Item 1A. Risk Factors.
The following risk factors and the forward-looking statements disclaimer elsewhere herein should be read carefully in connection with evaluating our Business and our subsidiaries. These risks and uncertainties could cause actual results and events to differ materially from those anticipated. Many of the risk factors described under one heading below may apply to more than one section in which we have grouped them for the purpose of this presentation. As a result, you should consider all of the following factors, together with all of the other information presented herein, in evaluating our Business and our subsidiaries and the joint ventures and investments they enter into. These risk factors may be amended, supplemented or superseded from time to time in future filings and reports that we file with the Commission in the future.
Risk Factors Related to the COVID-19 Pandemic
The COVID-19 pandemic has had and may continue to have a negative effect on the Company’s Business. The uncertain future impact of COVID-19 could be material to the Company’s future results of operations and financial position.
During 2020, the rapid spread of the pandemic and the continuously evolving responses to combat it had an adverse impact on the global economy. Many of those impacts continued in 2021 despite the availability of vaccines as new variants of COVID-19, including the Delta and Omicron variants, have continued to impact the global economy.
The impact of the COVID-19 pandemic and measures to prevent its spread impacted our Business in a number of ways. Beginning in March 2020, the Company’s advertising revenue was negatively impacted, however, advertising revenue improved during the second half of 2020. The global pandemic had and may continue to have a material adverse impact on supply chain logistics, which may negatively impact advertising in the future as expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Operationally, most non-production and programming personnel are working remotely. Remote work arrangements may introduce operational risks, including but not limited to cybersecurity risks and risks to our internal controls and financial reporting, and impair our ability to manage our business. The Company has managed the remote workforce effectively and there have been no material adverse impacts on operations through December 31, 2021.
Given the global nature of the COVID-19 pandemic, our investment in Canal 1, which operates in Colombia, has also been negatively impacted. Colombia’s President declared a state of emergency, locking down the country on March 20, 2020. Since then, most restrictions have been lifted allowing services to work at full capacity including 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.
The Company has evaluated and will continue 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. The magnitude of the impact will depend on the duration and extent of the global pandemic, including recent increases in, and any additional waves of, COVID-19 cases, new variants of the virus, and the availability and efficacy of a vaccine and treatments for the disease and the impact of federal, state, local and foreign governmental actions, including measures taken by governmental authorities to address the pandemic, which may precipitate or exacerbate other risks and/or uncertainties, and consumer behavior in response to the pandemic and such governmental actions.
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Risk Factors Related to our Business
Service providers could discontinue or refrain from carrying our Networks or Pantaya, decide not to renew their distribution agreements or renew on less favorable terms, which could substantially reduce the number of viewers and harm our Business and operating results.
Consolidation among cable and satellite operators has given the largest operators considerable leverage in their relationships with programmers, including our Networks. Some of our largest Distributors are combining and have gained, or may gain, market power, which could affect our ability to maximize the value of our content through those platforms. In addition, many of the countries and territories in which we distribute our Networks also have a small number of dominant Distributors. The success of each of our Networks and Pantaya is dependent, in part, on our ability to enter into new carriage agreements and maintain or renew existing agreements or arrangements with Distributors. Although our Networks currently have arrangements or agreements with, and are being carried by, many of the largest Distributors, having such a relationship or agreement with a Distributor does not always ensure that the Distributors will continue to carry our Networks. Additionally, under our Cable Networks’ current contracts and arrangements, we typically offer Distributors the right to transmit the programming services comprising our Cable Networks to their subscribers, but not all such contracts or arrangements require that the programming services comprising our Cable Networks be offered to all subscribers of, or any specific tiers of, or to a specific minimum number of subscribers of a Distributor. Also, WAPA is dependent on its retransmission consent agreements that provide for per subscriber fees with annual rate escalators. No assurances can be provided that WAPA will be to all such agreements on terms, on a timely basis, or at all. A to secure a renewal of Pantaya’s or our Networks’ agreements, or a renewal on less terms may result in a reduction in our Business’s subscriber revenue and advertising revenue, and may have a material effect on our results of operations and financial position.
The success of our Business is dependent upon advertising revenue, which is seasonal and cyclical, and will also fluctuate as a result of a number of other factors, some of which are beyond our control.
The success of our Business is dependent upon our advertising revenues. Our Networks’ ability to sell advertising time and space depends on, among other things:
economic conditions in the markets in which our Networks operate;
the popularity of the programming offered by our Networks;
changes in the population demographics in the markets in which our Networks operate;
advertising price fluctuations, which can be affected by the popularity of programming, the availability of programming, and the relative supply of and demand for commercial advertising;
our competitors’ activities, including increased competition from other advertising-based mediums, particularly MVPD operators, digital platforms, and the internet;
decisions by advertisers to withdraw or delay planned advertising expenditures for any reason;
labor disputes or other disruptions at major advertisers;
changes in audience ratings, including Nielsen’s ability to provide ratings; and
other factors beyond our control.
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Audience ratings may be impacted by a number of factors outside of our control, including a decline in viewership, changes in ratings technology or methodology or changes in household sampling. For example, as a result of the impact of Hurricanes Irma and Maria, Nielsen suspended reporting of ratings data in Puerto Rico in September 2017 through May 1, 2018. Any decline in audience ratings could cause revenue to decline, adversely impacting our Business and our operating results. Our advertising revenue and results are also subject to seasonal and cyclical fluctuations that we expect to continue. Seasonal fluctuations typically result in higher operating income in the fourth quarter than in the first, second, and third quarters of each year. This seasonality is primarily attributable to advertisers’ increased expenditures in anticipation of the holiday season spending. In addition, we typically experience an increase in revenue every four years as a result of advertising sales in respect of local government elections in Puerto Rico. The year ended December 31, 2020 was a political election year in Puerto Rico. The next political election year will occur in 2024. As a result of the seasonality and cyclicality of our revenue, and the historically significant increase in our revenue during election years, investors are cautioned that it has been, and is expected to remain, to engage in period-over-period comparisons of our revenue and results of operations.
If our Networks or Pantaya’s viewership declines for any reason, or our audience ratings decline for any reason or our Networks/Pantaya fail to develop and distribute popular programs, our advertising and subscriber fee revenues could decrease, as applicable.
Our Networks and Pantaya’s viewership and audience ratings, as applicable, are critical factors affecting both (i) the advertising revenue that we receive, and (ii) the extent of subscriber revenue we receive, as applicable, under agreements with our Distributors. Our ratings are dependent, in part, on our ability to consistently create and acquire programming that meets the changing preferences of viewers in general and viewers in our Networks’ target demographic category.
Our Networks and Pantaya’s viewership is also affected by the quality and acceptance of competing programs and other content offered by other networks, the availability of alternative forms of entertainment and leisure time activities, including general economic conditions, piracy, digital and on-demand distribution and growing competition for consumer discretionary spending. In particular, consumer preference for over-the-top sources for viewing and purchasing content, including through increasing number of companies that offer SVOD, AVOD or FAST services has been and may continue adversely affect viewership of our Networks. Audience ratings may be impacted by a number of factors outside of our control, including a decline in viewership through traditional linear distribution model, intensifying audience fragmentation, changes in ratings technology or methodology or changes in household sampling. Any decline in our Networks’ viewership or audience ratings could cause advertising revenue to decline, subscription revenues to fall, and adversely impact our Business and operating results.
Our Networks may not be able to grow their subscribers and/or subscriber revenue, or such subscribers and/or revenues may decline and, as a result, our revenues and profitability may not increase and could decrease.
The growth of our Networks’ subscriber base depends upon many factors, such as overall growth in cable, satellite and telco subscribers, competition from streaming services, the popularity of our Networks’ programming, our ability to negotiate new carriage agreements, or amendments to, or renewals of, current carriage agreements, maintenance of existing distribution, and the success of our marketing efforts in driving consumer demand for their content, as well as other factors that are beyond our control, including temporary and permanent migration shifts in Puerto Rico.
A major component of our financial growth strategy is based on our ability to increase our Cable Networks’ subscriber base. If our Cable Networks’ programming services are required by the FCC to be offered on an “à la carte” basis, our Cable Networks could experience higher costs, reduced distribution of our program service, perhaps significantly, and lose viewers. There can be no assurance that we will be able to maintain or increase our Cable Networks’ subscriber base on cable, satellite and telco systems or that our current carriage will not decrease as a result of a number of factors or that we will be able to maintain or increase our Cable Networks’ current subscriber fee rates.
In particular, negotiations for new carriage agreements, or amendments to, or renewals of, current carriage agreements, are lengthy and complex, and our Networks are not able to predict with any accuracy when such increases in our subscriber bases may occur, if at all, or if we can maintain or increase our current affiliate fees, as applicable. If our Networks are unable to grow our subscriber bases or if we reduce our affiliate fees, as applicable, our revenues may not increase and could decrease.
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Demand for our programming and our Business, financial condition and results of operations are affected by changes that impact Hispanics living in the United States.
We believe one of our growth drivers will result from projected increases in the U.S. Hispanic population and projected increases in their buying power. Factors that impact the U.S. Hispanic population, including a slowdown in immigration into the U.S. in the future, the impact of federal and state immigration legislation and policies on both the U.S. Hispanic population and persons emigrating from Latin America could affect the growth of the U.S. Hispanic population and, as a result, the demand for our programming. Immigration reform has been a continued area of focus for the last and current U.S. presidential administration, as highlighted in the Presidential election in 2020. Although the details and timing of potential changes to immigration law are difficult to predict, restrictions on travel and eligibility for U.S. visa programs may lead to a slowdown of projected immigration levels in the U.S. Hispanic population. Furthermore, U.S. Hispanics might have chosen not to participate in the census, which would result in the U.S. Hispanic population to be underreported. If the U.S. Hispanic population grows more slowly than anticipated, the projected buying power of the U.S. Hispanic population may not grow as anticipated. In addition, economic conditions, such as unemployment, that impact the U.S. Hispanic population could the growth of, or reduce, the projected buying power of U.S. Hispanics. If the U.S. Hispanic population or its buying power grows more than anticipated, it could have a material effect on our business, financial condition and results of operations.
In addition, in the U.S. we exclusively target our Hispanic audience through Spanish-language programming. As U.S. Hispanics become bilingual or English-dominant, demand for our Spanish-language programming could be adversely impacted by competing English-language programming, including programming primarily in English-language targeting the bilingual or English-dominant U.S. Hispanic population. In addition, a shift in policy towards encouraging English-language fluency among U.S. Hispanic immigrants could also impact demand for Spanish-language programming. If we are unable to create more programming and networks targeted to this audience, we may lose audience share to competing English-language or bilingual programming which could lead to lower ratings and consequently, lower advertising revenues, which could have a material adverse effect on our business, financial condition and results of operations.
If our efforts to attract and retain subscribers to our Pantaya platform are not successful, our Business will be adversely affected.
Pantaya’s future success is subject to inherent uncertainty. The video streaming market is intensely competitive and our ability to attract and retain subscribers to our pay streaming service as well as the subscription revenue they enable us to generate, will depend on our ability to consistently provide appealing and differentiated content, effectively market our service and provide a quality experience for selecting and viewing that content. Furthermore, the relative service levels, content offerings, promotions and pricing, and related features of competitors to Pantaya may adversely impact our ability to attract and retain subscribers. If consumers do not perceive our offerings to be of value, including if we introduce new or adjust existing features, adjust pricing or offerings, terminate or modify promotional or trial period offerings, experience technical issues, or change the mix of content in a manner that is not favorably received by them, we may not be able to attract and retain subscribers. In addition, many subscribers to these types of offerings originate from word-of-mouth advertising from then existing subscribers. If our efforts to satisfy subscribers are not successful, including because we or modify promotional or trial-period offerings or because of technical issues with the platform, we may not be to attract or retain subscribers, and as a result, our ability to maintain and/or grow our business will be affected.
