The following discussion and analysis summarizes our financial condition and operating performance and should be read in conjunction with our historical Consolidated Financial Statements and notes thereto included above. Unless the context indicates otherwise, the terms the "Company," "Hemisphere," "we," "our" or "us" are used to refer to
Hemisphere Media Group, Inc.and its consolidated subsidiaries.
Important elements of the management report and the analysis of results of operations and financial position include:
? Overview. The Overview section provides a summary of our business, operations
divisions and business trends, outlook and strategy.
Consolidated operating results. Consolidated operating results
? presents an analysis of our results on a consolidated basis to
the year has ended
Cash and capital resources. The Liquidity and Capital Resources Section
? provides an analysis of our cash flows for the year ended
compared to the year ended
Critical accounting policies and estimates. The discussion of our accounting
? policies considered important for understanding our finances
the status and results of operations, and which require considerable judgment and
management estimates in their application.
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 with a premium Spanish-language streaming platform distributed in the U.S., five Spanish-language cable television networks distributed in the U.S., two Spanish-language cable television networks distributed in Latin America, the #1-rated 59 Table of Contents broadcast television network in Puerto Rico, a leading distributor of content to television and digital media platforms in Latin Americaand a 40% interest in the #3-rated broadcast television network in Colombia.
Pantaya: the very first premium subscription streaming service from
Spanish-language media offering the largest selection of news and classics,
free commercial blockbusters and exclusive rights to critically acclaimed
movies and series
? productions and titles from our library, as well as titles from third parties
producers. The company formed Pantaya in partnership with Lionsgate and
launched the service in
2021, the Company acquired the remaining 75% interest from Lionsgate,
and Pantaya is now a wholly owned consolidated subsidiary of the Company. From
Cinelatino: the first cable film network in the Spanish language with approximately
3.4 million(1) subscribers in the
? best contemporary movies and original tv series from
distribution, Cinelatino is the highest rated original film in Spanish
network in the
WAPA: first broadcasting network and producer of television content
? WAPA is
entertainment programming, producing over 71 hours in total each week.
Additionally, we operate WAPA.TV, a leading news and entertainment website in
WAPA Deportes: via its multicast signal, WAPA distributes WAPA Deportes, a
? first sports television channel in
professional sporting events
WAPA America: a cable television network serving primarily Puerto Ricans and
other Caribbean Hispanics living in the
? presents information and entertainment programs produced by WAPA. WAPA America is
distributed in the
basic digital subscribers.
Pasiones: a cable television network dedicated to presenting the most popular
telenovelas and drama series, distributed in the
Pasiones offers the best telenovelas of
prime time telenovela cable television network. Pasiones about
3.7 million(1) subscribers in the
Centroamerica TV: a cable television network targeting Central Americans living
part of the
? popular news and entertainment from
programming of the best professional soccer leagues in the region.
Centroamerica TV is distributed in the
Television Dominicana: a cable television network targeting Dominicans living
? Dominicana broadcasts the most popular news and entertainment programs from the
league, featuring current and former MLB players. Dominican television is
distributed in the
Snap Media: A Content Distributor for Broadcast and Cable TV Networks
and OTT, SVOD and AVOD platforms in
acquired a 75% stake in Snap Media and, as part of the acquisition,
Snap Media has entered into a joint venture with MarVista, an independent company
? entertainment studio and shareholder of Snap Media, to produce
movies and series. Snap Media is responsible for content distribution
owned and/or controlled by our Networks, as well as content to be produced by
the production joint venture between Snap Media and MarVista. At
the Company entered into an omnibus agreement, pursuant to which, minority shareholders 60 Table of Contents
relinquished the 25% non-controlling interest in Snap Media, in which case Snap
Media became a wholly owned subsidiary of the Company.
Channel 1: the #3 ranked broadcast television network in
interest in Canal 1 in partnership with the main producers of information and
entertainment content in
television concession renewable in 2016. The partnership began
? operation of channel 1 on
resulting in the extension of the concession license for another ten
years without additional compensation. The concession is now due to expire on
REMEZCLA: a digital media company targeting Anglophones and bilinguals
? Hispanic millennials through innovative content. At
a 25.5% stake in REMEZCLA.
