dividends to us from WAPA are also subject to certain local taxation. Consequently, our ability to pay dividends is limited by funds that our subsidiaries are permitted to dividend to us, and in certain instances, will subject us to certain tax liabilities.
General Risk Factors
Adverse conditions in the U.S. and international economies could negatively impact our results of operations.
Unfavorable general economic conditions, such as a recession or economic slowdown in parts of the United States or in one or more of the major markets in which we operate, could negatively affect the affordability of and demand for some of our products and services. In addition, adverse economic conditions may lead to loss of subscriptions for our Networks. If these events were to occur, it could have a material adverse effect on our results of operations.
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The risks associated with our advertising revenue become more acute in periods of a slowing economy or recession, including, as a result of public health crises, such as COVID-19, which may be accompanied by a decrease in advertising. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Cancellations, reductions or delays in purchases of advertising could, and often do, occur as a result of a strike, a general economic downturn, an economic downturn in one or more industries or in one or more geographic areas, or a failure to agree on contractual terms.
Any potential hostilities, terrorist attacks, or similarly newsworthy events leading to broadcast interruptions, may affect our revenues and results of operations.
If any existing hostilities escalate, or if the United States experiences a terrorist attack or experiences any similar event resulting in interruptions to regularly scheduled broadcasting, we may lose revenue and/or incur increased expenses. Lost revenue and increased expenses may be due to preemption, delay or cancellation of advertising campaigns, or diminished subscriber fees, as well as increased costs of covering such events. We cannot predict the (i) extent or duration of any future disruption to our programming schedule, (ii) amount of advertising revenue that would be lost or delayed, (iii) the amount of decline in any subscriber fees or (iv) the amount by which broadcasting expenses would increase as a result. Any such loss of revenue and increased expenses could negatively affect our results of operations.
We may need to increase the size of our organization, and may experience difficulties in managing growth.
At Hemisphere, the parent holding company, we do not have significant operating assets and only have a limited number of employees. In connection with the completion of any future acquisitions, we may be required to hire additional personnel and enhance our information technology systems. Any future growth may increase our corporate operating costs and impose significant added responsibilities on members of our management, including the need to identify, recruit, maintain and integrate additional employees and implement enhanced informational technology systems. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively. Future growth will also increase our costs and expenses and limit our liquidity.
Future acquisitions or business opportunities, including investments in complementary businesses could involve unknown risks that could harm our Business and adversely affect our financial condition.
From time to time, we have acquired or invested in complementary businesses and entered into joint ventures/investments. In the future we may make other acquisitions, invest in complementary businesses including joint ventures that involve unknown risks, and may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our Business, financial condition, results of operations and cash flows. Such transactions involve numerous other risks including:
· | difficulties integrating acquired businesses, technologies and personnel into our business; |
· | difficulties in obtaining and verifying the financial statements and other business information of acquired businesses; |
· | inability to obtain required regulatory approvals on favorable terms; |
· | potential loss of key employees, key contractual relationships or key customers of either acquired businesses or our Business; |
· | assumption of the liabilities and exposure to unforeseen or undisclosed liabilities of acquired businesses; |
· | dilution of interests of holders of our common shares through the issuance of equity securities or equity-linked securities; and |
· | in the case of joint ventures and other investments, interests that diverge from those of our partners without the ability to direct the management and operations of the joint venture or investment in the manner we believe most appropriate. |
Although we intend to conduct extensive business, financial and legal due diligence in connection with the evaluation of future business or acquisition opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such businesses, acquisitions or joint ventures. The realization of any unknown risks could expose us to unanticipated costs and liabilities
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and prevent or limit us from realizing the projected benefits of the businesses or acquisitions, which could adversely affect our financial condition and liquidity. In addition, our Business, financial condition, results of operations and the ability to service our debt may be adversely impacted depending on specific risks applicable to any business or company we acquire.
We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not consummated, which could materially adversely affect subsequent attempts to locate and acquire or invest in another business.
We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments, with respect to such transaction, will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, business opportunities or financings and capital market transactions investment or financing, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.
Possible strategic initiatives may impact our Business.