Subscribers may cancel our service for many reasons, including a perception that they do not use the service sufficiently, the need to cut household expenses, our content is unsatisfactory, competitive services provide a better value or experience and customer service issues are not satisfactorily resolved. We must continually add new subscribers both to replace canceled subscriptions and to grow our business beyond our current subscription base.
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Pantaya has numerous competitors who offer SVOD services, including Netflix, Discovery, Viacom, Disney, Amazon and AT&T. Additionally, Univision has announced that they are launching their own streaming service in 2022. Some of these competitors have long operating histories, large customer bases, strong brand recognition, exclusive rights to certain content and significant financial, marketing and other resources. They may secure better terms from suppliers, adopt more aggressive pricing and devote more resources to product development, technology, infrastructure, content acquisitions and marketing. New entrants may enter the market or existing providers may adjust their services with unique offerings or approaches to providing entertainment video. Companies also may enter into business combinations or alliances that strengthen their competitive positions. We also compete with providers of advertising-based video on demand, which offer consumers free content in exchange for viewing advertisements. If we are unable to successfully or profitably compete with current and new competitors, our Business will be adversely affected, and we may not be to increase or maintain market share, revenues or .
If studios, content providers or other rights holders refuse to license streaming content or other rights upon terms acceptable to us, our Pantaya service could be adversely affected.
Although we produce a substantial portion of the content available on Pantaya, some of the content that we offer to Pantaya subscribers is sourced from third parties, including studios, content providers and other rights holders. The license periods and the terms and conditions of such licenses vary. As content providers develop their own video streaming services, they may be unwilling to provide us with access to certain content, including popular series or movies. If the studios, content providers and other rights holders are not or are no longer willing or able to license us content upon terms acceptable to us, our ability to stream content to our subscribers may be adversely affected and/or our costs could increase. As competition increases, we may or are likely to see the cost of certain programming increase. As we seek to differentiate our service, we are often focused on securing certain exclusive rights when obtaining content. We are also focused on programming an overall mix of content that delights our subscribers in a cost efficient manner. If we do not maintain a compelling mix of content, our subscriber acquisition and retention may be affected.
The television markets in which our Networks operate is highly competitive, and we may not be able to compete effectively, particularly against competitors with greater financial resources, brand recognition, marketplace presence and relationships with service providers.
Our Networks compete with other television channels for the distribution of their programming, development and acquisition of content, audience viewership and advertising sales. With respect to audiences, television stations compete primarily based on program popularity. We cannot provide any assurances as to the acceptability by audiences of any of the programs our Networks broadcast. Further, because our Networks compete for the rights to produce or license certain programming, we cannot provide any assurances that we will be able to produce or obtain any desired programming at costs that we believe are reasonable. Our inability or failure to broadcast popular programs on our Networks, or otherwise maintain viewership for any reason, including as a result of significant increases in programming alternatives and the failure to compete with new technological innovations could result in a lack of advertisers, or a reduction in the amount advertisers are willing to pay us to advertise, which could have a material adverse effect on our Business, financial condition, and results of operations.
Our Networks compete with other Spanish-language broadcast and cable television networks, and digital media companies for the acquisition of programming, viewership, the sale of advertising, and creative talent. Our Networks also compete for the development and acquisition of programming, selling of commercial time on our Networks and on-air and creative talent. It is possible that our competitors, many of which have substantially greater financial and operational resources than our Networks, could revise their programming to offer more competitive programming which is of interest to our Networks’ viewers.
Additionally, our Cable Networks compete with other television channels to be included in the offerings of each video service provider and for placement in the packaged offerings having the most subscribers. For example, our Cable Networks’ ability to secure distribution is dependent upon the production, acquisition and packaging of programming, audience viewership, and the prices charged for carriage. Our Cable Networks’ contractual agreements with Distributors are renewed or renegotiated from time to time in the ordinary course of business. With respect to WAPA, OTT and cable network programming, combined with increased access to cable and satellite TV, has become a significant competitor for broadcast television programming viewers.
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Our Networks also compete for advertising revenue with general-interest television and other forms of media, including magazines, newspapers, radio and digital media. Our ability to secure additional advertising accounts relating to our Networks’ operations depends upon the size of each Networks’ audience, the popularity of our programming and the demographics of our viewers, as well as strategies taken by our Networks’ competitors, strategies taken by advertisers and the relative bargaining power of advertisers. Competition for advertising accounts and related advertising expenditures is intense. We face competition for such advertising expenditures from a variety of sources, including other networks and other media. We cannot provide assurance that our Networks’ advertising sponsors will pay advertising rates for commercial air time at levels sufficient for us to make a profit, that we will maintain relationships with our current advertising sponsors or that we will be able to attract new advertising sponsors or increase advertising revenues. Changes in ratings technology, or methodology or metrics used by advertisers or other changes in advertisers’ media buying strategies also could have a material adverse effect on our financial condition and results of operations. If we are unable to attract advertising accounts in sufficient quantities, our revenues and profitability may be .
Certain technological advances, including the increased deployment of fiber optic cable, are expected to allow cable and telecommunication video service providers to continue to expand both their channel and broadband distribution capacities and to increase transmission speeds. In addition, the ability to deliver content via new methods and devices is expected to increase substantially. The impact of such added capacities is hard to predict, but the development of new methods of content distribution could dilute our Networks’ market share and lead to increased competition for viewers by facilitating the emergence of additional channels and mobile and internet platforms through which viewers could view programming that is similar to that offered by our Networks.
If any of our existing competitors or new competitors, many of which have substantially greater financial and operational resources than our Networks, significantly expand their operations or their market penetration, our Business could be harmed. If any of these competitors were able to invent improved technology, or our Networks were not able to prevent them from obtaining and using their own proprietary technology and trade secrets, our Business and operating results, as well as our Networks’ future growth prospects, could be negatively affected. There can be no assurance that our Networks will be able to compete successfully in the future against existing or new competitors, or that increasing competition will not have a material adverse effect on our Business, financial condition or results of operations.
We rely upon a number of partners to make our service available on their devices.
Pantaya offers its subscribers the ability to receive streaming content through a host of internet-connected devices, including TVs, digital video players, television set-top boxes, and mobile devices, as well as through third party services, such as Apple TV, Amazon, Google and ROKU. The third party service providers may increase the distribution fees that they charge us for each subscriber, which would adversely affect our revenue. In addition, the devices are manufactured and sold by entities other than Pantaya, and third party services are provided by entities other than Pantaya, and while these entities should be responsible for the devices’ and services’ performance, the connection between these devices and services and Pantaya may nonetheless result in consumer dissatisfaction toward Pantaya and such dissatisfaction could result in claims against us or otherwise adversely impact our Business. In addition, technology changes to our streaming functionality may require that partners update their devices or services, or may lead to us to stop supporting the delivery of our service on certain devices. If partners do not update or otherwise modify their devices, or if we discontinue support for certain devices, our service and our subscribers’ use and could be impacted.
We have agreements with various cable and satellite and telecommunications operators to make our service available through the television set-top boxes of these service providers or through internet delivery, some of whom may have investments in competing streaming content providers. In many instances, our agreements also include provisions by which the partner bills consumers directly for the Pantaya service or otherwise offers services or products in connection with offering our service. We intend to continue to broaden our relationships with existing partners and to increase our capability to stream our content to other platforms and partners over time. If we are not successful in maintaining existing and creating new relationships, or if we encounter technological, content licensing, regulatory, business or other impediments to deliver our streaming content to our subscribers via these devices, our ability to retain subscribers and grow our business could be adversely impacted. Our Business could be adversely affected if, upon expiration of agreements with our partners, a number of our partners do not continue to provide access to our service or are unwilling to do so on terms acceptable to us, which terms may include the degree of accessibility and prominence of our service.
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Interpretation of certain terms of our distribution agreements may have an adverse effect on the distribution payments we receive under those agreements.
Many of our distribution agreements contain “most favored nation” clauses. These clauses typically provide that if we enter into an agreement with another Distributor which contains certain more favorable terms, we must offer some of those terms to our existing Distributors. While we believe that we have appropriately complied with the most favored nation clauses included in our distribution agreements, these agreements are complex and other parties could reach a different conclusion that, if correct, could have a material adverse effect on our results of operations and financial position.
Our results may be adversely affected if long-term programming contracts are not renewed on sufficiently favorable terms.
Our Networks enter into long-term contracts for acquisition of programming, including movies, television series, sporting rights and other programs. As these contracts expire, our Networks must renew or renegotiate these contracts, and if our Networks are unable to renew them on acceptable terms, we may lose programming rights. Even if these contracts are renewed, the cost of obtaining programming rights may increase (or increase at faster rates than our historical experience) or the revenue from distribution of programs may be reduced (or increase at slower rates than our historical experience). With respect to the acquisition of programming rights, the impact of these long-term contracts on our results over the term of the contracts depends on a number of factors, including effectiveness of marketing efforts, the size of audiences and the strength of advertising markets. There can be no assurance that revenues from programming based on these rights will exceed the cost of the rights plus the other costs of distributing the programming.
There has been a shift in consumer behavior as a result of technological innovations and changes in the distribution of content, which may affect our viewership and the profitability of our Business in unpredictable ways. Our Networks’ failure to acquire or maintain state-of-the-art technology or adapt our business models may harm our Business and competitive advantage.
Technology in the video, telecommunications and data services industry is changing rapidly. Consumer behavior related to changes in content distribution and technological innovation affect our economic model and viewership in ways that are not entirely predictable. Consumers are increasingly viewing streaming content from SVOD, AVOD and FAST platforms, on a time-delayed or on-demand basis from traditional distributors, and from connected apps and websites and on a wide variety of screens, such as televisions, tablets, mobile phones and other devices. Additionally, devices that allow users to view television programs on a time-shifted basis and technologies that enable users to fast-forward or skip programming, including commercials, such as DVRs and portable digital devices and systems that enable users to store or make portable copies of content may affect the attractiveness of our offerings to advertisers and could therefore adversely affect our revenues. There is increased demand for short-form, user-generated and interactive content, which have different economic models than our traditional content offerings. Digital downloads, rights lockers, rentals and subscription services are competing for consumer preferences with each other and with traditional physical distribution of our content. Each distribution model has different risks and economic consequences for us, so the rapid evolution of consumer preferences may have an economic impact that is not completely predictable. Distribution windows are also evolving, potentially affecting revenues from other windows. We may be required to incur substantial capital expenditures to implement new technologies, or, if we to do so, may face significant new due to technological adopted by competitors, which in turn could result in to our Business and operating results. Additionally, the development of new methods of content distribution could dilute our Networks’ market share and lead to increased competition for viewers. If we cannot ensure that our distribution methods and content are responsive to our target audiences, our Business could be affected.
Certain digital video recording technologies offered by cable and satellite systems allow viewers to digitally record, store and play back television programming at a later time and may impact our advertising revenue. Most of these technologies permit viewers to fast forward through advertisements; or, in certain cases, skip them entirely. The use of these technologies may decrease viewership of commercials as recorded by media measurement services such as Nielsen and, as a result, lower the advertising revenues of our television stations. The current ratings provided by Nielsen for use by linear content providers are limited to live viewing plus viewing of a digitally recorded program in the same week as the original air date and give broadcasters no credit for delayed viewing that occurs after the same week as the original air date. The effects of new ratings system technologies including people meters and set-top boxes, and the ability of such technologies to be a reliable standard that can be used by advertisers is currently unknown.