(1) Subscription amounts are based on the most recent installments received from our
Distributors at the period end date, which is generally two months before
at 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'spolitical 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. The next election in Puerto Ricowill be in 2024. 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 whoreceive 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.
In 2021, we generated approximately 95% of our net revenue from
WAPA has been the #1-rated broadcast television network in
Puerto Ricosince 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 Ricoand has been successfully growing affiliate revenue. WAPA's primetime household rating for the year ended December 31, 2021was 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, FOXand the CW. As a 61
Following the success of its audiences since the start of Nielsen’s audience measurement, management believes that WAPA is well positioned for future subscription revenue growth.
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 Statesin 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. Colombiahad 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 Colombiareceive a 55% share of overall viewing. These factors result in an annual market for free-to-air television advertising of approximately $256 millionfor 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.
62 Table of Contents COVID-19 Pandemic
March 2020, the World Health Organizationcharacterized the coronavirus ("COVID-19") as a pandemic, and the President of the United Statesdeclared 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 December 31, 2021. The Company's advertising revenue improved during the second part of 2020, 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 and Omicron variants, 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 Annual Report. The Company has evaluated and continues to evaluate the potential impact of the COVID-19 pandemic on its 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. Given the global nature of the COVID-19 pandemic, our investment in Canal 1, which operates in Colombia, has also been negatively impacted. Colombia'sPresident 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 retail and mass transportation, however some limitations are still in place for public events and the state of emergency declaration has been extended to April 30, 2022. The COVID-19 pandemic had a material adverse impact on advertising spending, and accordingly, had a material adverse impact on Canal 1's advertising revenue in 2020. However, advertising spend and Canal 1's advertising revenue improved and surpassed pre-COVID-19
levels in 2021. 63 Table of Contents
CONSOLIDATED OPERATING RESULTS
Comparison of consolidated results of operations for the years ended
Years Ended $ Change % Change December 31, Favorable/ Favorable/ 2021 2020 (Unfavorable) (Unfavorable) Net revenues
$ 195,650 $ 151,18444,466 29.4 % Operating expenses: Cost of revenues 59,555 48,309 (11,246) (23.3) % Selling, general and administrative 93,813 44,646 (49,167) NM Depreciation and amortization 25,504 11,472 (14,032) NM Other expenses 8,959 3,226 (5,733) NM Gain from FCC spectrum repack and other (2,638) (953) 1,685 NM Impairment of goodwill and intangibles - 2,784
2,784 100.0 % Total operating expenses 185,193 109,484 (75,709) (69.2) % Operating income 10,457 41,700 (31,243) (74.9) % Other income (expense), net:
Interest expense and other, net (11,983) (10,376) (1,607) (15.5) % Gain (loss) on equity method investments 17,679 (22,258) 39,937 NM Impairment of equity method investment - (5,479) 5,479 100.0 % Other (expense) income, net (128) 3,267 (3,395) NM Total other income (expense), net 5,568 (34,846)
40,414 NM Income before income taxes 16,025 6,854 9,171 NM Income tax expense (4,994) (8,992) 3,998 44.5 % Net income (loss) 11,031 (2,138) 13,169 NM Net loss attributable to non-controlling interest 32 903 (871) (96.5) % Net income (loss) attributable to Hemisphere Media Group, Inc.
$ 11,063 $ (1,235)12,298 NM NM = not meaningful Net Revenues Net revenues were $195.7 millionfor the year ended December 31, 2021, an increase of $44.5 million, or 29%, as compared to $151.2 millionfor the year ended December 31, 2020. Subscriber revenue increased $39.8 million, or 51%, primarily due to the inclusion of Pantaya, which the Company acquired on March 31, 2021, as well as contractual rate increases, offset in part by a decline in U.S.pay television subscribers. Advertising revenue increased $3.6 million, or 5%, primarily due to growth in the Puerto Ricotelevision advertising market, offset in part by political advertising revenue in the prior year period. Other revenue increased $1.1 million, or 22%, driven primarily by the timing of the licensing of our content to third parties. Excluding political advertising in the prior year period, net revenues increased $48.7 million, or 33%.
