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
the Company entered into an agreement to sell Pantaya to TelevisaUnivision. For
more information, see Note 4, "Held for Sale" of Notes to Condensed
Consolidated Financial Statements, included elsewhere in this Quarterly Report.
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 70 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
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. 27 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. For more information, see Note 15, "Subsequent
Events" of Notes to Condensed Consolidated Financial Statements, included
elsewhere in this Quarterly Report.
(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 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 Distributors. 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. Distributors 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 Distributors 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 28
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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 inPuerto 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 inPuerto Rico and has been successfully growing affiliate revenue. WAPA's primetime household rating for the year endedDecember 31, 2021 was nearly four times higher than the most highly rated English-languageU.S. broadcast network in theU.S. ,CBS , and higher than the combined ratings ofCBS ,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 theU.S. As a result, management believes ourU.S. cable networks are well-positioned to benefit from growth in both the growing national advertising spend targeted at the highly sought-afterU.S. Hispanic cable television audience, and growth in theU.S. Hispanic population, which is expected to continue its long-term upward trajectory. Hispanics represent 18% of the totalU.S. television household population and 11% of the totalU.S. buying power, but the aggregate linear television media spend targeted atU.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 ourU.S. networks to benefit from growth in theU.S. Hispanic population, as it continues its long-term growth. According to the 2020 U.S. Census, nearly 62.1 million Hispanics resided inthe 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 inLatin America . Pay-TV subscribers inLatin America (excludingBrazil ) are projected to grow from 53 million in 2021 to 60 million by 2025. Furthermore, as ofDecember 31, 2021 , Cinelatino and Pasiones were distributed to approximately 26% and 29% of total pay-TV subscribers throughoutLatin America (excludingBrazil ), 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 ofJanuary 1, 2022 , the second largest inLatin America (excludingBrazil ). According to IBOPE, the three major broadcast networks inColombia receive a 55% share of overall viewing. According to ASOMEDIOS, the free-to-air television advertising market was 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 inMexico , 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. While some of these agreements have expired, we are continuing to operate as though these agreements are in effect while we negotiate their renewals (which may be on different terms).
As of
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Comparison of Consolidated Operating Results for the Three and Six Months EndedJune 30, 2022 and 2021 (Unaudited) (amounts in thousands) Three Months Ended $ Change % Change Six Months Ended $ Change % Change June 30, Favorable/ Favorable/ June 30, Favorable/ Favorable/ 2022 2021 (Unfavorable) (Unfavorable) 2022 2021 (Unfavorable) (Unfavorable) Net revenues$ 54,174 $ 50,460 $ 3,714 7.4 %$ 102,973 $ 88,037 $ 14,936 17.0 % Operating expenses: Cost of revenues 18,348 14,798 (3,550) (24.0) % 33,473 26,577 (6,896) (25.9) % Selling, general and administrative 25,911 24,908 (1,003) (4.0) % 56,569 36,299 (20,270) (55.8) % Depreciation and amortization 3,335 4,337 1,002 23.1 % 10,964 7,002 (3,962) (56.6) % Other expenses 8,939 1,363 (7,576) NM 10,057 8,091 (1,966) (24.3) % (Gain) from FCC spectrum repack and other (95) (2,124) (2,029) (95.5) % (141) (2,176) (2,035) (93.5) % Total operating expenses 56,438 43,282 (13,156) (30.4) % 110,922 75,793 (35,129) (46.3) % Operating (loss) income (2,264) 7,178 (9,442) NM (7,949) 12,244 (20,193) NM Other (expense) income: Interest expense and other, net (3,111) (3,165) 54 1.7 % (6,275) (5,523) (752) (13.6) % Gain (loss) on equity method investment activity 2,283 (8,569) 10,852 NM (2,489) 24,040 (26,529) NM Other expense, net - - - NM - (668) 668 100.0 % Total other (expense) income (828) (11,734) 10,906 92.9 % (8,764) 17,849 (26,613) NM (Loss) income before income taxes (3,092) (4,556) 1,464 32.1 % (16,713) 30,093 (46,806) NM Income tax expense (819) (1,785) 966 54.1 % (426) (3,053) 2,627 86.0 % Net (loss) income (3,911) (6,341) 2,430 38.3 % (17,139) 27,040 (44,179) NM Net loss attributable to non-controlling interest - 55 (55) (100.0) % - 32 (32) (100.0) % Net (loss) income attributable toHemisphere Media Group , Inc.