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We face cybersecurity and similar risks, which could result in the disclosure of confidential information, disruption of our programming services, damage to our brands and reputation, legal exposure and financial losses.
We and our partners rely on various technology systems, including those used in connection with the production, distribution and broadcast of our programming, and our online, mobile and app offerings, the Pantaya streaming services, as well as our internal systems which store proprietary information, are susceptible to security breaches, operational data loss, general disruptions in functionality, and may not be compatible with new technology. These risks have been exacerbated by the COVID-19 pandemic as some of our employees are working remotely. We depend on our and our service providers’ information technology systems for the effectiveness of our operations, for streaming Pantaya’s content and to interface with our Networks’ customers, as well as to maintain financial records and accuracy. Any theft or misuse of confidential, personally identifiable or proprietary information could disrupt our business and result in, among other things, unfavorable publicity, damage to our reputation, loss of competitive information, in marketing our products, by our customers that we have not performed our contractual obligations, by affected parties and possible financial obligations for liabilities and related to the theft or of such information, as well as and other sanctions resulting from any related of data privacy regulations, any of which could have a material effect on our business, and financial condition. in our operations and services or to the functionality provided by our Networks and Pantaya could impact our revenues or cause customers to doing business with us. In addition, our business would be if any of the events of this nature caused our customers and potential customers to believe our services are . Our operations are dependent upon our ability to protect our technology infrastructure from business continuity events that could have a significant effect on our operations.
Although we have systems in place to monitor our security measures, disruption or failures of our, our subsidiaries’ or our service providers’ information technology systems, due to employee error, computer malware, viruses, hacking and phishing attacks, or otherwise, could impair our ability to effectively and timely provide services and products and maintain our financial records. Additionally, outside parties may attempt to fraudulently induce employees or users to disclose sensitive or confidential information in order to gain access to data. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any such breach or access could result in a of our proprietary information, which may include user data, a of our services or a reduction of the revenues we are to generate from such services, to our brands and reputation, a of confidence in the security of our offerings and services, and significant legal and financial exposure, each of which could potentially have a material effect on our Business.
Cable, satellite and telco television programming signals have been stolen or could be stolen in the future, which reduces our potential revenue from subscriber fees and advertising.
The delivery of subscription programming requires the use of conditional access technology to limit access to programming to only those who subscribe to programming and are authorized to view it. Conditional access systems use, among other things, encryption technology to protect the transmitted signal from unauthorized access. It is illegal to create, sell or otherwise distribute software or devices to circumvent conditional access technologies. However, theft of programming has been widely reported, and the access or “smart” cards used in service providers’ conditional access systems have been compromised and could be further compromised in the future. When conditional access systems are compromised, our Networks do not receive the potential subscriber fee revenues from the service providers. Further, measures that could be taken by service providers to limit such theft are not under our control. While we take proactive steps to combat piracy through the encryption of our signal and other measures, there can be no assurances that these or other steps are effective. Piracy of our Networks’ copyrighted materials could reduce our revenue and negatively affect our Business and operating results.
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We face risks, such as unforeseen costs and potential liability in connection with content we acquire, produce, license and/or distribute through our Business.
As a producer and distributor of content, we face potential liability for negligence, copyright and trademark infringement, or other claims based on the nature and content of materials that we acquire, produce, license and/or distribute. We also may face potential liability for content used in promoting our service, including marketing materials. We are devoting more resources toward the development, production, marketing and distribution of original programming. To the extent our original programming does not meet our expectations, in particular, in terms of costs, viewing and popularity, our Business, including our brand and results of operations may be adversely impacted. As we expand our original programming, we have become responsible for production costs and other expenses. We also take on risks associated with production, such as completion and key talent risk. We contract with third parties related to the development, production, marketing and distribution of our original programming. We may face potential liability or may suffer losses in connection with these arrangements, including but not limited to if such third parties violate applicable law, become or engage in behavior. To the extent we create and sell physical or digital merchandise relating to our original programming, and/or license such rights to third parties, we could become subject to product liability, intellectual property or other related to such merchandise. We may decide to remove content from our service, not to place licensed or produced content on our service or or alter production of original content if we believe such content might not be well received by our viewers, or could be to our brand or Business. To the extent we do not accurately anticipate costs or mitigate risks, including for content that we obtain but ultimately does not appear on or is removed from our service, or if we become liable for content we acquire, produce, license and/or distribute, our Business may . to these could be and the expenses and arising from any liability or production risks could our results of operations. We may not be indemnified or costs of these types and we may not have insurance coverage for these types of .
We have operations, properties and viewers that are located in Puerto Rico, California and Florida and could be adversely affected in the event of a hurricane, earthquake, wild fires or other extreme weather conditions.
WAPA’s corporate office and production facilities are located in Puerto Rico, where major hurricanes have occurred, as well as other extreme weather conditions, such as earthquakes, tornadoes, floods, fires, unusually heavy or prolonged rain, droughts and heat waves. Additionally, our corporate office and certain of our operations provided by our service providers are located in Miami, Florida, where similar weather conditions have occurred, including major hurricanes. Additionally, Pantaya is headquartered in Los Angeles, CA, where major earthquakes and wild fires have caused significant damage and disruption. Depending on where any particular hurricane, earthquake or other weather event makes landfall, our properties or those of our service providers could experience significant damage. Such event could have an adverse effect on our ability to broadcast our programming or produce new shows, which could have an adverse effect on our Business and results of operations. Additionally, many of WAPA’s regular viewers may be left without power and unable to view our programming which could have an adverse effect on our Business and results of operations.
In recent years, Puerto Rico has been affected by natural disasters, including earthquakes in early 2020 and Hurricanes Irma and Maria in 2017. As a result, businesses may be reluctant to establish or expand their operations in Puerto Rico and/or reduce spending on advertising. Such extreme weather conditions can also have impacts on our operations and properties. For example, Hurricanes Irma and Maria caused substantial damage to property and infrastructure in Puerto Rico, including limited damage to our studios and offices and to two of our three transmission towers and significant damage beyond repair to the third of our transmission towers. While WAPA-TV is not currently operating from its FCC-licensed facilities, we have modified the WAPA-TV facilities to broadcast over-the-air, and have received authorization from the FCC to construct modified facilities for WAPA-TV at a new transmitter site. WAPA-TV is operating from the new site at reduced power until construction of the permanent facilities is completed. The hurricanes destroyed residential and commercial buildings, agriculture, communications networks and most of Puerto Rico’s electric grid. There can be no assurances in the future that we have adequate insurance coverage to mitigate future from such extreme weather conditions. Following the hurricanes, there was a steep drop off in advertising revenue in Puerto Rico. There was also significant impact on subscriber revenue in Puerto Rico for the year ended December 31, 2017 and continued impact to the advertising market in 2018. Finally, as a result of the hurricanes and earthquakes, a significant number of citizens have left, or may leave, Puerto Rico, and there can be no assurance about when they will return, if at all. As a result, the from the storms and earthquakes, coupled with the uncertainty regarding the timing of the recovery and possible in television households, could have a material effect on our results of operations and financial position.
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Puerto Rico’s continuing economic hardships may have a negative effect on the overall performance of our Business, financial condition and results of operations.
Financial and economic conditions in Puerto Rico have deteriorated in recent years and continue to be uncertain. The continuation or worsening of such conditions could have an adverse effect on our Business, results of operations, and/or financial condition.
The Puerto Rican economy has been and continues to be in a recession since 2006, and has been burdened by limited economic activity, lower-than-estimated revenue collections, high government debt levels relative to the size of the economy and other potential fiscal challenges. On June 30, 2016, President Obama signed HR 5278 Bill, PROMESA, which, among other things, established a seven-member Federal Oversight and Management Board of Puerto Rico (the “Planning Board”) with broad powers over the finances of the Commonwealth and its instrumentalities and provides to the Commonwealth, its public corporations and municipalities, broad-based restructuring authority, including through a bankruptcy-type process similar to that of Chapter 9 of the U.S. Bankruptcy Code. The Commonwealth’s inability to access financing in the capital markets or from private lenders, has resulted in the Commonwealth and various public corporations defaulting on their public debt and entering into bankruptcy proceedings under PROMESA.
Moreover, Hurricane Maria caused a significant disruption to the island’s economic activity and GNP. Hurricane Maria also accelerated the outmigration trends that Puerto Rico was experiencing, with increased numbers of residents moving to the mainland United States, either on a temporary or permanent basis. In 2020, earthquakes and the COVID-19 pandemic further exacerbated these outflows.
Puerto Rico’s gross national product (GNP) has contracted in real terms every year between fiscal year 2007 and fiscal year 2018. The Planning Board estimates real GNP increased by 1.8% in fiscal year 2019 due to the influx of federal funds and private insurance payments to repair damage caused by Hurricanes Irma and María, and that it decreased approximately 3.2% in fiscal year 2020 due primarily to the adverse impact of the COVID-19 pandemic and the measures taken by the government in response to the same. The Planning Board projected that the negative effects of COVID-19 would continue through fiscal year 2021, resulting in a contraction in real GNP of approximately -2%, followed by 0.8% growth in the current fiscal year. Additionally, Puerto Rico’s track record of poor budget controls and high poverty levels compared to the U.S. average presents ongoing challenges.
On January 7, 2020, a 6.4 magnitude earthquake impacted the southwestern part of Puerto Rico, which caused island-wide power outages and significant damage to infrastructure and property in the southwest region of the island. The Commonwealth’s government estimates total earthquake-related damages at approximately $1 billion. In March 2020, the World Health Organization declared COVID-19 a pandemic. On March 15, 2020, the Puerto Rico Governor issued an executive order declaring a health emergency, ordering residents to shelter in place, implementing a mandatory curfew, and requiring the closure of all businesses, except for businesses that provide essential services, including banking and financial institutions with respect to certain services. While many of the restrictions have been gradually lifted, most businesses have had to make significant adjustments to protect customers and employees, including transitioning to telework and suspending or modifying certain operations in compliance with health and safety guidelines.
The macroeconomic outlook for Puerto Rico has improved from the loosening of Covid-19-related restrictions on economic activity, combined with federal disaster recovery funds Puerto Rico is expected to receive related to the recovery from hurricane Maria in 2017. In addition, seven years since the Commonwealth announced that it was unable to pay its outstanding debt obligations, on January 18, 2022, the Title III bankruptcy court approved a plan of adjustment that would restructure $33 billion of public debt to $7.4 billion in new bonds. Nevertheless, any recovery of the Puerto Rican economy could be adversely impacted by macroeconomic developments within the United States and across the globe.
The extent to which the COVID-19 pandemic will continue to adversely affect economic activity will depend on future developments, which are highly uncertain and difficult to predict, including the scope and duration of the pandemic (including the appearance of new strains of the virus), the restrictions imposed by governmental authorities and other third parties in response to the same, the pace of global vaccination efforts, and the amount of federal and local assistance offered to offset the impact of the pandemic. However, there can be no assurance that measures taken by governmental authorities will be sufficient to offset the pandemic’s economic impact.
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In addition to any negative direct consequences to our Business or results of operations arising from these financial, economic, pandemic and climate developments, some of these actions may adversely affect our distribution partners, advertisers or other consumers on whom we rely. Our Business and results of operations could be negatively affected as a result. For more information on the Puerto Rican economy, see “—Industry—Puerto Rico Overview—Economy”.
Certain of our Cable Network, Snap and the Canal 1 joint venture have international operations and exposures that incur certain risks not found in doing business in the United States.
