HEMISPHERE MEDIA GROUP, INC. OVERVIEW
Our Company
We are a leadingU.S. Spanish-language media company serving the fast growing and highly attractiveU.S. Hispanic and Latin American markets with a premium Spanish-language streaming platform distributed in theU.S. , five Spanish-language cable television networks distributed in theU.S. , two Spanish-language cable television networks distributed inLatin America , the #1-rated broadcast television network inPuerto Rico , a leading distributor of content to television and digital media platforms inLatin America and a 40% interest in the #3-rated broadcast television network inColombia .
Headquartered in
Pantaya: the first ever premium subscription streaming service of
Spanish-language media offering the largest selection of current and classic,
commercial free blockbusters and exclusive rights to critically acclaimed
movies and series from
? productions and titles from our library, as well as titles from third party
producers. The Company formed Pantaya in partnership with Lionsgate and
launched the service in
2021, the Company acquired the remaining 75% equity interest from Lionsgate,
and Pantaya is now a wholly-owned consolidated subsidiary of the Company. As of
Cinelatino: the leading Spanish-language cable movie network with approximately
3.3 million(1) subscribers in the
? best contemporary films and original television series from
America, and
distribution, Cinelatino is the highest rated Spanish-language original movie
network in the
WAPA: the leading broadcast television network and television content producer
in
? WAPA is
entertainment programming, producing over 71 hours in the aggregate each week.
Additionally, we operate WAPA.TV, a leading news and entertainment website in
WAPA Deportes: through its multicast signal, WAPA distributes WAPA Deportes, a
? leading sports television network in
Baseball (MLB),
events from
WAPA America: a cable television network serving primarily Puerto Ricans and
other Caribbean Hispanics living in the
? features news and entertainment programming produced by WAPA. WAPA America is
distributed in the
digital basic subscribers.
Pasiones: a cable television network dedicated to showcasing the most popular
telenovelas and serialized dramas, distributed in the
Pasiones features top-rated telenovelas from
?
telenovela cable television network in primetime. Pasiones has approximately
3.6 million(1) subscribers in the
America.
Centroamerica TV: a cable television network targeting Central Americans living
in the
segment of the
? popular news and entertainment from
programming from the top professional soccer leagues in the region.
Centroamerica TV is distributed in theU.S. to approximately 3.1 million(1) subscribers. 26 Table of Contents
Television Dominicana: a cable television network targeting Dominicans living
in the
? Dominicana airs the most popular news and entertainment programs from the
league, featuring current and former players from MLB. Television Dominicana is
distributed in the
Snap Media: a distributor of content to broadcast and cable television networks
and OTT, SVOD and AVOD platforms in
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
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
interest in Canal 1 in partnership with leading producers of news and
entertainment content in
renewable broadcast television concession in 2016. The partnership began
? operating Canal 1 on
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
REMEZCLA: a digital media company targeting English speaking and bilingual
? Hispanic millennials through innovative content. On
a 25.5% interest in REMEZCLA.
Subscriber amounts are based on most recent remittances received from our
(1) 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 revenue and subscriber revenue. All of our Networks derive revenues from advertising. Advertising revenue is generated from the sale of advertising time, which is typically sold pursuant to advertising orders with advertisers. Our advertising revenue is tied to the success of our programming, including the popularity of our programming 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 political advertising in an election year. For example, in 2020, we experienced higher advertising sales as a result of political advertising spending during the 2020 Puerto Rico gubernatorial elections. Elections inPuerto Rico occur every 4 years. All of our Networks receive fees paid by MVPDs. 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 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 receive our Networks. The terms of certain non-U.S. affiliation agreements provide for payment of a fixed contractual monthly fee. Changes in subscriber revenue at our Networks are primarily derived from changes in contractual affiliation 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 subscriptions to Pantaya, our streaming platform. Pantaya 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 streaming platform. 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.
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WAPA has been the #1-rated broadcast television network in Puerto Rico since the
start of Nielsen audience measurement twelve years ago and management believes
it is highly valued by its viewers and cable, satellite and telecommunications
service providers. WAPA is distributed by all pay-TV distributors in Puerto Rico
and has been successfully growing affiliate revenue. WAPA's primetime household
rating for the year ended December 31, 2021 was nearly four 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 since the start of Nielsen audience measurement,
management believes WAPA is well positioned for future growth in 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 growth in
the U.S. Hispanic population, which is expected to continue its long-term upward
trajectory.
Hispanics represent 18% of the total U.S. television household population and
11% of the total U.S. buying power, but the aggregate linear television 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.
Management expects our U.S. networks to benefit from growth in the U.S. Hispanic
population, as it continues its long-term growth. According to the 2020 U.S.
Census, nearly 62.1 million Hispanics resided in the United States in 2020,
representing an increase of more than 27 million people between 2000 and 2020,
and that number is projected to grow to approximately 75 million by 2030. U.S.
Hispanic television households grew by 35% during the period from 2010 to 2021,
from 12.9 million households to 17.5 million households.
