Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Here Media Inc. | c92438exv32w2.htm |
EX-10.1 - EXHIBIT 10.1 - Here Media Inc. | c92438exv10w1.htm |
EX-32.1 - EXHIBIT 32.1 - Here Media Inc. | c92438exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Here Media Inc. | c92438exv31w1.htm |
EX-10.2 - EXHIBIT 10.2 - Here Media Inc. | c92438exv10w2.htm |
EX-31.2 - EXHIBIT 31.2 - Here Media Inc. | c92438exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-53690
HERE MEDIA INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE (State or Other Jurisdiction of Incorporation or Organization) |
26-3962587 (I.R.S. Employer Identification No.) |
|
10990 WILSHIRE BOULEVARD, PENTHOUSE | ||
LOS ANGELES, CALIFORNIA | 90024 | |
(Address of Principal Executive Offices) | (Zip Code) |
(310) 806-4288
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
Number of shares outstanding of the registrants Common Stock, $0.001 par value, outstanding
as of October 31, 2009: 20,700,675
Here Media Inc.
INDEX
Form 10-Q
For the Period ended September 30, 2009
INDEX
Form 10-Q
For the Period ended September 30, 2009
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Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Here Media Inc.
Item 1. | Financial Statements |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31, | September 30, | |||||||
2008 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,530 | $ | 507 | ||||
Restricted cash |
| 550 | ||||||
Accounts receivable, net |
3,849 | 3,263 | ||||||
Inventory |
713 | 616 | ||||||
Program broadcasting rights, current portion |
3,864 | 3,242 | ||||||
Prepaid expenses and other current assets |
1,313 | 1,507 | ||||||
Due from related parties |
| 156 | ||||||
Total current assets |
12,269 | 9,841 | ||||||
Property and equipment, net |
1,019 | 1,780 | ||||||
Intangible assets, net |
430 | 2,307 | ||||||
Program broadcasting rights, less current portion |
8,859 | 11,560 | ||||||
Other assets |
286 | 549 | ||||||
Total assets |
$ | 22,863 | $ | 26,037 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,154 | $ | 6,049 | ||||
Accrued expenses and other liabilities |
1,291 | 3,508 | ||||||
Accrued restructuring |
| 716 | ||||||
Due to related parties, current portion |
5,785 | 511 | ||||||
Deferred revenue, current portion |
1,305 | 3,380 | ||||||
Capital lease obligations, current portion |
44 | 200 | ||||||
Deferred rent, current portion |
| 29 | ||||||
Total current liabilities |
10,579 | 14,393 | ||||||
Lines of credit from related parties |
| 3,538 | ||||||
Deferred revenue, less current portion |
1,319 | 2,244 | ||||||
Capital lease obligations, less current portion |
92 | 115 | ||||||
Deferred rent, less current portion |
117 | 66 | ||||||
Due to related parties, less current portion |
5,800 | 12,703 | ||||||
Other long-term liabilities |
| 193 | ||||||
Total liabilities |
17,907 | 33,252 | ||||||
Commitments and contingencies (Note 7) |
||||||||
Stockholders equity (deficit): |
||||||||
Common stock: $0.001 par value, 40,000 shares authorized, 16,630 and 20,701 shares
issued and outstanding at December 31, 2008 and September 30, 2009, respectively |
17 | 21 | ||||||
Preferred stock: $0.001 par value, 10,000 shares authorized, zero shares
issued and outstanding at December 31, 2008 and September 30, 2009, respectively |
| | ||||||
Special stock: $0.001 par value, 4,200 shares authorized, zero and 4,071 shares
issued and outstanding at December 31, 2008 and September 30, 2009, respectively |
| 4 | ||||||
Additional paid-in capital |
4,939 | 5,001 | ||||||
Accumulated other comprehensive loss |
| (1 | ) | |||||
Accumulated deficit |
| (12,240 | ) | |||||
Total stockholders equity (deficit) |
4,956 | (7,215 | ) | |||||
Total liabilities and stockholders equity (deficit) |