$ (3,911) $ (6,286) $ 2,375 37.8 %$ (17,139) $ 27,072 $ (44,211) NM NM = Not meaningful Net Revenues Net revenues were$54.2 million for the three months endedJune 30, 2022 , an increase of$3.7 million , or 7%, as compared to$50.5 million for the comparable period in 2021. Subscriber revenue decreased$0.2 million , or 1%, primarily due to a decline inU.S. cable subscribers, offset in part by contractual rate increases and new launches of our Cable Networks. Advertising revenue decreased$0.2 million , or 1%, driven by a decline in ad sales at our Cable Networks. Other revenue increased$4.1 million driven primarily by the licensing of content to third parties. 30 Table of Contents
Net revenues were$103.0 million for the six months endedJune 30, 2022 , an increase of$14.9 million , or 17%, as compared to$88.0 million for the comparable period in 2021, primarily due to the inclusion of Pantaya, which the Company acquired onMarch 31, 2021 . Subscriber revenue increased$12.0 million , or 23%, primarily due to the inclusion of Pantaya. Advertising revenue decreased$0.1 million , driven by a decline in ad sales at our Cable Networks. Other revenue increased$3.0 million driven primarily by the licensing of content
to third parties. Operating Expenses 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 endedJune 30, 2022 , were$18.3 million , an increase of$3.6 million , or 24%, compared to$14.8 million for the comparable period in 2021, due to programming costs related to content licensed to third parties. Cost of revenues for the six months endedJune 30, 2022 , were$33.5 million , an increase of$6.9 million , or 26%, compared to$26.6 million for the comparable period in 2021, due the inclusion of Pantaya and programming costs related to content licensed to third parties. 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 endedJune 30, 2022 , were$25.9 million , an increase of$1.0 million or 4%, compared to$24.9 million for the comparable period in 2021, due to higher personnel costs, offset in part by a decrease in stock compensation. Selling, general, and administrative expenses for the six months endedJune 30, 2022 , were$56.5 million , an increase of$20.3 million , or 56%, compared to$36.3 million for the comparable period in 2021, due the inclusion of Pantaya, including higher marketing and personnel costs, offset in part by a decrease in stock compensation. Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of fixed assets and amortization of intangibles. Depreciation and amortization for the three months endedJune 30, 2022 , was$3.3 million , a decrease of$1.0 million , or 23%, compared to$4.3 million for the comparable period in 2021. Depreciation and amortization for the six months endedJune 30, 2022 , was$11.0 million , an increase of$4.0 million , or 57%, compared to$7.0 million for the comparable period in 2021. For the three months period endedJune 30, 2022 , the decrease is primarily due to the amortization of certain intangible assets that were fully amortized in the prior quarter. For the six months period endedJune 30, 2022 , the increase was primarily due to the amortization of intangible assets recognized as part of the acquisition of Pantaya, offset in part by the amortization of certain intangible assets that were fully amortized in during the prior year. Other Expenses: Other expenses include legal and financial advisory fees, and other fees incurred in connection with transactions and corporate finance activities, including debt and equity financings. Other expenses for the three months endedJune 30, 2022 , were$8.9 million , an increase of$7.6 million , compared to$1.4 million in the comparable period in 2021, due to transaction expenses related to the announced transactions. Other expenses for the six months endedJune 30, 2022 , were$10.1 million , an increase of$2.0 million , compared to$8.1 million in the comparable period in 2021, due to transaction expenses related to the announced transactions, offset in part by the expenses incurred in connection with the acquisition of Pantaya 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 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 endedJune 30, 2022 , was$0.1 million as compared to$2.1 million in the comparable period of 2021. Gain from FCC spectrum repack and other for the six months endedJune 30, 2022 , was$0.1 million as compared to$2.2 million in the comparable period of 2021. These decreases were due to reimbursements received in the prior year period from the FCC for equipment purchases required as a result of the FCC spectrum repack and the disposal of assets no longer utilized in the operations of the business during the prior year period.