Doing business in foreign countries carries with it certain risks that are not found in doing business in the United States. The risks of doing business in foreign countries that could result in losses against which our Cable Networks are not insured include:
exposure to local economic conditions;
potential adverse changes in the diplomatic relations of foreign countries with the United States;
hostility from local populations;
significant fluctuations in foreign currency value;
the adverse effect of currency exchange controls or other restrictions;
restrictions on the withdrawal of foreign investment and earnings;
the transition away from the London Inter-bank Offered Rate (“LIBOR”);
government policies against businesses owned by foreigners;
investment restrictions or requirements;
expropriations of property;
the potential instability of foreign governments and economies;
the risk of insurrections;
difficulties in collecting revenues and seeking recourse against third parties owing payments to us;
withholding and other taxes on remittances and other payments by subsidiaries;
changes in taxation structure; and
shifting consumer preferences regarding the viewing of video programming.
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For example, Canal 1 operates solely in Colombia. Although Colombia has a long-standing tradition respecting the rule of law, which has been bolstered in recent years by the present and former government’s policies and programs, no assurances can be given that our joint venture’s plans and operations will not be adversely affected by future developments in Colombia. Canal 1’s operations and activities in Colombia are subject to political, economic and other uncertainties, including the risk of expropriation, nationalization, renegotiation or nullification of existing contracts, broadcast licenses or other agreements, changes in laws or taxation policies, currency exchange restrictions, and changing political conditions and international monetary fluctuations. Future government actions concerning the economy, taxation, or the operation and regulation of national over-the-air broadcast concessions, could have a significant effect on the joint venture. Colombia was home to South America’s largest and longest running insurgency, which ended on December 1, 2016 following the government’s ratification of a peace treaty with the Revolutionary Armed Forces of Colombia (“FARC”). While the situation has improved dramatically in recent years, there can be no guarantee that the situation will not again . Any increase in kidnapping, gang warfare, homicide and/or terrorist activity in Colombia generally may supply chains and qualified individuals from being involved with the joint venture’s operations. Any changes in regulations or shifts in political attitudes are beyond our control and may affect the joint venture’s business.
Furthermore, some foreign markets where we operate may be more adversely affected by current economic conditions than the U.S. For example, in Colombia, decreases in the growth rate, periods of negative growth, increases in inflation, changes in law, regulation, policy, or future, judicial rulings and interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, interest rates, taxation and other political or economic developments in or affecting Colombia may affect the overall business environment and may, in turn, adversely impact our joint venture’s financial condition and results of operations in the future. Colombia’s fiscal deficit and growing public debt could adversely affect the Colombian economy. Snap maintains a minor presence in Argentina, whose economy has significantly struggled in recent years.
We also may incur additional expenses as a result of changes, including the imposition of new restrictions, in the existing economic or political environment in the regions where we do business. Acts of terrorism, hostilities, or financial, political, economic or other uncertainties could lead to a reduction in revenue or loss of investment, which could adversely affect our results of operations.
Our Networks are subject to interruptions of distribution as a result of our reliance on broadcast towers, satellites and Distributors for transmission of its programming. A significant interruption in transmission ability could seriously affect our Business and results of operations, particularly if not fully covered by its insurance.
Our Networks could experience interruptions of distribution or potentially long-term increased costs of delivery if the ability of broadcast towers, satellites or satellite transponders, or Distributors to transmit our Networks' content is disrupted because of accidents, weather interruptions, governmental regulation, terrorism, or other third party action. For example, see risk factor above, " We have operations, properties and viewers that are located in Puerto Rico, California and Florida and could be adversely affected in the event of a hurricane, earthquake, wild fires or other extreme weather conditions. "
As protection against these hazards, we maintain insurance coverage against some, but not all, such potential losses and liabilities. We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may increase substantially. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. For example, coverage for hurricane damage can be limited, and coverage for terrorism risks can include broad exclusions. If our Networks were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.
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The success of much of our Business is dependent upon the retention and performance of on-air talent and program hosts and other key employees.
Our Business depends upon the continued efforts, abilities and expertise of our corporate executive team. There can be no assurance that these individuals will remain with us. Our Business, financial condition and results of operations could be materially adversely affected if we lose any of these persons and are unable to attract and retain qualified replacements. Additionally, our Networks independently contract with several on-air personalities and hosts with significant loyal audiences in their respective markets. Although our Networks have entered into long-term agreements with some of their key on-air talent and program hosts to protect their interests in those relationships, we can give no assurance that all or any of these persons will remain with our Networks or will retain their audiences. Competition for these individuals is intense and many of these individuals are under no legal obligation to remain with our Networks. Our competitors may choose to extend offers to any of these individuals on terms which our Networks may be unable or unwilling to meet. Furthermore, the popularity and audience loyalty of our Networks’ key on-air talent and program hosts is highly sensitive to rapidly changing public tastes. A of such or audience loyalty is beyond our control and could limit our Network’ ability to generate revenue and could have a material effect on our Business, financial condition and results of operations.
Changes in how network operators handle and charge for access to data that travels across their networks could adversely impact our Pantaya service.
We rely upon the ability of consumers to access our Pantaya service through the internet. If network operators block, restrict or otherwise impair access to our Pantaya service over their networks, our service and business could be negatively affected. To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our subscriber acquisition and retention could be negatively impacted. Furthermore, to the extent network operators create tiers of internet access service and either charge us for or prohibit us from being available through these tiers, our Business could be negatively impacted.
Most network operators that provide consumers with access to the internet also provide these consumers with multichannel video programming. As such, many network operators have an incentive to use their network infrastructure in a manner adverse to our continued growth and success. While we believe that consumer demand, regulatory oversight and competition will help check these incentives, to the extent that network operators are able to provide preferential treatment to their data as opposed to ours or otherwise implement discriminatory network management practices, our Business could be negatively impacted.
We are subject to payment processing risk.
Our subscribers pay for our service using a variety of different payment methods, including credit and debit cards, gift cards, prepaid cards, direct debit, online wallets, direct carrier and partner billing. We rely on third parties to process payment. Acceptance and processing of these payment methods are subject to certain rules and regulations, including additional authentication requirements for certain payment methods, and require payment of interchange and other fees. To the extent there are increases in payment processing fees, material changes in the payment ecosystem, such as large re-issuances of payment cards, delays in receiving payments from payment processors, changes to rules or regulations concerning payments, loss of payment partners and/or disruptions or failures in partner systems or payment products, including products we use to update payment information, our revenue, operating expenses and results of operation could be adversely impacted. For example, to extent that our subscribers’ credit and debit cards expire and we are unable to secure updated payment information within the applicable grace period due to delays or disruptions in our partner systems or otherwise, the subscription to our services expires, which leads to the of the subscriber. In certain instances, we leverage third parties to bill subscribers on our behalf. If these third parties become or to continue processing payments on our behalf, we would have to transition subscribers or otherwise find alternative methods of collecting payments, which could impact subscriber acquisition and retention. The of our ability to process payments on any major payment method would significantly our ability to operate our Business.
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We could be adversely affected by strikes or other union job actions.
A majority of our employees in Puerto Rico are highly specialized union members who are essential to the production of television programs and news. These employees are covered by our CBA. Our CBA expires on May 31, 2022 and, as of July 1, 2021, covers all of our unionized employees. A strike by, or a lockout of, UPAGRA, which provides personnel essential to the production of television programs, could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of time, could cause a delay or interruption in the programming schedule of certain of our Networks, which could have a material adverse effect on our Business, financial condition and results of operations.
We could become obligated to pay additional contributions due to the unfunded vested benefits of a multiemployer pension plan. A future incurrence of withdrawal liability could have a material effect on our results of operations.
WAPA makes contributions to the Newspaper Guild International Pension Plan (the “Plan” or “TNGIPP”), a multiemployer pension plan with a plan year end of December 31 that provides defined benefits to certain employees covered by our CBA. WAPA’s contribution rates to the Plan are generally determined in accordance with the provisions of the CBA and a rehabilitation plan that was adopted by the TNGIPP.
The risks in participating in such a plan are different from the risks of single-employer plans, in the following respects:
Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of any other participating employer.
If a participating employer ceases to contribute to a multiemployer plan, the unfunded obligation of the plan allocable to such withdrawing employer may be borne by the remaining participating employers.
WAPA has received Annual Funding Notices, Report of Summary Plan Information, Critical Status Notices (“Notices”) and the above-noted Rehabilitation Plan, as defined by the Pension Protection Act of 2006 (“PPA”), from the Plan. The Notices indicate that the Plan actuary has certified that the Plan is in critical and declining status, the “Red Zone”, as defined by the PPA and the Multiemployer Pension Reform Act of 2014 (“MPRA”), due to the projected insolvency of the Plan within the next 19 years. A plan of rehabilitation (“Rehabilitation Plan”) was adopted by the Trustees of the Plan (“Trustees”) on May 1, 2010 and then updated on November 17, 2015.
On May 29, 2010, the Trustees sent WAPA a Notice of Reduction and Adjustment of Benefits Due to Critical Status explaining all changes adopted under the Rehabilitation Plan, including the reduction or elimination of benefits referred to as “adjustable benefits.” In connection with the adoption of the Rehabilitation Plan, most of the Plan participating unions and contributing employers (including the Newspaper Guild International and WAPA), agreed to one of the “schedules” of changes as set forth under the Rehabilitation Plan. In 2015, the Plan’s Trustee’s reviewed the Rehabilitation Plan and the financial projections under the Plan and determined that it was not prudent to continue benefit accruals under the current Plan and that implementation of an updated plan with a new benefit design would be in the best interest of the Plan’s participants.
WAPA elected the “Preferred Schedule” and executed a Memorandum of Agreement, effective May 27, 2010 (the “MOA”) and agreed to the following contribution rate increases: 3.0% beginning on January 1, 2013; an additional 3.0% beginning on January 1, 2014; and an additional 3% beginning on January 1, 2015. On July 14, 2017 WAPA executed an updated MOA under which it agreed to remain a contributing employer to the Plan through May 31, 2022 and to make contributions to the Plan at a fixed rate of $18.03 per week for each WAPA covered employee during such period (i.e., its contributions per employee will not increase during the term of its CBA or through any period during which a new CBA is entered into, if any).
The future cost of the Plan depends on a number of factors, including the funding status of the Plan and the ability of other participating companies to meet ongoing funding obligations. Assets contributed to the Plan are not segregated or otherwise restricted to provide benefits only to the employees of WAPA. While WAPA’s pension cost for the Plan is established by the CBA and is fixed for the term of the CBA, the Plan may revise the Rehabilitation Plan to impose additional increased contribution rates and surcharges that could be applicable to future CBAs based on the funded status of the plan and in accordance with the provisions of the Rehabilitation Plan and the PPA. Factors that could impact the funded status of the Plan include investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions.
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The contributions required under the terms of the CBA and the effect of the Rehabilitation Plan as described above are not anticipated to have a material effect on our results of operations. However, in the event other contributing employers are unable to, or fail to, meet their ongoing funding obligations, the financial impact on WAPA to make future contributions towards any plan underfunding may be material. In addition, if a United States multiemployer defined benefit plan fails to satisfy certain minimum funding requirements, the Internal Revenue Service may impose a nondeductible excise tax of 5% on the amount of the accumulated funding deficiency for those employers contributing to the fund.