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 year ended
December 31, 2021, were $59.6 million, an increase of $11.2 million, or 23%, compared to $48.3 millionfor the year ended December 31, 2020, due to the inclusion of Pantaya, primarily comprised of programming, streaming delivery costs and third-party distribution fees. Additionally, programming and production costs increased due to the launch of new programming and certain programming and sporting events produced and broadcast in the current year period that were cancelled in the prior year period due to the COVID-19 pandemic, offset in part by lower programming amortization. 64
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 year ended
December 31, 2021, were $93.8 million, an increase of $49.2 million, compared to $44.6 millionfor the year ended December 31, 2020, due to the inclusion of Pantaya, primarily comprised of marketing and personnel expenses. Additionally, the increase was due to higher advertising sales commissions, as a result of the growth in advertising revenue, higher stock-based compensation, offset in part by lower bad debt reserves. The prior year also reflected cost reductions implemented in response to the pandemic, including salary reductions and employee retention credits, which the Company did not have in the current year period. Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of fixed assets and amortization of intangibles. Depreciation and amortization for the year ended December 31, 2021, was $25.5 million, an increase of $14.0 million, compared to $11.5 millionfor the year ended December 31, 2020, due to the amortization of intangible assets recognized as part of 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 year ended December 31, 2021, were $9.0 million, an increase of $5.7 million, compared to $3.2 millionfor the year ended December 31, 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 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 year ended December 31, 2021, was $2.6 million, an increase as compared to $1.0 millionfor the year ended December 31, 2020, due to the timing of reimbursements received from the FCC for equipment purchases. Impairment of goodwill and intangibles: Impairment of goodwill and intangibles represents the amount by which the carrying value of an asset exceeds the asset's fair value. The $2.8 millioncharge for the year ended December 31, 2020, was related to impairment of goodwill and intangible assets identified in connection with the acquisition of Snap. There were no impairment charges in the current year. Other income (expense), net Interest Expense and Other, net: Interest expense for the year ended December 31, 2021, increased $1.6 million, or 16%, due to incremental borrowing on our Third Amended Term Loan Facility, offset in part by a lower average interest rate due to the decline in LIBOR. Gain (Loss) on Equity Method Investments: Gain on equity method investments for the year ended December 31, 2021, was $17.7 million, an improvement of $39.9 million, compared to a loss of $22.3 millionfor the year ended December 31, 2020, primarily due to a $30.1 millionone-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 improved operating results at Canal 1. For more information, see Note 3, "Business Combination" and Note 7, "Equity Method Investments" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report. Impairment of Equity Method Investment: In March 2020, we recorded a non-cash impairment charge of $5.5 millionreflecting the write-off of the full valuation of our investment in REMEZCLA. There were no impairment charges for the year ended December 31,2021. For more information, see Note 7, "Equity Method Investments" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report. 65 Table of Contents
Other (expense) income, net: Other expense, net for the year ended
December 31, 2021, was $0.1 milliondue 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 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 income, net for the year ended December 31, 2020, was $3.3 millionas the Company received proceeds for the reimbursement of expenses related to a strategic transaction. The expenses incurred were recorded in other expenses in the accompanying Consolidated Statements of Operations. For more information, see Note 3, "Business Combination" and Note 12, "Stockholders' Equity" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report. Income Tax Expense
Income tax expenses for the year ended
December 31, 2021, was $5.0 millionas compared to $9.0 millionfor the year ended December 31, 2020, due to lower operating income and Puerto Ricotax credits. For more information, see Note 8, "Income Taxes" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report. Net Income (Loss) Net income for the year ended December 31, 2021, was $11.0 million, compared to a loss of $2.1 millionfor the year ended December 31, 2020, as the current year period benefitted from a one-time non-cash gain of $30.1 millionrecognized 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 Consolidated Financial Statements, included elsewhere in this Annual Report.
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 and was
$0.0 millionfor the year ended December 31, 2021, as compared to $0.9 millionfor the year ended December 31, 2020. 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 more information, see Note 12, "Stockholders' Equity" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report.