$ | 22,863 | $ | 26,037 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
Here Media Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Revenue: |
||||||||||||||||
Advertising services (*) |
$ | 2,483 | $ | 3,726 | $ | 2,483 | $ | 11,404 | ||||||||
Subscription services |
905 | 3,000 | 1,972 | 5,754 | ||||||||||||
Transaction services (*) |
3,800 | 637 | 6,538 | 2,085 | ||||||||||||
Total revenue |
7,188 | 7,363 | 10,993 | 19,243 | ||||||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of revenue |
3,120 | 6,887 | 6,123 | 15,504 | ||||||||||||
Sales and marketing |
975 | 2,056 | 1,580 | 4,790 | ||||||||||||
General and administrative |
1,304 | 2,615 | 4,761 | 6,385 | ||||||||||||
Restructuring |
| 786 | | 786 | ||||||||||||
Acquisition transaction costs |
| 223 | | 3,008 | ||||||||||||
Depreciation and amortization |
83 | 568 | 170 | 970 | ||||||||||||
Total operating costs and expenses |
5,482 | 13,135 | 12,634 | 31,443 | ||||||||||||
Income (loss) from operations |
1,706 | (5,772 | ) | (1,641 | ) | (12,200 | ) | |||||||||
Interest expense |
| (31 | ) | | (40 | ) | ||||||||||
Income (loss) from continuing operations |
1,706 | (5,803 | ) | (1,641 | ) | (12,240 | ) | |||||||||
Income from discontinued operations |
11 | | 11 | | ||||||||||||
Net income (loss) |
$ | 1,717 | $ | (5,803 | ) | $ | (1,630 | ) | $ | (12,240 | ) | |||||
Net loss per share: |
||||||||||||||||
Basic and diluted |
$ | (0.28 | ) | $ | (0.67 | ) | ||||||||||
Weighted-average shares used to compute net loss
per share basic and diluted |
20,701 | 18,285 | ||||||||||||||
(*) Supplemental disclosure of related party revenue (see Note 5): |
||||||||||||||||
Advertising services revenue: |
||||||||||||||||
Related parties |
$ | 423 | $ | 83 | $ | 423 | $ | 2,314 | ||||||||
Non-related parties |
2,060 | 3,643 | 2,060 | 9,090 | ||||||||||||
$ | 2,483 | $ | 3,726 | $ | 2,483 | $ | 11,404 | |||||||||
Transaction services revenue: |
||||||||||||||||
Related parties |
$ | 3,553 | $ | | $ | 6,236 | $ | 467 | ||||||||
Non-related parties |
247 | 637 | 302 | 1,618 | ||||||||||||
$ | 3,800 | $ | 637 | $ | 6,538 | $ | 2,085 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Here Media Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
(In thousands)
Accumulated | Total | |||||||||||||||||||||||||||||||
Additional | Other | Stockholders | ||||||||||||||||||||||||||||||
Common Stock | Special Stock | Paid-in | Comprehensive | Accumulated | Equity | |||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Capital | Loss | Deficit | (Deficit) | |||||||||||||||||||||||||
Balance as of
December 31, 2008 |
16,630 | $ | 17 | | $ | | $ | 4,939 | $ | | $ | | $ | 4,956 | ||||||||||||||||||
Members distribution |
| | | | (990 | ) | | | (990 | ) | ||||||||||||||||||||||
Merger with PlanetOut Inc. |
4,071 | 4 | 4,071 | 4 | 892 | | | 900 | ||||||||||||||||||||||||
Contribution of film rights |
| | | | 50 | | | 50 | ||||||||||||||||||||||||
Contribution of services |
| | | | 110 | | | 110 | ||||||||||||||||||||||||
Foreign currency
translation adjustment |
| | | | | (1 | ) | | (1 | ) | ||||||||||||||||||||||
Net loss |
| | | | | | (12,240 | ) | (12,240 | ) | ||||||||||||||||||||||
Balance as of
September 30, 2009 |
20,701 | $ | 21 | 4,071 | $ | 4 | $ | 5,001 | $ | (1 | ) | $ | (12,240 | ) | $ | (7,215 | ) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Here Media Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, | ||||||||
2008 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,630 | ) | $ | (12,240 | ) | ||
Net income from discontinued operations, net of tax |
(11 | ) | | |||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
170 | 970 | ||||||
Program broadcasting rights amortization |
3,065 | 3,456 | ||||||
Sale of accounts receivable |
| 3,200 | ||||||
Contributed services |
| 110 | ||||||