If WAPA completely or partially withdrew from the Plan, it would be obligated to pay complete or partial withdrawal liability (which could be material). Under the statutory requirements applicable to withdrawal liability with respect to a multiemployer pension plan, in the event of a complete withdrawal from the Plan, WAPA would be obligated to make withdrawal liability payments to fund its proportionate share of the Plan’s unfunded vested benefits (“UVBs”). WAPA’s payment amount for a given year would be determined based on its highest contribution rate (as limited by MPRA) and its highest average contribution hours over a period of three consecutive plan years out of the ten-year period preceding the date of withdrawal. To the extent that the prescribed payment amount was not sufficient to discharge WAPA’s share of the Plan’s UVBs, WAPA’s payment obligation would nevertheless end after 20 years of payments (absent a withdrawal that is part of a mass withdrawal, in which case the annual payments would continue indefinitely or until WAPA paid its share of the Plan’s UVBs at the time of withdrawal).
Pursuant to the last available notice (for the Plan year ended December 31, 2020), WAPA’s contributions to the Plan exceeded 5% of total contributions made to the Plan. For more information, see Note 16, “Retirement Plans” of Notes to Consolidated Financial Statements, included in this Annual Report.
A large portion of our revenue is generated from a limited number of customers, and the loss of these customers could adversely affect our Business.
Our Networks depend upon agreements with a limited number of Distributors. For the year ended December 31, 2021, none of our Distributors accounted for more than 10% of our total net revenues. The loss of channel carriage with any significant Distributor, or our inability to renew an affiliation agreement with any significant Distributor on acceptable terms, would have a materially adverse effect on our Business, financial condition and results of operations.
If our goodwill or intangibles become impaired, we will be required to recognize a non-cash charge which could have a significant effect on our reported net earnings.
A significant portion of our assets consist of goodwill and intangibles. We test our goodwill and intangibles for impairment each year. A significant downward revision in the present value of estimated future cash flows for a reporting unit could result in an impairment of goodwill and intangibles and a noncash charge would be required. Such a charge could have a significant effect on our reported net earnings.
Our equity method investments’ past financial performance may not be indicative of future results.
We have equity investments in several entities and the accounting treatment applied for these investments varies depending on a number of factors, including, but not limited to, our percentage ownership and the level of influence or control we have over the relevant entity. Any losses experienced by these entities could adversely impact our results of operations and the value of our investment. In addition, if these entities were to fail and cease operations, we may lose the entire value of our investment and the stream of any shared profits. Some of our ventures may require additional uncommitted funding.
Our use of joint ventures may limit our flexibility with jointly owned investments.
We have and may continue in the future to develop and/or acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Our participation in joint ventures is subject to risks that may not be present with other methods of ownership, including but not limited to:
difficulties integrating acquired businesses, technologies and personnel into our business;
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we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources to resolve such impasses or potential disputes, including litigation or arbitration;
our joint venture partners could have investment and financing goals that are not consistent with our objectives, including the timing, terms and strategies for any investments, and what levels of debt to incur or carry;
our ability to transfer our interest in a joint venture to a third party may be restricted and the market for our interest may be limited;
our joint venture partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for such capital; and
our joint venture partners may have competing interests in our markets that could create conflict of interest issues.
Any of the foregoing risks could materially adversely affect our Business, results of operations and financial condition.
Our officers, directors, stockholders and their respective affiliates may have a pecuniary interest in certain transactions in which we are involved, and may also compete with us.
We have not adopted a policy that expressly prohibits our directors, officers, stockholders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. For example, one of our directors is also a director of TelevisaUnivision (in which he may have a material financial interest), which recently announced plans to launch a Spanish-language SVOD/AVOD service in the U.S. and Latin America, which will directly compete with Pantaya for subscribers and content. We may, subject to the terms of our Third Amended Term Loan Facility and applicable law, enter into transactions in which such persons have an interest. In addition, such parties may have an interest in certain transactions such as strategic partnerships or joint ventures in which we may become involved, and may also compete with us.
Future acquisitions and dispositions may not require a stockholder vote and may be material to us.
Any future acquisitions could be material in size and scope, and our stockholders and potential investors may have virtually no substantive information about any new business upon which to base a decision whether to invest in our Class A common stock. In any event, depending upon the size and structure of any acquisitions, stockholders are generally expected to not have the opportunity to vote on the transaction, and may not have access to any information about any new business until the transaction is completed and we file a report with the Commission disclosing the nature of such transaction and/or business. Similarly, we may effect material dispositions in the future. Even if a stockholder vote is required for any of our future acquisitions, under our amended and restated certificate of incorporation and our amended and restated bylaws, our stockholders are allowed to approve such transactions by written consent, which may effectively result in only our controlling stockholder having an opportunity to vote on such transactions.
Future acquisitions or business opportunities, including investments in complementary businesses could involve unknown risks that could harm our Business and adversely affect our financial condition.
From time to time, we have acquired or invested in complementary businesses and entered into joint ventures/investments. For example, we recently acquired Pantaya. In the future we may make other acquisitions, invest in complementary businesses including joint ventures that involve unknown risks, and may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our Business, financial condition, results of operations and cash flows. Such transactions involve numerous other risks including:
difficulties integrating acquired businesses, technologies and personnel into our business, including our recent acquisition of Pantaya;
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difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
inability to obtain required regulatory approvals on favorable terms;
potential loss of key employees, key contractual relationships or key customers of either acquired businesses or our business;
assumption of the liabilities and exposure to unforeseen or undisclosed liabilities of acquired businesses;
dilution of interests of holders of our common shares through the issuance of equity securities or equity-linked securities;
the failure to realize the expected strategic and other benefits from the transactions; and
in the case of joint ventures and other investments, interests that diverge from those of our partners without the ability to direct the management and operations of the joint venture or investment in the manner we believe most appropriate.
Although we intend to conduct extensive business, financial and legal due diligence in connection with the evaluation of future business or acquisition opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such businesses, acquisitions or joint ventures. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the businesses or acquisitions, which could adversely affect our financial condition and liquidity. In addition, our Business, financial condition, results of operations and the ability to service our debt may be adversely impacted depending on specific risks applicable to any business or company we acquire.
Unrelated third parties may bring claims against us based on the nature and content of information posted on websites maintained by our Networks and Pantaya.
Our Networks and Pantaya host, or may host in the future, internet sites that enable individuals to exchange information, generate content, comment on content, and engage in various online activities. The law relating to the liability of providers of these online services for activities of their users is currently unsettled both within the United States and internationally. Claims may be brought against us for defamation, negligence, copyright or trademark infringement, unlawful activity, tort, including personal injury, fraud, or other theories based on the nature and content of information that may be posted online or generated by users of our internet sites. Defenses of such actions could be costly and involve significant time and attention of our management and other resources.
The success of our Business is highly dependent on the existence and maintenance of intellectual property rights in the entertainment products and services we create.
The value to us of our intellectual property rights is dependent on the scope and duration of our rights as defined by applicable laws in the U.S. and abroad and the manner in which those laws are construed. If those laws are drafted or interpreted in ways that limit the extent or duration of our rights, or if existing laws are changed, our ability to generate revenue from our intellectual property may decrease, or the cost of obtaining and maintaining rights may increase. There can be no assurance that our efforts to enforce our rights and protect our products, services and intellectual property will be successful in preventing content piracy or signal theft. Content piracy and signal theft present a threat to our revenues.
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The unauthorized use of our intellectual property rights may increase the cost of protecting these rights or reduce our revenues. New technologies such as the convergence of computing, communication, and entertainment devices, the falling prices of devices incorporating such technologies, and increased broadband internet speed and penetration have made the unauthorized digital copying and distribution of our programming content easier and faster and enforcement of intellectual property rights more challenging. The unauthorized use of intellectual property in the entertainment industry generally continues to be a significant challenge for intellectual property rights holders. Inadequate laws or weak enforcement mechanisms to protect intellectual property in one country can adversely affect the results of our operations worldwide, despite our efforts to protect our intellectual property rights. COVID-19 pandemic may increase incentives and opportunities to access content in ways, as economic conditions coupled with a shift in government priorities could lead to less enforcement. These developments may require us to devote substantial resources to protecting our intellectual property use and present the risk of increased of revenue as a result of distribution of our content.
With respect to intellectual property developed by us and rights acquired by us from others, we are subject to the risk of challenges to our copyright, trademark and patent rights by third parties. Successful challenges to our rights in intellectual property may result in increased costs for obtaining rights or the loss of the opportunity to earn revenue from the intellectual property that is the subject of challenged rights. We are not aware of any challenges to our intellectual property rights that we currently foresee having a material effect on our operations.
If we are unable to protect our domain names, our reputation and brands could be adversely affected.
We currently hold various domain name registrations relating to our brands. The registration and maintenance of domain names generally are regulated by governmental agencies and their designees. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to register or maintain relevant domain names. We may be unable, without significant cost or at all, to prevent third parties from registering domain names that are similar to, infringe upon or otherwise decrease the value of, our and our subsidiaries trademarks and other proprietary rights. Failure to protect our domain names could adversely affect our reputation and brands, and make it more difficult for users to find our Business’s websites and services.
We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in loss of significant rights.
Other parties may assert intellectual property infringement claims against us, and our Networks’ and Pantaya’s products may infringe the intellectual property rights of third parties. From time to time, our Business receives letters alleging infringement of intellectual property rights of others. Intellectual property litigation can be expensive and time-consuming and could divert management’s attention from our Business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement or enter into royalty or license agreements that may not be available on acceptable or desirable terms, if at all. Our to license proprietary rights on a timely basis would our Business.
Changes in accounting standards can significantly impact reported operating results.
Generally accepted accounting principles, accompanying pronouncements and implementation guidelines for many aspects of our Business, including those related to intangible assets and income taxes, are complex and involve significant judgments. Changes in these rules or their interpretation could significantly change our reported operating results.
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Our Third Amended Term Loan Facility may limit our financial and operating flexibility.
Our Third Amended Term Loan Facility includes financial covenants restricting our subsidiaries ability to incur additional indebtedness, pay dividends or make other payments, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets. These covenants limit our ability to fund future working capital and capital expenditures, engage in future acquisitions or development activities, or otherwise realize the value of our assets and opportunities fully because of the need to dedicate a portion of cash flow from operations to payments on debt. In addition, such covenants limit our flexibility in planning for, or reacting to, changes in the industries in which we operate.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our long-term debt are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness could increase even though the amount borrowed remained the same, and our net income could decrease. In order to manage our exposure to interest rate risk, we have entered into and may in the future enter into derivative financial instruments, typically interest rate swaps and caps, involving the exchange of floating for fixed rate interest payments. If we are unable to enter into interest rate swaps, it may adversely affect our cash flow and may impact our ability to make required principal and interest payments on our indebtedness.
Our LIBOR-based Third Amended Term Loan Facility, financing agreements and interest rate swaps may need to be renegotiated if LIBOR ceases to exist, which may affect our interest expense.