Net income (loss) attributable to
Net income attributable to
CASH AND CAPITAL RESOURCES
Sources and uses of species
Our principal sources of cash are cash on hand, cash flows from operating activities and capacity under our revolving loan ("Revolving Facility"). At
December 31, 2021, we had $49.5 millionof cash on hand and $30.0 millionundrawn and available under our Revolving Facility. Our primary uses of cash include the production and acquisition of programming, operating costs, personnel costs, equipment purchases, principal and interest payments on our outstanding debt and income taxes. Cash may also be used to fund investments, acquisitions and repurchases of common stock. On November 18, 2020, the Company announced that its Board of Directors authorized the repurchase of up to $20 millionof the Company's Class A common stock, par value $0.0001per share ("Class A common stock"). Under the Company's stock repurchase program, management was 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 repurchase plan expired on November 19, 2021. As of November 19, 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 Consolidated Balance Sheets. 66 Table of Contents 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 Amounts in thousands 2021 2020 Cash provided by (used in): Operating activities $ 4,480 $ 55,979Investing activities (130,983) (10,593) Financing activities 41,509 (3,066)
(Decrease) net increase in cash
Comparison for the year ended
Cash provided by operating activities is primarily driven by our net income, 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, deferred taxes, provision for bad debts, and (gain) loss on equity method investments. Net cash provided by operating activities for the year ended
December 31, 2021, was $4.5 million, a decrease of $51.5 million, as compared to $56.0 millionin the same period in 2020, due to a decrease in non-cash items of $37.1 millionand a decrease in net working capital of $27.6 million, offset in part by an improvement in net income of $13.2 million. The decrease in non-cash items is due to a $39.9 millionimprovement in gain on equity method investments primarily due to a $30.1 millionone-time gain recognized on the existing 25% equity interest in Pantaya upon the step acquisition of the remaining 75% equity interest, an increase in gain from FCC spectrum repack and other of $1.7 million, and decreases in impairment charges totaling $8.3 million, deferred tax expense of $1.7 million, programming amortization of $1.5 million, provision for bad debts of $0.8 million, offset in part by increases in depreciation and amortization of $14.0 million, stock-based compensation of $0.8 million, amortization of deferred financing and original issue discount of $0.7 million, and other non-cash acquisition related charges of $1.3 million. The decrease in net working capital is due to increases in prepaids and other assets of $18.2 millionand programming rights of $14.0 million, both primarily due to the inclusion of Pantaya, and decreases in programming rights payable of $8.2 million, other accrued expenses of $3.8 million, and income taxes payable of $3.1 million, offset in part by a decrease in accounts receivable of $12.9 millionand increases in accounts payable of $6.0 million, other liabilities of $0.6 million, and due from related parties, net of $0.4 million.
For more information, see Note 3, “Business combinations” and Note 7, “Equity-accounted investments” in the Notes to the Consolidated Financial Statements, included elsewhere in this Annual Report.
Net cash used in investing activities for the year ended
December 31, 2021, was $131.0 million, an increase of $120.4 millionas compared to $10.6 millionin the same period in 2020. The increase was primarily due to the net cash paid for the Pantaya Acquisition of $122.6 million(net of cash acquired) and an increase in capital expenditures of $1.8 million, offset in part by a decrease in funding of equity investments of $2.6 millionand increased proceeds received from the FCC related to the spectrum repack of $1.4 million. 67 Table of Contents Financing Activities Net cash provided by financing activities for the year ended December 31, 2021, was $41.5 million, as compared to net cash used of $3.1 millionin the same period in 2020. The increase is due to net proceeds of $47.4 millionreceived from incremental borrowing under our Third Amended Term Loan Facility in connection with the Pantaya Acquisition, offset in part by increases in repurchases of our Class A common stock of $2.4 millionand repayments of long-term debt of $0.4 million.