Other Expenses
Interest Expense and other, net: Interest Expense and other, net: Interest expense for the three months endedJune 30, 2022 , decreased$0.1 million , or 2%, due to the expiration of our interest rate swaps onMarch 31, 2022 , offset in part by higher average interest rates in the current year period. Interest expense for the six months endedJune 30, 2022 , increased$0.8 million , or 14%, due to the incremental borrowing on our Third Amended Term Loan Facility onMarch 31, 2021 , offset in part by the expiration of our interest rate swaps. 31 Table of Contents Gain (Loss) on Equity Method Investment Activity: Gain on equity method investment activity for the three months endedJune 30, 2022 , was$2.3 million , an improvement of$10.9 million compared to a loss of$8.6 million for the comparable period in 2021, due to lower losses at Canal 1 as a result of unrealized foreign currency gains onU.S. dollar denominated obligations and improved operating results. Loss on equity method investment activity for the six months endedJune 30, 2022 , was$2.5 million , as compared to a gain of$24.0 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 . Other expense, net: Other expense, net for the six months endedJune 30, 2022 , was$0 million , a decrease of$0.7 million , compared to an expense of$0.7 million in the comparable period in 2021, which reflected the write-off of the net book value of programming licensed from Pantaya prior to the Acquisition Date. Income Tax Expense Income tax expense for the three months endedJune 30, 2022 , was$0.8 million as compared to$1.8 million for the comparable period in 2021. Income tax expense for the six months endedJune 30, 2022 , was$0.4 million as compared to$3.1 million for the comparable period in 2021. 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 endedJune 30, 2022 , was$3.9 million as compared to$6.3 million for the comparable period in 2021. Net loss for the six months endedJune 30, 2022 , was$17.1 million as compared to net income of$27.0 million for the comparable period in 2021, as the prior 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.
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, for the three months endedJune 30, 2022 , was$0 million as compared to$0.1 million for the comparable period in 2021. Net loss attributable to non-controlling interest, related to the 25% interest in Snap Media held by minority shareholders, for the six months endedJune 30, 2022 , was$0 million as compared to$0.0 million for the comparable period in 2021. EffectiveJuly 15, 2021 , the Company entered into an omnibus modification agreement withSnap Distribution, Inc. , aBritish Virgin Islands company, pursuant to whichSnap Distribution, Inc. relinquished the non-controlling 25% interest in Snap Media, at which point Snap Media became a wholly owned subsidiary of the Company. For more information, see Note 6, "Equity Method Investments" of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Net (Loss) Income Attributable to
Net loss available toHemisphere Media Group, Inc. for the three months endedJune 30, 2022 , was$3.9 million as compared to$6.3 million for the comparable period in 2021. Net loss available toHemisphere Media Group, Inc. for the six months endedJune 30, 2022 , was$17.1 million as compared to net income of$27.1 million for the comparable period in 2021.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our principal sources of cash are cash on hand, borrowings under our revolving
credit facility and cash flows from operating activities and capacity under our
revolving loan ("Revolving Facility"). At June 30, 2022 , we had $28.9 million of
cash on hand and $30 million undrawn and available under our revolving credit
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
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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
Six Months Ended June 30,
Amounts in thousands: 2022 2021
Cash provided by (used in):
Operating activities $ (17,047) $ 19,899
Investing activities (2,141) (124,859)
Financing activities (1,395) 42,928
Net decrease in cash $ (20,583) $ (62,032) Comparison for the Six 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 six months endedJune 30, 2022 was$17.0 million , a decrease of$36.9 million , as compared to provided by$19.9 million in the prior year period, due to a decrease in net loss of$44.2 million and a decrease in net working capital of$24.0 million , offset in part by an increase in non-cash items of$31.3 million . The decrease in net working capital is due increases in programming rights of$9.9 million , prepaids and other assets of$3.5 million , due from related parties of$1.3 million and accounts receivable of$0.5 million and decreases in accounts payable of$9.3 million , income taxes payable of$3.5 million , and other liabilities of$0.1 million , offset in part by increases in programming rights payable of$2.8 million and other accrued expenses of$1.3 million . The increase in non-cash items is due to a$26.5 million increase in loss on equity method investment activity primarily due to a$30.1 million one-time gain recognized in the prior year period on the existing 25% equity interest in Pantaya upon the step acquisition of the remaining 75% equity interest, and increases in depreciation and amortization of$4.0 million , programming amortization of$3.4 million , and a decrease in the gain from FCC spectrum repack of$2.2 million , offset in part by an increase in deferred taxes of$3.1 million and other non-cash acquisition related charges of$1.3 million in the prior year period.
Investing Activities
Net cash used in investing activities for the six months endedJune 30, 2022 , was$2.1 million , an improvement of$122.7 million as compared to$124.9 million in the prior year period. The improvement was primarily due to the net cash paid in the prior year period for the acquisition of Pantaya of$122.6 million .
Financing Activities
Net cash used in financing activities for the six months endedJune 30, 2022 , was$1.4 million , a decrease of$44.3 million as compared to net cash provided by of$42.9 million in the prior year period. The decrease is due to net proceeds of$47.4 million received from incremental borrowing under our Third Amended Term Loan Facility in connection with the acquisition of Pantaya in the prior year period.
For more information, see Note 8, "Long-Term Debt" of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
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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 Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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