Our Third Amended Term Loan Facility and interest rate swaps bears interest at a variable rate based on LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. On March 5, 2021, the ICE Benchmark Administration (“IBA”) released the LIBOR cessation statement, pursuant to which the IBA publicly announced that it intends to cease publication of euro, sterling, Swiss franc and Japanese yen and 1 week and 2 month USD LIBOR settings on December 31, 2021 and the remaining USD LIBOR settings on June 30, 2023. In accordance with recommendations from the Alternative Reference Rates Committee, U.S. dollar LIBOR is expected to be replaced with the Secured Overnight Financing Rate (“SOFR”), a new index that measures the cost of borrowing cash overnight, backed by U.S. Treasury securities. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. As a result, parties may seek to adjust the spreads relative to such reference rate in underlying contractual arrangements. These reforms may cause LIBOR to perform differently than in the past or to disappear entirely. The consequences of these developments with respect to LIBOR cannot be entirely predicted but may result in the level of interest payments on the portion of our indebtedness that bears interest at variable rates and our interest rate swaps to be affected, which may impact the amount of our interest payments under such debt and payments under our interest rate swaps. We and the administrative agent for the Third Amended Term Loan Facility may seek to amend the credit agreement governing the Third Amended Term Loan Facility to replace LIBOR with a different benchmark index that is expected to mirror what is happening in the rest of the debt markets at the time and make certain other conforming changes to the agreement. As such, the interest rate on borrowings under our Third Amended Term Loan Facility may change. The new rate may not be as as those in effect prior to any LIBOR phase-out. In addition, the overall financial market may be as a result of the phase-out or replacement of LIBOR. in the financial market could have a material effect on our Business, financial condition and results of operations.
Risk Factors Related to Governmental Regulation
We are subject to restrictions on foreign (non-U.S.) ownership.
Under the Communications Act, a broadcast license may not be granted to or held by any corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives, or by non-U.S. corporations.
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Furthermore, the Communications Act provides that no FCC broadcast license may be granted to or held by any corporation that is directly or indirectly controlled by any other corporation of which more than 25% of the capital stock is owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives, or by non-U.S. corporations, if the FCC finds the public interest will be served by the refusal or revocation of such license. These restrictions apply in modified form to other forms of business organizations, including partnerships and limited liability companies. The FCC has interpreted this provision of the Communications Act to require an affirmative public interest finding before a broadcast license may be granted to or held by any entity exceeding the 25% non-U.S. equity or voting thresholds.
On January 18, 2017, the FCC granted our request to allow non-U.S. investors to own up to 49.99% of our capital stock and hold 49.99% of our voting power. Subsequently, on September 18, 2018, the FCC granted approval of additional specific non-U.S. equity and/or voting ownership interests in excess of 5%. On November 19, 2019, the FCC approved up to 100% aggregate non-U.S. ownership of our equity and voting interests and approved the ownership by any one of a list of specifically approved non-U.S. persons of up to 49.99 percent of our capital stock and/or voting power. However, we remain subject to the requirement to obtain specific approval from the FCC before any other non-U.S. person, in addition to the non-U.S. persons that the FCC has previously approved in the series of declaratory rulings identified above, acquires more than 5% of our capital stock or more than 5% voting rights. We are also required to notify the FCC and take remedial actions as necessary, if we determine that any unapproved non-U.S. person has acquired more than 5% of our capital stock or voting rights, and we may be subject to FCC enforcement action, including monetary forfeitures, if such a circumstance occurs.
To the extent necessary to comply with the Communications Act, FCC rules and policies, and the FCC’s declaratory ruling, our board of directors may (i) prohibit the ownership, voting or transfer of any portion of our outstanding capital stock to the extent the ownership, voting or transfer of such portion would cause us to violate or would otherwise result in violation of any provision of the Communications Act, FCC rules and policies, or the FCC’s declaratory ruling; (ii) convert shares of our Class B common stock into shares of our Class A common stock to the extent necessary to bring us into compliance with the Communications Act, FCC rules and policies, or the FCC’s declaratory ruling; and (iii) redeem capital stock to the extent necessary to bring us into compliance with the Communications Act, FCC rules and policies, or the FCC’s declaratory ruling or to prevent the loss or impairment of any of our FCC licenses.
Federal regulation of the broadcasting industry limits WAPA’s operating flexibility.
The ownership, operation and sale of broadcast television stations, such as WAPA, are subject to the jurisdiction of the FCC under the Communications Act. Matters subject to FCC oversight include the assignment of frequency bands for broadcast television; the approval of a television station’s frequency, location and operating power; the issuance, renewal, revocation or modification of a television station’s FCC license; the approval of changes in the ownership or control of a television station’s licensee; the regulation of equipment used by television stations; and the adoption and implementation of regulations and policies concerning the ownership, operation, programming and employment practices of television stations.
WAPA depends upon maintaining its broadcast licenses, which are issued by the FCC for a term of eight years and are renewable. Generally, the FCC renews a broadcast license upon a finding that (i) the broadcast station has served the public interest, convenience and necessity; (ii) there have been no serious violations by the licensee of the Communications Act or the FCC’s rules; and (iii) there have been no other violations by the licensee of the Communications Act or other FCC rules, which, taken together, indicate a pattern of abuse. Interested parties may challenge a renewal application. The FCC has the authority to revoke licenses, not renew them, or renew them with conditions, including renewals for less than a full term. All television stations licensed to communities in Puerto Rico were required to file renewal applications by October 1, 2020. We filed renewal applications for each of our Puerto Rico television stations on October 1, 2020. The deadline for the filing of petitions to deny our renewal applications was January 1, 2021, and no party filed an objection to any of our applications. Our renewal applications were granted in 2021 for full eight-year terms, expiring on February 1, 2029. It cannot be that our future license renewal applications for WAPA will be approved, or that the renewals, if granted, will not include conditions or qualifications that could affect our operations. If WAPA’s licenses are not renewed in the future, or are renewed with substantial conditions or modifications (including renewing one or more of our licenses for a term of fewer than eight years), it could prevent us from operating WAPA and generating revenue from it.
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Furthermore, WAPA’s ability to successfully negotiate and renegotiate future retransmission consent agreements may be hindered by potential legislative or regulatory changes to the framework under which these agreements are negotiated. In March 2011, the FCC issued a Notice of Proposed Rulemaking to consider changes to its rules governing the negotiation of retransmission consent agreements. The FCC concluded that it lacked statutory authority to impose mandatory arbitration or interim carriage obligations in the event of a dispute between broadcasters and pay television operators. In accordance with the STELA Reauthorization Viewer Act of 2014, in 2015, the FCC eliminated the rules which had precluded cable operators from deleting or repositioning local television stations during “sweeps” rating periods. The Further Consolidated Appropriations Act, 2020 enacted in December 2019 made permanent the statutory requirement that broadcasters and MVPDs negotiate retransmission consent agreements in good faith, which had been scheduled to expire at the end of 2019. In March 2021, H.R. 1856, the Modern Television Act of 2021, was introduced in the House of Representatives. The bill proposes to repeal retransmission consent requirements and compulsory copyright licenses and make other changes to copyright law and regulations governing negotiation of retransmission consent agreements. The bill was referred to the House Energy and Commerce and House Judiciary committees; however, no hearings or other actions with respect to the bill have been scheduled.
Our Networks are subject to FCC sanctions or penalties if they violate the FCC’s rules or regulations.
If we or any of our officers, directors, or attributable interest holders materially violate the FCC’s rules and regulations or are convicted of a felony or are found to have engaged in unlawful anticompetitive conduct or fraud upon another government agency, the FCC may, in response to a petition by a third party or on its own initiative, in its discretion, commence a proceeding to impose sanctions upon us that could involve the imposition of monetary penalties, the denial of a license renewal application, revocation of a broadcast license or other sanctions. In addition, the FCC has recently emphasized more vigorous enforcement of certain of its regulations, including indecency standards, sponsorship identification requirements, improper use of EAS alert signals, and children’s programming requirements, which impact broadcasters, and also rules that relate to the emergency alert system and closed captioning, and equal employment outreach and recordkeeping requirements, which impact broadcasters and MVPDs. The FCC has also recently increased enforcement of requirements regarding online public inspection files, which are now maintained on an FCC website and are therefore widely accessible by members of the public and the FCC. In 2021, the statutory maximum fine for broadcasting material increased from $419,353 to $445,445 per and the maximum for any continuing arising from a single act or to act increased to $4,111,796. In recent years, the FCC issued cable network owners and broadcast licensees, with the ranging from $280,000 to $1,120,000, for FCC rules relating to the use of the emergency alert system attention signal. These enforcement efforts could result in increased costs associated with the adoption and implementation of stricter compliance procedures at our Business facilities or FCC . Additionally, the effect of recent judicial decisions regarding the FCC’s enforcement practices remain unclear and we are to predict the impact of these decisions on the FCC’s enforcement practices, which could have a material effect on our Business.
The cable, satellite and telco-delivered television industry is subject to substantial governmental regulation for which compliance may increase our Networks’ costs, hinder our growth and possibly expose us to penalties for failure to comply.
The multichannel video programming distribution industry is subject to extensive legislation and regulation at the federal level, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Operating in a regulated industry increases our cost of doing business as video programmers, and such regulation may also hinder our ability to increase and/or maintain our revenues. The regulation of programming services is subject to the political process and continues to be under evaluation and subject to change. Material changes in the law and regulatory requirements are difficult to anticipate and our Business may be harmed by future legislation, new regulation, deregulation and/or court decisions interpreting such laws and regulations.
The following are examples of the types of currently active legislative, regulatory and judicial inquiries and proceedings that may impact our Cable Networks. The FCC may adopt rules which would require cable and satellite providers to make available programming channels on an a la carte basis. A major component of our financial growth strategy is based on our ability to increase our Cable Networks’ subscriber base. If our Cable Networks’ programming services are required by the FCC to be offered on an “a la carte” basis, our Cable Networks could experience higher costs, reduced distribution of our program service, perhaps significantly, and loss of viewers. There can be no assurance that we will be able to maintain or increase our Cable Networks’ subscriber base on cable, satellite and telco systems or that our current carriage will not decrease as a result of a number of factors or that we will be able to maintain or increase our Cable Networks’ current subscriber fee rates.
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Further, the FCC and certain courts are examining the types of technologies that will be considered “multichannel video programming systems” under federal regulation and the rules that will be applied to distribution of television programming via such technologies. We cannot predict the outcome of any of these inquiries or proceedings or how their outcome would impact our ability to have our Cable Networks’ content carried on multichannel programming distribution and the value of our advertising inventories.
Our Cable Networks are subject to Program Access restrictions.
Because certain of our directors are also directors of cable companies, we are considered to be a vertically integrated cable programmer and are subject to the program access rules. The other holdings of entities that acquire an interest in our capital stock may be attributable to our Cable Networks and could further subject us to the program access rule restrictions. While we do not believe our status as a vertically integrated cable programmer will materially limit or impair the activities of our Cable Networks, the program access rules could have a material adverse effect on our Business, financial condition and results of operations.
“Must-carry” regulations reduce the amount of channel space that is available for carriage of the Cable Networks cable offerings.
The Cable Act of 1992 imposed “must carry” or “retransmission consent” regulations on cable systems, requiring them to carry the signals of local broadcast television stations that choose to exercise their must carry rights rather than negotiate a retransmission consent arrangement. DBS systems are also subject to their own must carry rules. The FCC’s implementation of these “must-carry” obligations requires cable and DBS operators to give certain broadcasters preferential access to channel space. This reduces the amount of channel space that is available for carriage of our Cable Networks offerings by cable television systems and DBS operators in the U.S. Congress, the FCC or any other foreign government may, in the future, adopt new laws, regulations and policies regarding a wide variety of matters which could affect our Cable Networks.
The broadcast incentive auction has resulted in the modification of our broadcast licenses for WAPA by requiring us to operate on other channels.