Discussion on indebtedness
February 14, 2017, Hemisphere Media Holdings, LLC("Holdings") and InterMedia Español, Inc. (together with Holdings, the "Borrowers"), both wholly owned, indirect subsidiaries of the Company, amended the Term Loan Facility (the "Second Amended Term Loan Facility"). The Second Amended Term Loan Facility provides for a $213.3 millionsenior secured term loan B facility, and 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 millionand 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% or (ii) an ABR plus a margin of 2.50%. There is no LIBOR floor. The add-on to the term loan B facility was issued with 4.0% of original issue discount ("OID"). Additionally, the Third Amended Term Loan Facility provides for a Revolving Facility allowing for an aggregate principal amount of up to $30.0 million. The Revolving Facility is secured on a pari passu basis by the collateral securing the Third Amended Term Loan 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 zero) 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 December 31, 2021, the Revolving Facility was undrawn. The Third 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 millionof undrawn letters of credit and cash collateralized or backstopped letters of credit) exceeds 35% of the aggregate commitments under the Revolving Facility. 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 Third Amended Term Loan Facility with any remaining amount due at final maturity. The Third Amended Term Loan Facility principal payments commenced on 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. Within 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, 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 Third Amended Term Loan Facility, no excess cash flow payment will be due in March 2022. 68
In accordance with ASC 470 - Debt, the Incremental Facility borrowing was deemed a modification of the Second Term Loan Facility and as such, an additional
$2.0 millionof original issue discount ("OID") incurred in connection with the Third Amended Term Loan Facility was added to the existing OID. As of December 31, 2021, the OID balance was $2.2 million, net of accumulated amortization of $3.3 millionand was recorded as a reduction to the principal amount of the long-term debt outstanding as presented on the accompanying Consolidated Balance Sheets and will be amortized as a component of interest expense over the term of the Third Amended Term Loan Facility. Financing costs of $0.6 millionincurred in connection with the Third Amended Term Loan Facility were expensed in accordance with ASC 470 - Debt and are included in other expenses in the accompanying Consolidated Statement of Operations at December 31, 2021. In accordance with ASU 2015-15 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 $0.5 million, net of accumulated amortization of $2.8 million, are presented as a reduction to the Third Amended Term Loan Facility outstanding at December 31, 2021as presented on the accompanying Consolidated Balance Sheets, and will be amortized as a component of interest expense over the term of the Third Amended Term Loan Facility. An additional $0.4 millionof deferred costs, net of accumulated amortization of $0.2 million, incurred on the Revolving Facility in connection with the Third Amended Term Loan Facility, is recorded to prepaid and other current assets and other non-current assets in the accompanying Consolidated Balance Sheets as of December 31, 2021. Amortization of these costs will be straight-line through maturity on November 15, 2023.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with
U.S.GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the Consolidated Financial Statements included in the Annual Report on Form 10-K 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. We consider policies relating to the following matters to be critical accounting policies: Revenue Recognition The Company primarily earns revenue from (i) the distribution of its programming services through distributors and directly to consumers, (ii) advertising, and (iii) licensing of its programming. Revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which generally occurs when, or as, control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer. The Company's revenue recognition policies associated with each major source of revenue from contracts with customers are described in Note 2, "Revenue Recognition" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report.
The Company acquires, licenses, and produces content, including original programming ("programming rights"), for exploitation on our Networks, streaming platform, as well as, to be licensed to third parties. For acquired and licensed content, the Company capitalizes amounts paid to secure or extend the rights. For produced content, the Company capitalizes costs associated with the production, including development costs, direct cost, and production overhead. In development production costs for projects that will be completed within one year and after one year are recorded in prepaid and other current assets and other assets non-current, respectively, in the accompanying Consolidated Balance Sheets. Once production is complete, the capitalized costs are moved to programming rights current in the accompanying Consolidated Balance Sheets. 69
If management estimates that the unamortized cost of programming rights exceeds the estimated fair value, an adjustment is recorded to reduce the carrying value of the programming rights. For the year ended
December 31, 2021, management did not deem it necessary to write-down program rights. For the year ended December 31, 2020, management deemed it necessary to write-down certain program rights of $0.9 million, which is included in the amortization of programming rights. Programming rights are generally amortized over the term of the related license agreements or the number of exhibitions, whichever occurs first. For productions with intended distribution to third-parties, the Company amortizes the cost, including any participations and residuals, over the expected ultimate revenue stream in proportion to the revenues recognized. Programming rights to be utilized on our Networks or streaming platform within one year are classified as current assets, while programming rights to be utilized subsequently are considered non-current. Programming rights payable are classified as current or noncurrent in accordance with the payment terms of the various agreements. For more information on Programming Rights and Costs, see Note 1, "Nature of Business and Significant Accounting Policies" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report.