Provision for doubtful accounts |
| 89 | ||||||
Restructuring |
| 786 | ||||||
Amortization of deferred rent |
(4 | ) | (120 | ) | ||||
Loss on disposal or write-off of property and equipment |
| 6 | ||||||
Changes in operating assets and liabilities, net of acquisition effects: |
||||||||
Accounts receivable |
(732 | ) | (2,093 | ) | ||||
Inventory |
48 | 97 | ||||||
Program broadcasting rights |
(4,612 | ) | (3,894 | ) | ||||
Prepaid expenses and other assets |
(598 | ) | 458 | |||||
Accounts payable |
(419 | ) | 3,124 | |||||
Accrued expenses and other liabilities |
662 | 229 | ||||||
Accrued restructuring |
| (165 | ) | |||||
Due to related parties |
2,068 | 1,106 | ||||||
Deferred revenue |
(33 | ) | 692 | |||||
Net cash used in operating activities of continuing operations |
(2,026 | ) | (4,189 | ) | ||||
Net cash used in operating activities of discontinued operations |
(47 | ) | | |||||
Net cash used in operating activities |
(2,073 | ) | (4,189 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(178 | ) | (297 | ) | ||||
Cash received in acquisition of PlanetOut Inc. |
| 915 | ||||||
Changes in restricted cash |
| 550 | ||||||
Net cash provided by (used in) investing activities |
(178 | ) | 1,168 | |||||
Cash flows from financing activities: |
||||||||
Principal payments under capital lease obligations |
(5 | ) | (224 | ) | ||||
Borrowings
under lines of credit from related parties, net of repayments |
| 3,520 | ||||||
Loans from (repayments to) related parties |
2,475 | (2,297 | ) | |||||
Net cash provided by financing activities of continuing operations |
2,470 | 999 | ||||||
Net cash provided by financing activities of discontinued
operations |
48 | | ||||||
Net cash provided by financing activities |
2,518 | 999 | ||||||
Effect of exchange rate on cash and cash equivalents |
| (1 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
267 | (2,023 | ) | |||||
Cash and cash equivalents, beginning of period |
26 | 2,530 | ||||||
Cash and cash equivalents, end of period |
$ | 293 | $ | 507 | ||||
Supplemental disclosure of noncash flow investing and financing activities: |
||||||||
Contribution of film rights |
$ | | $ | 50 | ||||
Distribution of related party receivable to members |
$ | | $ | 990 | ||||
Assignment of investment in OUTtv from related party |
$ | | $ | 75 | ||||
Assignment of program broadcasting rights from related party |
$ | | $ | 1,600 | ||||
Acquisitions (see Note 2): |
||||||||
Assets acquired |
$ | 6,630 | $ | 7,717 | ||||
Liabilities assumed |
6,130 | 6,817 | ||||||
Net fair value of stock issued in acquisition |
$ | 500 | $ | 900 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Here Media Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 The Company and Summary of Significant Accounting Policies
The Company
Here Media Inc. (Here Media or the Company) is the parent company of Here Networks, LLC
(Here Networks), Here Publishing Inc. (formerly named Regent Entertainment Media Inc.) (Here
Publishing) and PlanetOut Inc. (PlanetOut). Here Media was formed in connection with the
business combination of Here Networks and Here Publishing (collectively, the HMI Entities) and
PlanetOut, which was completed on June 11, 2009. See Note 2, Business Combinations and Intangible
Assets.
The HMI Entities, collectively, have been determined to be the acquiring entity in the
business combination, and the historical information for the HMI Entities is presented as combined
with Here Media. Both Here Networks and Here Publishing of the HMI Entities were commonly owned
and controlled prior to the business combination with PlanetOut. The owners of Here Networks
acquired Here Publishing in August 2008. The historical financial information for Here Publishing
is included from the date of its acquisition, August 13, 2008.