As a result of the FCC spectrum auction, which was concluded in January 2017, the FCC is engaged in a “repack” of television stations that did not relinquish spectrum in the auction in remaining television broadcast spectrum, which requires certain television stations that did not relinquish spectrum to modify their transmission facilities, including requiring such stations to operate on other channel designations. The FCC is authorized to reimburse stations for reasonable relocation costs. The original reimbursement limit across all stations was $1.75 billion. In March 2018 Congress authorized an additional $1 billion to be used for reimbursements related to repacking and directed that a portion of the additional funds be used to reimburse low power television stations, television translator stations and FM stations that are required to modify their facilities on a temporary or permanent basis to accommodate changes made by television stations being repacked as well as for consumer education efforts. The FCC, when repacking the television broadcast spectrum, will use reasonable efforts to preserve a station’s coverage area and population served. The FCC has assigned new channels to stations that are required to be “repacked” and stations are in the process of moving to their new channels. We did not relinquish any of our spectrum in the auction. Two of our licenses, WNJX-TV and WTIN-TV, were reassigned new channels as a result of the incentive auction, have transitioned to new channels and during 2021 completed construction of modified facilities on their post-auction channels.
We cannot predict whether following the repacking the coverage area and population served by our stations will be completely preserved or whether the $2.75 billion set aside for reimbursing repacking expenses will be sufficient to cover all repacking expenses. Nevertheless, we do not believe that the auction will have a material negative impact on our Business, because with post-auction channel assignments our stations will remain in the more desirable UHF band; our three television stations have overlapping coverage areas, so it is unlikely that we will lose service to a significant portion of the households that we serve. If the FCC is unable to reimburse all of our repacking expenses, the amount of the shortfall is unlikely to be material to our Business as a whole.
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Risks Related to Our Securities and Corporate Structure
If securities or industry analysts do not publish or cease publishing research or reports about us, our Business, or our market, or if they change their recommendations regarding our Class A common stock adversely, the price and trading volume of our Class A common stock could decline.
If securities or industry analysts do not publish or cease publishing research or reports about us, our Business, or our market, or if they change their recommendations regarding our Class A common stock adversely, the price and trading volume of our Class A common stock could decline. The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts may publish about our Business, our market, or our competitors. As of December 31, 2021, only two industry analysts published research on our Business. If any of the analysts who may cover our Business change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our Class A common stock would likely decline. If any analyst who may cover our Business were to cease coverage of Hemisphere or fail to regularly publish reports about us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to .
The stock price of our Class A common stock may be volatile.
The stock price of our Class A common stock may be volatile and subject to wide fluctuations. In addition, the trading volume of our Class A common stock may fluctuate and cause significant price variations to occur. Some of the factors that could cause fluctuations in the stock price or trading volume of our Class A common stock include:
market and economic conditions, including market conditions in the cable television programming and broadcasting industries;
actual or expected variations in quarterly operating results;
liquidity of our Class A common stock;
differences between actual operating results and those expected by investors and analysts;
changes in recommendations by securities analysts;
operations and stock performance of our competitors;
accounting charges, including charges relating to the impairment of goodwill;
significant acquisitions or strategic alliances by us or by our competitors;
sales of our Class A common stock, including sales by our directors and officers or significant investors;
recruitment or departure of key personnel;
loss of key advertisers; and
changes in reserves for professional liability claims.
We cannot assure you that the price of our Class A common stock will not fluctuate or decline significantly in the future. In addition, the stock market in general can experience considerable price and volume fluctuations that may be unrelated to our performance.
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The market liquidity for our Class A common stock is relatively low and may make it difficult to purchase or sell our Class A common stock.
The average daily trading volume in our Class A common stock during the year ended December 31, 2021 was approximately 67,844 shares. Although a more active trading market may develop in the future, there can be no assurance as to the liquidity of any markets that may develop for our Class A common stock or the prices at which holders may be able to sell our Class A common stock and the limited market liquidity for our securities could affect a holder’s ability to sell at a price satisfactory to that holder.
We are a “controlled company” within the meaning of NASDAQ rules and, as a result, we qualify for, and choose to rely on, exemptions from certain corporate governance requirements.
Our controlling stockholder, Gato Investments LP, controls the majority of the voting power of all of our outstanding capital stock. As a result of the concentration of the voting rights in our Company, we are a “controlled company” within the meaning of the rules and corporate governance standards of NASDAQ. Under the NASDAQ rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain NASDAQ corporate governance requirements, including:
the requirement that a majority of our board of directors consists of independent directors;
the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors;
the requirement that we have a compensation committee that is composed entirely of independent directors; and
the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.
We have elected not to comply with the above corporate governance requirements. Accordingly, our stockholders are not afforded the same protections generally as stockholders of other NASDAQ-listed companies for so long as we remain a “controlled company” and rely upon such exemptions. The interests of our controlling stockholder may conflict with the interests of our other stockholders, and the concentration of voting power in such stockholder will limit our other stockholders’ ability to influence corporate matters.
Our controlling stockholder exercises significant influence over us and their interests in our Business may be different from the interests of our stockholders; future sales of substantial amounts of our Class A common stock may adversely affect our market price.
Our controlling stockholder, Gato Investments LP, controls the majority of the voting power of all of our outstanding capital stock. The controlling stockholders’ Class B common stock vote on a 10 to 1 basis with our Class A common stock, which means that each share of our Class B common stock has 10 votes and each share of our Class A common stock has 1 vote. All shares of our capital stock vote together as a single class. Accordingly, our controlling stockholder generally has the ability for the foreseeable future to influence the outcome of any of our corporate actions which require stockholder approval, including, but not limited to, the election of directors, significant corporate transactions, such as a merger or other sale of the Company or the sale of all or substantially all of our assets. This concentrated voting control will limit your ability to influence corporate matters and could adversely affect the market price of our Class A common.
Our controlling stockholder may delay or prevent a change in control in our Business. In addition, the significant concentration of stock ownership may adversely affect the value of our Class A common stock due to a resulting lack of liquidity of our Class A common stock or a perception among investors that conflicts of interest may exist or arise. If our controlling stockholder sells a substantial amount of our Class A common stock (upon conversion of their Class B common stock, which may be converted at any time in their sole discretion) in the public market, or investors perceive that these sales could occur, the market price of our Class A common stock could be adversely affected.
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The interests of our controlling stockholder, which has investments in other companies, may from time to time diverge from the interests of our other stockholders, particularly with regard to new investment opportunities. Our controlling stockholder is not restricted from investing in other businesses involving or related to programming, content, production and broadcasting. Our controlling stockholder may also engage in other businesses that compete or may in the future compete with our Business.
We have entered into a Registration Rights Agreement and joinders thereto with certain parties, including our controlling stockholder. If requested properly under the terms of the Registration Rights Agreement, certain of these stockholders have the right to require us to register the offer and sale of all or some of their Class A common stock (including upon conversion of their Class B common stock) under the Securities Act in certain circumstances and also have the right to include those shares in a registration initiated by us. If we are required to include the shares of capital stock held by these stockholders pursuant to these registration rights in a registration initiated by us, sales made by such stockholders may adversely affect the price of our Class A common stock and our ability to raise needed capital. In addition, if these stockholders exercise their demand registration rights and cause a large number of shares to be sold in the public market or demand that we include their shares for registration on a shelf registration statement, such sales or shelf registration may have an adverse effect on the market price of our Class A common stock.
Any other future sales of substantial amounts of our Class A common stock into the public market, or perceptions in the market that such sales could occur, may adversely affect the prevailing market price of our Class A common stock and impair our ability to raise capital through the sale of additional equity securities.
We have a staggered board of directors and other anti-takeover provisions, which may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of our stockholders.
Our amended and restated certificate of incorporation provides that our board of directors will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. As a result, at any annual meeting only a minority of the board of directors will be considered for election. Since this “staggered board” would prevent our stockholders from replacing a majority of our board of directors at any annual meeting, it may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of our stockholders. Some of the provisions of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could, together or separately, discourage potential acquisition proposals or delay or prevent a change in control. In particular, our board of directors is authorized to issue up to 50,000,000 shares of preferred stock with rights and privileges that might be senior to either class of our common stock and, without the consent of the holders of either class of our common stock.
The Company’s amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between the Company and its stockholders, which could increase costs to bring a claim, discourage claims or limit the ability of the Company’s stockholders to bring a claim in a judicial forum viewed by the stockholders as more favorable for disputes with the Company or the Company’s directors, officers or other employees.
The Company’s amended and restated bylaws provide that unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee or stockholder of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim against the Company, its directors, officers or other employees, or stockholders arising pursuant to any provision of the General Corporation Law of the State of Delaware (the “DGCL”) or the Company’s Certificate of Incorporation or Bylaws (as each may be amended from time to time), and (iv) any action asserting a claim against the Company, its directors, officers or other employees, or stockholders governed by the internal affairs doctrine. The choice of forum provision may increase costs to bring a claim, discourage claims or limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for with the Company or the Company’s directors, officers or other employees, or stockholders which may such lawsuits the Company or the Company’s directors, officers and other employees or stockholders. Alternatively, if a court were to find the choice of forum provision contained in the Company’s amended and bylaws to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving such action in other jurisdictions. The forum provision in the Company’s amended and bylaws will not or contract the scope of federal or concurrent jurisdiction for actions brought under the federal securities laws including the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, or the respective rules and regulations promulgated thereunder.
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Our dependence on subsidiaries for cash flow may negatively affect our Business.
We are a holding company with no business operations of our own. Our only significant asset is the outstanding capital stock and membership interests of our subsidiaries. We conduct, and expect to continue conducting, all of our business operations through our subsidiaries. Accordingly, our ability to pay our obligations is dependent upon dividends and other distributions from our subsidiaries to us. Although our Third Amended Term Loan Facility permits certain restricted payments from our subsidiaries to us to pay for our administrative expenses corporate overhead, franchise taxes, public company costs, directors’ fees and certain insurance premiums and deductibles, it restricts our subsidiaries ability to remit dividends to us in other instances at certain leverage ratios. Additionally, dividends to us from WAPA are also subject to certain local taxation. Consequently, our ability to pay dividends is limited by funds that our subsidiaries are permitted to dividend to us, and in certain instances, will subject us to certain tax liabilities.
General Risk Factors
Adverse conditions in the U.S. and international economies could negatively impact our results of operations.
Unfavorable general economic conditions, such as a recession or economic slowdown in parts of the United States or in one or more of the major markets in which we operate, could negatively affect the affordability of and demand for some of our products and services. In addition, adverse economic conditions may lead to loss of subscriptions for our Networks. If these events were to occur, it could have a material adverse effect on our results of operations.
The risks associated with our advertising revenue become more acute in periods of a slowing economy or recession, including, as a result of public health crises, such as COVID-19, which may be accompanied by a decrease in advertising. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Cancellations, reductions or delays in purchases of advertising could, and often do, occur as a result of a strike, a general economic downturn, an economic downturn in one or more industries or in one or more geographic areas, or a failure to agree on contractual terms.
Any potential hostilities, terrorist attacks, or similarly newsworthy events leading to broadcast interruptions, may affect our revenues and results of operations.
If any existing hostilities escalate, or if the United States experiences a terrorist attack or experiences any similar event resulting in interruptions to regularly scheduled broadcasting, we may lose revenue and/or incur increased expenses. Lost revenue and increased expenses may be due to preemption, delay or cancellation of advertising campaigns, or diminished subscriber fees, as well as increased costs of covering such events. We cannot predict the (i) extent or duration of any future disruption to our programming schedule, (ii) amount of advertising revenue that would be lost or delayed, (iii) the amount of decline in any subscriber fees or (iv) the amount by which broadcasting expenses would increase as a result. Any such loss of revenue and increased expenses could negatively affect our results of operations.
We may need to increase the size of our organization, and may experience difficulties in managing growth.