We will continue to evaluate the nature and scope of our operations and various short-term and long-term strategic considerations. There are uncertainties and risks relating to strategic initiatives. Also, prospective competitors may have greater financial resources. These factors may place us at a competitive disadvantage in successfully completing future acquisitions and investments. Future acquisitions or joint ventures may not be available on attractive terms, or at all. If we do make additional acquisitions, we may not be able to successfully integrate the acquired businesses. For example, we could face several challenges in the consolidation and integration of information technology, accounting systems, personnel and operations. In addition, while we believe that there may be target businesses that we could potentially acquire or invest in, our ability to compete with respect to the acquisition of certain target businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing in order to consummate future acquisitions and investment opportunities. We cannot assure you that any additional financing will be available to us on acceptable terms, if at all. This inherent competitive limitation gives others with greater financial resources an advantage in pursuing acquisition and investment opportunities. Finally, certain acquisitions or divestitures may be subject to FCC approval and FCC rules and regulations. If we do not realize the expected benefits or synergies of such transactions, there may be an adverse effect on our Business, financial condition and results of operations.
In the course of their other business activities, certain of our officers and directors may become aware of investment and acquisition opportunities that may be appropriate for presentation to us as well as the other entities with which they are affiliated. Such officers and directors may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
Certain of our officers and directors may become aware of business opportunities which may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Due to those officers’ and directors’ existing affiliations with other entities, they may have fiduciary obligations to present potential business opportunities to those entities in addition to presenting them to us, which could cause additional conflicts of interest. To the extent that such officers and directors identify business combination opportunities that may be suitable for entities to which they have pre-existing fiduciary obligations, or are presented with such opportunities in their capacities as fiduciaries to such entities, they may be required to honor their pre-existing fiduciary obligations to such entities. Accordingly, they may not present business combination opportunities to us that otherwise may be attractive to such entities unless the other entities have declined to accept such opportunities.
We have incurred substantial costs in connection with our previous acquisitions, joint ventures and growth strategy, including legal, accounting, advisory and other costs.
We have incurred substantial costs, including a number of non-recurring costs, in connection with our prior acquisitions, joint ventures and growth strategy and expect to incur substantial costs in connection with any other transaction we complete in the future. Some of these costs are payable regardless of whether the acquisition is completed. These costs will reduce the amount of cash
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otherwise available to us for acquisitions, business opportunities and other corporate purposes. There is no assurance that the actual costs will not exceed our estimates. We may continue to incur additional material charges reflecting additional costs associated with our investments and the integration of our acquisitions, and joint ventures in fiscal quarters subsequent to the quarter in which the relevant acquisition was consummated.
From time to time we may be subject to litigation for which we may be unable to accurately assess our level of exposure and which, if adversely determined, may have a material adverse effect on our consolidated financial condition or results of operations.
We and our subsidiaries are or may become parties to legal proceedings that are considered to be either ordinary or routine litigation incidental to our or their current or prior businesses or not material to our consolidated financial position or liquidity. There can be no assurance that we will prevail in any litigation in which we or our subsidiaries may become involved, or that our or their insurance coverage will be adequate to cover any potential losses. To the extent that we or our subsidiaries sustain losses from any pending litigation which are not reserved or otherwise provided for or insured against, our Business, results of operations, cash flows and/or financial condition could be materially adversely affected.
Any violation of the Foreign Corrupt Practices Act or other similar laws and regulations could have a negative impact on us.
We are subject to risks associated with doing business outside of the United States, which exposes us to complex foreign and U.S. regulations inherent in doing business cross-border and in each of the countries in which we transact business. We are subject to regulations imposed by the Foreign Corrupt Practices Act, or the FCPA, and other anti-corruption laws that generally prohibit U.S. companies and their subsidiaries from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties and the SEC and U.S. Department of Justice have increased their enforcement activities with respect to the FCPA. Internal control policies and procedures and employee training and compliance programs that we have implemented to deter prohibited practices may not be effective in prohibiting employees, contractors or agents from violating or circumventing such policies and the law. If our employees or agents fail to comply with applicable laws or company policies governing their international operations, we may face investigations, prosecutions and other legal proceedings and actions which could result in civil penalties, administrative remedies and criminal sanctions. Any determination that we have violated the FCPA could have a material adverse effect on our financial condition. Compliance with international and U.S. laws and regulations that apply to international operations increases the cost of doing business in foreign jurisdictions.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our internal controls over financial reporting and to report on our assessment as to the effectiveness of these controls. Any delays or difficulty in satisfying these requirements or negative reports concerning our internal controls could have a material adverse effect on our future results of operations and financial condition.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We must perform system and process evaluation and testing of our internal control over financial reporting to allow our management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in internal control over financial reporting that are deemed to be material weaknesses. Compliance with Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. The need to focus on compliance with Section 404 of Sarbanes-Oxley may strain management and finance resources and otherwise present additional administrative and operational challenges as our management seeks to comply with these requirements.