Here Networks offers original movies, series, documentaries and music specials tailored
for the lesbian, gay, bisexual and transgender (LGBT) community on a subscription and transaction
basis via cable television, DTH satellite television, fiber-optic television and the Internet under
the brand name here!. Here Publishing publishes magazines and books targeting the LGBT
community, which are distributed through the newsstand distribution network as well as by
subscriptions of print and digital editions of the magazines. Products include The Advocate, Out,
HIVPlus and Alyson Books, and companion websites. PlanetOut is a leading online media company
serving the LGBT community. PlanetOut serves this audience through its websites Gay.com and
PlanetOut.com.
Unaudited Interim Financial Information
The unaudited condensed consolidated financial statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (the SEC) but omit certain
information and footnote disclosures necessary to present the statements in accordance with United
States generally accepted accounting principles (U.S. GAAP). The accompanying unaudited condensed
consolidated financial statements are unaudited but reflect all adjustments, including normal
recurring adjustments which in the opinion of management are necessary to state fairly the
financial position and the results of operations for the interim periods. The accompanying
unaudited condensed consolidated balance sheet as of December 31, 2008 has been derived from the
audited balance sheet of each of the HMI entities at that date. Results of interim periods are not
necessarily indicative of results for the entire year. These unaudited condensed consolidated
financial statements should be read in conjunction with the Companys Amendment No. 4 to the
Registration Statement on Form S-4 filed with the SEC on May 14, 2009 and PlanetOuts Annual Report
on Form 10-K for the fiscal year ended December 31, 2008.
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation. Investments in entities in which the Company holds less
than a 20 percent ownership interest and over which the Company does not have the ability to
significantly influence the operations of the investee are accounted for using the cost method of
accounting. The Company has performed an evaluation of subsequent events through the date the
financial statements were issued on November 13, 2009.
As a result of the Company experiencing recurring losses and negative cash flow from
operations in each of the last two years to date and its accumulated deficit, the Company has
assessed its anticipated cash needs for the next twelve months and has adopted an operating plan to
manage its capital expenditures and costs of operating activities consistent with its revenues in
order to meet its working capital needs for the next twelve months. Although the Company believes
that it will have sufficient working capital to conduct its operations and meet its current
obligations for the next twelve months, it can give no assurance that it will be able to do so.
The accompanying condensed consolidated financial statements are presented on the basis that the
Company is a going concern and do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
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Table of Contents
Reclassifications
Certain reclassifications have been made in the condensed consolidated financial statements
for prior periods contained herein to conform to the current year presentation. These
reclassifications do not change the previously reported net income (loss) or net income (loss) per
share of the Company.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Significant estimates and
assumptions made by management include, among others, the assessment of collectability of accounts
receivable, the determination of the allowance for doubtful accounts, the determination of the
reserve for inventory obsolescence, determination of ultimate revenue in the amortization of
program broadcasting rights, the valuation and useful life of capitalized software and long-lived
assets, any impairment of long-lived assets such as program broadcasting rights and intangible
assets, the valuation of deferred tax asset balances and the fair value of the stock issued in the
business combination. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original or remaining
maturities of three months or less to be cash equivalents. The Companys investments are primarily
comprised of money market funds and certificates of deposit, the fair market value of which
approximates cost.
Restricted Cash
Restricted cash consists of reserves required by the Companys former credit card processor
for its online operations in order to cover any exposure that they may have as the Company collects
revenue in advance of providing services to its customers.
Fair Value Measurement of Assets and Liabilities
The Companys financial assets and liabilities are valued using market prices on both active
markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are
obtained from real-time quotes for transactions in active exchange markets involving identical
assets. Level 2 instrument valuations are obtained from readily-available pricing sources for
comparable instruments. As of September 30, 2009, the Company did not have any assets or
liabilities without observable market values that would require a high level of judgment to
determine fair value (Level 3). The Companys financial assets consist primarily of cash and
cash equivalents which are highly liquid investments with original or remaining maturities of three
months or less when purchased. The Companys financial instruments, including accounts receivable
and accounts payable, are carried at cost, which approximates their fair value because of the
short-term nature of these instruments. The fair value of line of credit agreements approximate
carrying value because the related effective rates of interest approximate current market rates
available to us for debt with similar terms and similar remaining maturities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash, cash equivalents and accounts receivable. Cash and cash equivalents
are maintained by financial institutions in the United States. Deposits in the United States may
exceed federally insured limits. Management believes that the financial institutions that hold the
Companys cash and cash equivalents are financially credit worthy and, accordingly, that minimal
credit risk exists with respect to the Companys cash and cash equivalents.