The Company's goodwill is recorded as a result of the Company's business combinations using the acquisition method of accounting. Indefinite lived intangible assets include a broadcast license, trademarks and tradenames. Other intangible assets include affiliate and customer relationships, programming rights, brands, and non-compete agreements with estimated useful lives of one to ten years. Other intangible assets are amortized over their estimated useful lives using the straight-line method. Costs incurred to renew or extend the term of recognized intangible assets are capitalized and amortized over the useful life of the asset. The Company tests its broadcast license annually for impairment or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of these assets with their carrying amounts using a discounted cash flow valuation method, assuming a hypothetical start-up scenario. The Company tests its trademarks and tradenames annually for impairment or whenever events or changes in circumstances indicate that such assets might be impaired. The test consists of a comparison of the fair value of these assets with the carrying amounts utilizing an income approach in the form of the royalty relief method, which measures the cost savings that a business enjoys since it does not have to pay a royalty rate for the use of a particular domain name and brand. The Company tests its goodwill annually for impairment or whenever events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test compares the fair value of each reporting unit with its carrying amount, including goodwill. The fair value of the reporting units is determined utilizing a combination of a discounted cash flow analysis incorporating variables such as revenue projections, projected operating cash flow margins, and discount rates, as well as a market-based approach employing comparable sales analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the Company and prevailing values in the broadcast and cable markets. If the fair value exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. The Company tests its other finite lived intangible asset for impairment whenever events or changes in circumstances indicate that such asset or asset group might be impaired. This analysis is performed by comparing the respective carrying value of the asset group to the current and expected future cash flows, on an undiscounted basis, to be generated from such asset group. If such analysis indicates that the carrying value of this asset group is not recoverable, the carrying value of such asset group is reduced to fair value. 70 Table of Contents
January 2017, the FASB issued Accounting Standards Updates ("ASU") 2017 04-Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for GoodwillImpairment. The amendments in this Update simplify how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under amendments in this Update, an entity would perform its annual, or interim, testing by comparing the fair value of a reporting unit with its carrying amount. An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company adopted this ASU as part of the annual goodwill and intangible impairment test as of December 31, 2020. The Company completed its annual impairment analysis and determined that there were no impairment charges for the year ended December 31, 2021. For the year ended December 31, 2020, the Company determined that based on the economic downturn related to the COVID-19 pandemic, the expected timing of recovery, and the expected growth of the business, the carrying value of the Snap reporting unit and other finite lived intangible assets, identified in connection with the acquisition of Snap, exceeded their respective fair values, resulting in an impairment charge totaling $2.8 millionfor the year ended December 31, 2020. For more information on Goodwilland intangible assets, see Note 6, " Goodwilland Intangible Assets" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record foreign withholding tax, which is withheld by foreign customers from their remittances to us, on a gross basis as a component of income taxes and separate from revenue in the accompanying Consolidated Statements of Operations. We follow the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. To the extent that interest and penalties are assessed by taxing authorities on any underpayment of income taxes, such amounts are accrued and classified as a component of income tax expense. On
January 1, 2021, the Company adopted Financial Accounting Standards Board("the FASB") ASU 2019-12-Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis of goodwill, separate entity financial statements, and interim recognition of enactment of tax laws or rate changes. The adoption of this ASU did not have an impact on our accompanying Consolidated Financial Statements as of and for the year ended December 31, 2021.
For further information on income taxes, see Note 8, “Income Taxes”, in the Notes to the Consolidated Financial Statements, included elsewhere in this Annual Report.
71 Table of Contents Equity-based compensation We have given equity incentives to certain employees. We account for such equity incentives in accordance with ASC 718 "Stock Compensation," which requires us to measure compensation cost for equity settled awards at fair value on the date of grant and recognize compensation cost in the accompanying Consolidated Statements of Operations over the requisite service or performance period the award is expected to vest. Compensation cost is determined using the Black-Scholes option pricing model. For more information on Income taxes, see Note 12, "Stockholders' Equity" of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report.
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