Similarly, management expects Cinelatino and Pasiones to benefit from growth in
Latin America . Pay-TV subscribers in Latin America (excluding Brazil ) are
projected to grow from 53 million in 2021 to 60 million by 2025. Furthermore, as
of December 31, 2021 , Cinelatino and Pasiones were distributed to approximately
26% and 29% of total pay-TV subscribers throughout Latin America (excluding
Brazil ), respectively.
Colombia , where we own 40% of Canal 1, the #3-rated broadcast television
network, is a large and appealing market for broadcast television. Colombia had
an estimated population of 51.6 million as of January 1, 2022 , the second
largest in Latin America (excluding Brazil ). According to IBOPE, the three major
broadcast networks in Colombia receive a 55% share of overall viewing. These
factors result in an annual market for free-to-air television advertising of
approximately $256 million for 2021 (as converted 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, including an agreement
pursuant to which MVS provides satellite and technical support and other
administrative support services, an agreement that grants MVS the non-exclusive
right to distribute the Cinelatino service to third party distributors in
Mexico , and an agreement between Cinelatino and Dish Mexico (an affiliate of
MVS), pursuant to which Dish Mexico distributes Cinelatino and pays subscriber
fees to Cinelatino.
As of
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Comparison of Consolidated Operating Results for the Three Months EndedMarch 31, 2022 and 2021 (Unaudited) (amounts in thousands) Three Months Ended $ Change % Change March 31, Favorable/ Favorable/ 2022 2021 (Unfavorable) (Unfavorable) Net revenues$ 48,799 $ 37,577 $ 11,222 29.9 % Operating Expenses: Cost of revenues 15,125 11,779 (3,346) (28.4) % Selling, general and administrative 30,658 11,391 (19,267) NM Depreciation and amortization 7,629 2,665 (4,964) NM Other expenses 1,118 6,728 5,610 83.4 % Gain from FCC spectrum repack and other (46) (52) (6) (11.5) % Total operating expenses 54,484 32,511 (21,973) (67.6) % Operating loss (income) (5,685) 5,066 (10,751) NM Other (expense) income: Interest expense and other, net (3,164) (2,358) (806) (34.2) % (Loss) gain on equity method investment activity (4,772) 32,609 (37,381) NM Other expense, net - (668) 668 100 % Total other (expense) income (7,936) 29,583 (37,519) NM
(Loss) Income before income taxes (13,621) 34,649 (48,270) NM Income tax benefit (expense) 393 (1,268) 1,661 NM Net (loss) income (13,228) 33,381 (46,609) NM Net income attributable to non-controlling interest - (23) 23 100 % Net (loss) income available to Hemisphere Media Group, Inc.$ (13,228) $ 33,358 $ (46,586) NM NM = Not meaningful Net Revenues
Net revenues were$48.8 million for the three months endedMarch 31, 2022 , an increase of$11.2 million , or 30%, as compared to$37.6 million for the comparable period in 2021 due to an increase in our subscriber revenue. Subscriber revenue increased$12.3 million , or 61%, due to the inclusion of Pantaya, which the Company acquired onMarch 31, 2021 , offset in part by a decline inU.S. pay television subscribers. Advertising revenue increased$0.1 million primarily due to an increase in advertising revenue at WAPA, offset by a decrease in advertising revenue at ourU.S. cable networks. Other revenue decreased$1.1 million driven by the timing of licensing of our content to
third parties. Operating Expenses Cost of Revenues: Cost of revenues consists primarily of programming and production costs, programming amortization, technical and streaming delivery costs and distribution fees. Cost of revenues for the three months endedMarch 31, 2022 , were$15.1 million , an increase of$3.3 million , or 28%, as compared to$11.8 million for the comparable period in 2021, due to the inclusion of Pantaya, primarily comprised of programming, streaming delivery costs and third-party distribution fees. Selling, General and Administrative: Selling, general and administrative expenses consist principally of marketing, research, employee costs, stock-based compensation, and other general administrative costs. Selling, general, and administrative expenses for the three months endedMarch 31, 2022 , were$30.7 million , an increase of$19.3 million as compared to$11.4 million for the comparable period in 2021, due to the inclusion of Pantaya, primarily comprised of marketing and personnel expenses. Additionally, the increase was due to higher personnel costs, insurance and stock-based compensation. 29
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Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of fixed assets and amortization of intangibles. Depreciation and amortization for the three months endedMarch 31, 2022 , was$7.6 million , an increase of$5.0 million , as compared to$2.7 million for the comparable period in 2021, the increase is due to the amortization of intangible assets recognized in connection with the Pantaya Acquisition. Other Expenses: Other expenses include legal and financial advisory fees, and other fees incurred in connection with acquisition and corporate finance activities, including debt and equity financings. Other expenses for the three months endedMarch 31, 2022 , were$1.1 million , a decrease of$5.6 million , or 83%, as compared to$6.7 million for the comparable period in 2021, which included fees and expenses incurred in connection with the Pantaya Acquisition and the incremental borrowing on our Third Amended Term Loan Facility. This decrease was offset in part by expenses in the current year period related to the pursuit of strategic transactions. Gain from FCC spectrum 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 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 endedMarch 31, 2022 , was consistent with the prior year period.