The Companys accounts receivable are derived primarily from advertising customers, from major
cable or satellite operators and from wholesale distributors of the Companys magazines and books
with limited risk. The Company performs ongoing credit evaluations of its customers, does not
require collateral and maintains allowances for potential credit losses when deemed necessary. To
date, such losses have been within managements expectations.
During each of the three and nine months ended September 30, 2008 and 2009, no customer
accounted for more than 10% of total revenues from unrelated parties. As of December 31, 2008 and
September 30, 2009, no customer accounted for more than 10% of total accounts receivable.
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Inventory
Inventory consists of books held for sale and materials related to the production of future
publications such as editorial and artwork costs, advances on books, paper, other publishing and
novelty products and shipping materials. Inventory is stated at the lower of cost or market. Cost
is determined using the specific identification method for books held for sale and using the
first-in, first-out method for materials related to future production.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method over the estimated useful lives of the
related assets, generally ranging from three to five years. Leasehold improvements are amortized
over the shorter of their economic lives or lease term, including the option to extend if extension
is probable, generally ranging from two to seven years. Maintenance and repairs are charged to
expense as incurred. Expenditures that increase the value or productive capacity of assets are
capitalized. When assets are retired or otherwise disposed of, the cost and accumulated
depreciation and amortization are removed from the accounts and any resulting gain or loss is
reflected in the condensed consolidated statement of operations in the period realized.
Internal Use Software and Website Development Costs
The Company capitalizes internally developed software and website development costs incurred
in the application development stage of an internal-use software project when the preliminary
project stage has been completed and technological and economic feasibility has been determined.
The Company exercises judgment in determining which stage of development a software project is in
at any point in time. Capitalized costs are amortized on a straight-line basis over the estimated
useful life of the software, generally three years, once it is available for its intended use.
Intangible Assets and Other Long-Lived Assets
The Company evaluates identifiable intangible assets and other long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable. The Company records an impairment charge on intangibles
or long-lived assets to be held and used when it determines that the carrying value of these assets
may not be recoverable and/or exceeds their carrying value. Based on the existence of one or more
indicators of impairment, the Company measures any impairment based on a projected discounted cash
flow method using a discount rate that it determines to be commensurate with the risk inherent in
its business model. These estimates of cash flow require significant judgment based on the
Companys historical results and anticipated results and are subject to many factors including
assumptions about the timing and amount of future cash flows, growth rates and discount rates.
Program Broadcasting Rights
Program broadcasting rights consist of the non-reimbursable amounts paid by the Company for
rights to distribute particular films or film libraries. Rights to programs available for
broadcast under program license agreements are initially recorded at the beginning of the license
period on the basis of the amounts of total license fees payable under the license agreements and
are charged to operating expense over the license period. Program broadcasting rights are recorded
at the lower of cost, less accumulated amortization, or net realizable value. The Companys
distribution agreements with the producers of the films or programs typically include rights to
exploit the films and television programming via most forms of media in the United States and its
territories for the duration of the licensing agreement.
The Company offers multiple hours of programming to subscribers each month, refreshing the
content by 50% or more on a monthly basis. Accordingly, the Company is unable to attribute the
monthly fees earned per subscriber to individual programs or films. As a result, the Company is
unable to recognize expenses utilizing the individual film forecast method. Therefore, the
Companys program broadcasting rights are amortized utilizing the straight-line method, generally
over the license term. The Company believes that this method provides a reasonable matching of
expenses with total estimated revenues over the periods that revenues associated with the films and
programs are expected to be realized.
When certain factors indicate that impairment may exist, the Company tests for impairment of
its program broadcasting rights. The carrying value of a long-lived asset held for use is
considered impaired when the anticipated discounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair market value of the long-lived asset held for
use. Fair market value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved to estimate the fair value of the film assets. In
determining the film assets fair value, the Company considers key indicators such as the
anticipated growth in subscriber level, and the plan for expansion into international territories.