At Hemisphere, the parent holding company, we do not have significant operating assets and only have a limited number of employees. In connection with the completion of any future acquisitions, we may be required to hire additional personnel and enhance our information technology systems. Any future growth may increase our corporate operating costs and impose significant added responsibilities on members of our management, including the need to identify, recruit, maintain and integrate additional employees and implement enhanced informational technology systems. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively. Future growth will also increase our costs and expenses and limit our liquidity.
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Future acquisitions or business opportunities, including investments in complementary businesses could involve unknown risks that could harm our Business and adversely affect our financial condition.
From time to time, we have acquired or invested in complementary businesses and entered into joint ventures/investments. In the future we may make other acquisitions, invest in complementary businesses including joint ventures that involve unknown risks, and may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our Business, financial condition, results of operations and cash flows. Such transactions involve numerous other risks including:
difficulties integrating acquired businesses, technologies and personnel into our business;
difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
inability to obtain required regulatory approvals on favorable terms;
potential loss of key employees, key contractual relationships or key customers of either acquired businesses or our business;
assumption of the liabilities and exposure to unforeseen or undisclosed liabilities of acquired businesses;
dilution of interests of holders of our common shares through the issuance of equity securities or equity-linked securities; and
in the case of joint ventures and other investments, interests that diverge from those of our partners without the ability to direct the management and operations of the joint venture or investment in the manner we believe most appropriate.
Although we intend to conduct extensive business, financial and legal due diligence in connection with the evaluation of future business or acquisition opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such businesses, acquisitions or joint ventures. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the businesses or acquisitions, which could adversely affect our financial condition and liquidity. In addition, our Business, financial condition, results of operations and the ability to service our debt may be adversely impacted depending on specific risks applicable to any business or company we acquire.
We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not consummated, which could materially adversely affect subsequent attempts to locate and acquire or invest in another business.
We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments, with respect to such transaction, will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, business opportunities or financings and capital market transactions investment or financing, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.
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Possible strategic initiatives may impact our Business.
We will continue to evaluate the nature and scope of our operations and various short-term and long-term strategic considerations. There are uncertainties and risks relating to strategic initiatives. Also, prospective competitors may have greater financial resources. These factors may place us at a competitive disadvantage in successfully completing future acquisitions and investments. Future acquisitions or joint ventures may not be available on attractive terms, or at all. If we do make additional acquisitions, we may not be able to successfully integrate the acquired businesses. For example, we could face several challenges in the consolidation and integration of information technology, accounting systems, personnel and operations. In addition, while we believe that there may be target businesses that we could potentially acquire or invest in, our ability to compete with respect to the acquisition of certain target businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing in order to consummate future acquisitions and investment opportunities. We cannot assure you that any additional financing will be available to us on acceptable terms, if at all. This inherent competitive gives others with financial resources an in pursuing acquisition and investment . Finally, certain acquisitions or may be subject to FCC approval and FCC rules and regulations. If we do not realize the expected benefits or synergies of such transactions, there may be an effect on our Business, financial condition and results of operations.
In the course of their other business activities, certain of our officers and directors may become aware of investment and acquisition opportunities that may be appropriate for presentation to us as well as the other entities with which they are affiliated. Such officers and directors may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
Certain of our officers and directors may become aware of business opportunities which may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Due to those officers’ and directors’ existing affiliations with other entities, they may have fiduciary obligations to present potential business opportunities to those entities in addition to presenting them to us, which could cause additional conflicts of interest. To the extent that such officers and directors identify business combination opportunities that may be suitable for entities to which they have pre-existing fiduciary obligations, or are presented with such opportunities in their capacities as fiduciaries to such entities, they may be required to honor their pre-existing fiduciary obligations to such entities. Accordingly, they may not present business combination opportunities to us that otherwise may be attractive to such entities unless the other entities have declined to accept such opportunities.
We have incurred substantial costs in connection with our previous acquisitions, joint ventures and growth strategy, including legal, accounting, advisory and other costs.
We have incurred substantial costs, including a number of non-recurring costs, in connection with our prior acquisitions, joint ventures and growth strategy and expect to incur substantial costs in connection with any other transaction we complete in the future. Some of these costs are payable regardless of whether the acquisition is completed. These costs will reduce the amount of cash otherwise available to us for acquisitions, business opportunities and other corporate purposes. There is no assurance that the actual costs will not exceed our estimates. We may continue to incur additional material charges reflecting additional costs associated with our investments and the integration of our acquisitions, and joint ventures in fiscal quarters subsequent to the quarter in which the relevant acquisition was consummated.
From time to time we may be subject to litigation for which we may be unable to accurately assess our level of exposure and which, if adversely determined, may have a material adverse effect on our consolidated financial condition or results of operations.
We and our subsidiaries are or may become parties to legal proceedings that are considered to be either ordinary or routine litigation incidental to our or their current or prior businesses or not material to our consolidated financial position or liquidity. There can be no assurance that we will prevail in any litigation in which we or our subsidiaries may become involved, or that our or their insurance coverage will be adequate to cover any potential losses. To the extent that we or our subsidiaries sustain losses from any pending litigation which are not reserved or otherwise provided for or insured against, our Business, results of operations, cash flows and/or financial condition could be materially adversely affected.
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Any violation of the Foreign Corrupt Practices Act or other similar laws and regulations could have a negative impact on us.
We are subject to risks associated with doing business outside of the United States, which exposes us to complex foreign and U.S. regulations inherent in doing business cross-border and in each of the countries in which we transact business. We are subject to regulations imposed by the Foreign Corrupt Practices Act, or the FCPA, and other anti-corruption laws that generally prohibit U.S. companies and their subsidiaries from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties and the SEC and U.S. Department of Justice have increased their enforcement activities with respect to the FCPA. Internal control policies and procedures and employee training and compliance programs that we have implemented to deter prohibited practices may not be in prohibiting employees, contractors or agents from or such policies and the law. If our employees or agents to comply with applicable laws or company policies governing their international operations, we may face , and other legal proceedings and actions which could result in civil , administrative remedies and sanctions. Any determination that we have the FCPA could have a material effect on our financial condition. Compliance with international and U.S. laws and regulations that apply to international operations increases the cost of doing business in foreign jurisdictions.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our internal controls over financial reporting and to report on our assessment as to the effectiveness of these controls. Any delays or difficulty in satisfying these requirements or negative reports concerning our internal controls could have a material adverse effect on our future results of operations and financial condition.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We must perform system and process evaluation and testing of our internal control over financial reporting to allow our management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in internal control over financial reporting that are deemed to be material weaknesses. Compliance with Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. The need to focus on compliance with Section 404 of Sarbanes-Oxley may strain management and finance resources and otherwise present additional administrative and operational challenges as our management seeks to comply with these requirements.
We may in the future discover areas of our internal controls that need improvement, particularly with respect to our existing acquired businesses, businesses that we may acquire in the future and newly formed businesses or entities. We cannot be certain that any remedial measures we take will ensure that we implement and maintain adequate internal controls over our financial reporting processes and reporting in the future.
In addition, we may acquire an entity that was not previously subject to U.S. public company requirements or did not previously prepare financial statements in accordance with U.S. GAAP or is not in compliance with the requirements of the Sarbanes-Oxley Act of 2002 or other public company reporting obligations applicable to such entity. We may incur additional costs in order to ensure that after such acquisition, we continue to comply with the requirements of the Sarbanes-Oxley Act of 2002 and our other public company requirements, which in turn could reduce our earnings or cause us to fail to meet our reporting obligations. In addition, development of an adequate financial reporting system and the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act of 2002 may increase the time and costs necessary to complete any such acquisition or cause us to fail to meet our reporting obligations. To the extent any of these newly acquired entities or any existing entities have deficiencies in its internal controls, it may impact our internal controls.
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Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are not able to comply with the requirements of Section 404 in a timely manner, if we fail to remedy any material weakness and maintain effective internal control over our financial reporting in the future, or if our independent registered public accounting firm is unable to provide us with an unqualified report regarding the effectiveness of our internal controls over financial reporting to the extent required by Section 404 of the Sarbanes-Oxley Act of 2002, our financial statements may be inaccurate, our ability to report our financial results on a timely and accurate basis may be adversely affected, investors could confidence in the reliability of our financial statements, our access to the capital markets may be restricted, the trading price of our Class A common stock may , and we may be subject to sanctions or by regulatory authorities, including the SEC or NASDAQ. In addition, to comply with our reporting obligations with the Commission may cause an event of to occur under our Third Amended Term Loan Facility, or similar instruments governing any debt we incur in the future.
Changes in governmental regulation, interpretation or legislative reform could increase our Business’s cost of doing business and adversely affect our profitability.
Laws and regulations, including in the areas of advertising, consumer affairs, data protection, finance, marketing, privacy, publishing and taxation requirements, are subject to change and differing interpretations. Changes in the political climate or in existing laws or regulations, or their interpretations, or the enactment of new laws or the issuance of new regulations or changes in enforcement priorities or activity could adversely affect us by, among other things:
increasing our administrative, compliance, and other costs;
forcing us to undergo a corporate restructuring;
limiting our ability to engage in inter-company transactions with our affiliates and subsidiaries;
increasing our tax obligations, including unfavorable outcomes from audits performed by various tax authorities;
affecting our ability to continue to serve our customers and to attract new customers;
affecting cash management practices and repatriation efforts;
forcing us to alter or restructure our Networks’ and Pantaya’s relationships with vendors and contractors;
increasing compliance efforts or costs;
limiting our use of or access to personal information;
impacting the economics of creating or distributing content, anti-piracy efforts, or our ability to protect or exploit intellectual property rights;
restricting our ability to market our products; and
requiring us to implement additional or different programs and systems.
For example, President Biden put forth several corporate income tax proposals during his campaign, including a significant increase in the corporate income tax rate and changes in the taxation of non-U.S. income. While it is too early to predict the outcome of these proposals, if enacted, they may have a material impact on our income tax liability. The determination of our worldwide provision for income taxes and current and deferred tax balances requires judgment and estimation. Our provision for income taxes could also be materially adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets, or by changes in worldwide tax laws, regulations, or accounting principles.
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Additionally, the California Consumer Privacy Act (CCPA), which took effect in January 2020, establishes certain transparency rules and creates new data privacy rights for consumers, including more ability to control how their data is shared with third parties. Furthermore, some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, and other states are beginning to pass similar laws. Compliance with such regulations is costly and time-consuming, and we may encounter difficulties, delays or significant expenses in connection with such compliance, and we may be exposed to significant penalties, liabilities, reputational harm and loss of business in the event that we fail to comply. While it is not possible to predict when or whether fundamental policy or interpretive changes would occur, these or other changes could fundamentally change the dynamics of the industries in which we operate or the costs associated with our operations. Changes in public policy or enforcement priorities could materially affect our , our ability to retain or grow business, or in the event of extreme circumstances, our financial condition. There can be no assurance that legislative or regulatory change or interpretive differences will not have a material effect on our Business.
Moreover, the adoption or modification of laws or regulations relating to the internet could limit or otherwise adversely affect the manner in which we currently operate our Pantaya service. The continued growth and development of the market for online commerce may lead to more stringent consumer protection laws, which may impose additional burdens on us. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur additional expenses or alter our business model for our Pantaya service. Changes in laws or regulations that adversely affect the growth, popularity or use of the internet, including laws impacting net neutrality, could decrease the demand for our Pantaya service and increase our cost of doing business. Favorable laws may change, including for example, in the United States where net neutrality regulations were repealed. Given uncertainty around these rules, including changing interpretations, amendments or repeal, coupled with potentially significant political and economic power of local network operators, we could experience discriminatory or anti-competitive practices that could impede the growth of Pantaya, cause us to incur additional expense or otherwise affect our Pantaya service.