Other Income (Expenses)
Interest Expense and Other, net: Interest expense and other, net for the three months endedMarch 31, 2022 , was$3.2 million , an increase of$0.8 million , or 34%, compared to$2.4 million for the comparable period in 2021 due to incremental borrowing on our Third Amended Term Loan Facility. (Loss) Gain on Equity Method Investment Activity: Loss on equity method investment activity for the three months endedMarch 31, 2022 , was$4.8 million , a decrease of$37.4 million , compared to gain on equity method investment activity of$32.6 million for the comparable period in 2021, 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 onMarch 31, 2021 . The decrease was also due to higher losses at Canal 1 primarily as a result of unrealized foreign currency losses onU.S. dollar denominated obligations in the current year period. Other Expense, net: Other expense, net for the three months endedMarch 31, 2022 , decreased$0.7 million . The prior year period included the write-off in the prior year period of the net book value of programming licensed from Pantaya prior to the Acquisition Date.
Income Tax Benefit (Expense)
Income tax benefit for the three months endedMarch 31, 2022 , was$0.4 million as compared to income tax expense$1.3 million for the comparable period in 2021, due to a pre-tax loss in the current year period. For more information, see Note 6, "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
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest, related to the 25% interest in Snap Media held by minority shareholders for the three months endedMarch 31, 2021 , was$0.0 million . OnJuly 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
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Net (Loss) Income Available to
Net loss available to
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our principal sources of cash are cash on hand, cash flows from operating
activities and capacity under our revolving loan ("Revolving Facility"). As of
March 31, 2022 , we had $37.3 million of cash on hand and $30 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 and acquisitions.
Management believes cash on hand, cash flow from operations and availability
under our Revolving Facility will provide sufficient liquidity 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, commitments from the
ordinary course of business that require cash payments to vendors and suppliers,
particularly for programming, operating leases and other commitments. However,
we do not expect to generate sufficient cash flow from operations to repay at
maturity the entirety of the then outstanding balances of our debt. As a result,
we will then be dependent upon our ability to access the capital and credit
markets in order to repay or refinance the outstanding balances of our
indebtedness. Failure to raise significant amounts of funding to repay these
obligations at maturity would adversely affect our business. In such a
circumstance, we would need to take other actions including selling assets,
seeking strategic investments from third parties or reducing other discretionary
uses of cash.
Cash Flows
Three Months Ended March 31,
Amounts in thousands: 2022 2021
Cash provided by (used in):
Operating activities $ (9,834) $ 17,778
Investing activities (1,599) (2,238)
Financing activities (715) 44,377
Net increase in cash $ (12,148) $ 59,917 Comparison for the Three Months Ended
Operating Activities
Cash used in 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, gain or loss on equity method investment activity, amortization of operating lease right-of-use assets, provision for bad debts. Net cash used in operating activities for the three months endedMarch 31, 2022 was$9.8 million , a decrease of$27.6 million , as compared to net cash provided of$17.8 million in the prior year period, due to an decrease in net loss of$46.6 million and an decrease in net working capital of$20.7 million , offset in part by a increase in non-cash items of$39.7 million . The decrease in net working capital is due increases in programming rights of$10.7 million and accounts receivable of$6.6 million and decreases in other accrued expenses of$3.9 million , income taxes payable of$1.4 million , programming rights payable of$0.6 million and due to/from related parties of$0.2 million , offset in part by decreases in prepaids and other assets of$1.7 million and increases in other liabilities of$0.6 million and accounts payable of$0.4 million . The increase in non-cash items is due to a$37.4 million increase in loss on equity method investment 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 the remaining 75% equity interest in the prior year period, an increase in depreciation and amortization of$5.0 million , offset in part by other non-cash acquisition related charges of$1.3 million in the prior year period. 31 Table of Contents Investing Activities
Net cash used in investing activities for the three months endedMarch 31, 2022 , was$1.6 million , an improvement of$0.6 million as compared to$2.2 million in the prior year period. The improvement is due to decreases in capital expenditures of$1.0 million and funding of equity investments of$0.6 million , offset in part by cash received from the Pantaya Acquisition of$1.0 million .
Financing Activities
Net cash used in financing activities for the three months endedMarch 31, 2022 , was$0.7 million , an decline of$45.1 million as compared to net cash provided of$44.4 million in the prior year period. The decline is due to net proceeds of$47.4 million received in the prior year period from incremental borrowing under our Third Amended Term Loan Facility in connection with the Pantaya Acquisition, offset in part by lower repurchases of our Class A common stock of$2.4 million .
For more information, see Note 7, "Long-Term Debt" of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance withU.S. GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by management and the related disclosures have been reviewed with the Audit Committee of our Board of Directors. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our 2021 Annual Report on Form 10-K.
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