We may in the future discover areas of our internal controls that need improvement, particularly with respect to our existing acquired businesses, businesses that we may acquire in the future and newly formed businesses or entities. We cannot be certain that any remedial measures we take will ensure that we implement and maintain adequate internal controls over our financial reporting processes and reporting in the future.
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In addition, we may acquire an entity that was not previously subject to U.S. public company requirements or did not previously prepare financial statements in accordance with U.S. GAAP or is not in compliance with the requirements of the Sarbanes-Oxley Act of 2002 or other public company reporting obligations applicable to such entity. We may incur additional costs in order to ensure that after such acquisition, we continue to comply with the requirements of the Sarbanes-Oxley Act of 2002 and our other public company requirements, which in turn could reduce our earnings or cause us to fail to meet our reporting obligations. In addition, development of an adequate financial reporting system and the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act of 2002 may increase the time and costs necessary to complete any such acquisition or cause us to fail to meet our reporting obligations. To the extent any of these newly acquired entities or any existing entities have deficiencies in its internal controls, it may impact our internal controls.
Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are not able to comply with the requirements of Section 404 in a timely manner, if we fail to remedy any material weakness and maintain effective internal control over our financial reporting in the future, or if our independent registered public accounting firm is unable to provide us with an unqualified report regarding the effectiveness of our internal controls over financial reporting to the extent required by Section 404 of the Sarbanes-Oxley Act of 2002, our financial statements may be inaccurate, our ability to report our financial results on a timely and accurate basis may be adversely affected, investors could lose confidence in the reliability of our financial statements, our access to the capital markets may be restricted, the trading price of our Class A common stock may decline, and we may be subject to sanctions or investigations by regulatory authorities, including the SEC or NASDAQ. In addition, failure to comply with our reporting obligations with the Commission may cause an event of default to occur under our Second Amended Term Loan Facility, or similar instruments governing any debt we incur in the future.
Changes in governmental regulation, interpretation or legislative reform could increase our Business’s cost of doing business and adversely affect our profitability.
Laws and regulations, including in the areas of advertising, consumer affairs, data protection, finance, marketing, privacy, publishing and taxation requirements, are subject to change and differing interpretations. Changes in the political climate or in existing laws or regulations, or their interpretations, or the enactment of new laws or the issuance of new regulations or changes in enforcement priorities or activity could adversely affect us by, among other things:
· | increasing our administrative, compliance, and other costs; |
· | forcing us to undergo a corporate restructuring; |
· | limiting our ability to engage in inter-company transactions with our affiliates and subsidiaries; |
· | increasing our tax obligations, including unfavorable outcomes from audits performed by various tax authorities; |
· | affecting our ability to continue to serve our customers and to attract new customers; |
· | affecting cash management practices and repatriation efforts; |
· | forcing us to alter or restructure our Networks’ and Pantaya’s relationships with vendors and contractors; |
· | increasing compliance efforts or costs; |
· | limiting our use of or access to personal information; |
· | impacting the economics of creating or distributing content, anti-piracy efforts, or our ability to protect or exploit intellectual property rights; |
· | restricting our ability to market our products; and |
· | requiring us to implement additional or different programs and systems. |
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For example, President Biden put forth several corporate income tax proposals during his campaign, including a significant increase in the corporate income tax rate and changes in the taxation of non-U.S. income. While it is too early to predict the outcome of these proposals, if enacted, they may have a material impact on our income tax liability. The determination of our worldwide provision for income taxes and current and deferred tax balances requires judgment and estimation. Our provision for income taxes could also be materially adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets, or by changes in worldwide tax laws, regulations, or accounting principles.
Additionally, the California Consumer Privacy Act (CCPA), which took effect in January 2020, establishes certain transparency rules and creates new data privacy rights for consumers, including more ability to control how their data is shared with third parties. Furthermore, some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, and other states are beginning to pass similar laws. Compliance with such regulations is costly and time-consuming, and we may encounter difficulties, delays or significant expenses in connection with such compliance, and we may be exposed to significant penalties, liabilities, reputational harm and loss of business in the event that we fail to comply. While it is not possible to predict when or whether fundamental policy or interpretive changes would occur, these or other changes could fundamentally change the dynamics of the industries in which we operate or the costs associated with our operations. Changes in public policy or enforcement priorities could materially affect our profitability, our ability to retain or grow business, or in the event of extreme circumstances, our financial condition. There can be no assurance that legislative or regulatory change or interpretive differences will not have a material adverse effect on our Business.
Moreover, the adoption or modification of laws or regulations relating to the internet could limit or otherwise adversely affect the manner in which we currently operate our Pantaya service. The continued growth and development of the market for online commerce may lead to more stringent consumer protection laws, which may impose additional burdens on us. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur additional expenses or alter our business model for our Pantaya service. Changes in laws or regulations that adversely affect the growth, popularity or use of the internet, including laws impacting net neutrality, could decrease the demand for our Pantaya service and increase our cost of doing business. Favorable laws may change, including for example, in the United States where net neutrality regulations were repealed. Given uncertainty around these rules, including changing interpretations, amendments or repeal, coupled with potentially significant political and economic power of local network operators, we could experience discriminatory or anti-competitive practices that could impede the growth of Pantaya, cause us to incur additional expense or otherwise negatively affect our Pantaya service.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Company Purchases of Equity Securities
Set forth below is the information concerning acquisitions of Hemisphere Media Group, Inc. Class A common stock by the Company during the three months ended September 30, 2017:2021:
Period (a) |
| Total |
| Average |
| Total Number of |
| Maximum Number (or |
| ||
|
|
|
|
|
|
|
|
|
| ||
July 17, 2017 - July 31, 2017 |
| 148,425 |
| $ | 12.23 |
| 148,425 |
| $ | 23,187,405 |
|
August 1, 2017 - August 31, 2017 |
| 248,213 |
| $ | 12.86 |
| 248,213 |
| $ | 20,000,099 |
|
September 1, 2017 - September 30, 2017 |
| 450,752 |
| $ | 12.62 |
| 450,752 |
| $ | 14,320,594 |
|
|
|
|
|
|
|
|
|
|
| ||
Total |
| 847,390 |
| $ | 12.62 |
| 847,390 |
|
|
| |
| | | | | | | | | | |
| | Total | | | | | Total Number of | | Approximate Dollar | |
| | Number of | | Average | | shares Purchased as | | Value of Shares that | ||
| | Shares | | Price Paid per | | Part of a Publicly | | May Yet be Purchased | ||
Period (a) |
| Purchased (b) |
| Share (c) |
| Announced Program |
| Under the Program (d) | ||
July 1, 2021 — July 31, 2021 |
| — | | $ | — |
| — | | $ | 18,328,412 |
August 1, 2021 — August 31, 2021 |
| — | | $ | — |
| — | | $ | 18,328,412 |
September 1, 2021 — September 30, 2021 |
| 2,277 | | $ | 11.00 |
| 2,277 | | $ | 18,303,356 |
Total |
| 2,277 | | $ | 11.00 |
| 2,277 | |
|
|
(a)The stock repurchase plan was announced on June 20, 2017.November 18, 2020.
(b)The Board of Directors authorized the repurchase of up to $25$20 million of the Company’s Class A common stock.
(c)Average Price Paid per Share includes broker commission of $0.02 per share.commission.
(d)The plan will expireexpires on July 17, 2018.November 19, 2021, but may be suspended or discontinued at any time in the Company’s sole discretion.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
Not applicable.
The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Quarterly Report.
Exhibit Index
Exhibit No. | Description of Exhibit | |||
|---|---|---|---|---|
10.1**± | | Employment Agreement, effective as of November 2021, by and between the Company and John Garcia. | ||
31.1 | | |||
31.2 |
| |||
32.1* |
| |||
32.2* |
| |||
| | Inline XBRL Instance | ||
| | Inline XBRL Taxonomy Extension | ||
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase | ||
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase | ||
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase | ||
101.DEF |
| Inline XBRL Taxonomy Extension Definition Document | ||
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* |
|
** | Filed herewith |
± | Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules or exhibits upon request by the SEC. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEMISPHERE MEDIA GROUP, INC. | |
|
|
|
|
|
|
DATE: November | By: | /s/ Alan J. Sokol |
|
| Alan J. Sokol |
|
| Chief Executive Officer and President |
|
| (Principal Executive Officer) |
|
|
|
|
|
|
DATE: November | By: | /s/ Craig D. Fischer |
|
| Craig D. Fischer |
|
| Chief Financial Officer |
|
| (Principal Financial and Accounting Officer) |
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