The Company also considers cash outflows necessary to generate the film assets cash inflows. The
Company uses a discount rate that it believes is appropriate to the risk level for film production.
Based on the result of discounted cash flows, no impairment loss was recognized during the three
and nine months ended September 30, 2008 and 2009.
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Related Party Transactions
Here Management, LLC (Here Management) is the controlling stockholder of the Company and is
51% owned by the Companys Chairman of the Board, Stephen P. Jarchow, and 35% owned by the
Companys Chief Executive Officer, Paul A. Colichman. Mr. Jarchow and Mr. Colichman are also the
majority stockholders of Regent Releasing LLC (Regent Releasing), Oxford Media LLC (Oxford
Media), Studios Funding LLC (Studios Funding), Convergent Funding LLC (Convergent Funding),
Regent Studios LLC (Regent Studios), Hyperion Media LLC (Hyperion), Regent Worldwide Sales LLC
(RWS), Regent Entertainment International Inc. and Regent Entertainment Partnership, L.P. (the
Affiliates). During the three and nine months ended September 30, 2008 and 2009, the Company was
a party to agreements with certain of the Affiliates related to publicity and marketing services
agreements, expense sharing arrangements, the sale of accounts receivable and the acquisition,
licensing or distribution of programming and motion pictures.
The Company and several of the Affiliates share certain general and administrative expenses.
Expenses shared by the Company and the Affiliates require the use of judgments and estimates in
determining the allocation of these expenses. Prior to the business combination on June 11, 2009,
these shared expenses included salary and other non-payroll related costs. Allocation of salary
costs between the Company and the Affiliates was performed on an individual employee basis and was
based upon the proportionate share of each employees time spent per affiliate company.
Non-payroll costs, such as insurance, office rent, utilities, information technology and other
office expenses were allocated in proportion to allocated payroll costs. Subsequent to the
business combination on June 11, 2009, the sharing of employees with the Affiliates has been
eliminated and non-payroll costs have been allocated between the Company and the Affiliates based
primarily on usage. The Companys management believes the allocation methodology is reasonable and
represents managements best available estimate of actual costs incurred by each company.
The Company shares its merchant services provided by US Bank with Hyperion through its
magazine fulfillment center. The funds and transactions are clearly identified, and the Company
believes that there are no risks associated with the comingling of funds.
The Company is also a party to agreements with several of its affiliates relating to the
acquisition, licensing or distribution of programming and motion pictures and the provision of
publicity and marketing services.
During the nine months ended September 30, 2009, the Company sold accounts receivable without
recourse to the Companys Chief Executive Officer, Paul A. Colichman, and the Companys Chairman of
the Board, Stephen P. Jarchow. See Note 5, Related Party Transactions. During the three months
ended September 30, 2009, the Company entered into line of credit agreements with Mr. Colichman and
Mr. Jarchow. See Note 6, Lines of Credit from Related
Parties.
Investment in OUTtv
The Company has invested $200,000 for its 33% ownership stake in the holding company that owns
a 58% interest in OUTtv (or a 19% effective ownership interest in OUTtv), and accounts for this
investment using the cost method of accounting as it does not exercise significant influence over
the investment (see Principles of Consolidation and Basis of Presentation). As part of this
investment, the Company entered into a Programming Service and Intellectual Property agreement
which calls for a barter exchange of programming rights deliverable by the Company in exchange for
certain amounts of advertising time on OUTtv. Also, OUTtv is obligated to pay $1.00 per month for
every 1,000 subscribers over 300,000. The Company deems this barter exchange and the obligation on
the subscriber counts as immaterial for the three and nine months ended September 30, 2008 and
2009. In addition, in consideration of the Programming Service and Intellectual Property
agreement, OUTtvs holding company is obligated to pay a license fee of $15,000 per month. The
license fee payments were deferred until OUTtv or the holding company raises $2.0 million in a
private placement or a public offering. Since the Company is uncertain that OUTtv will raise $2.0
million, the Company deems that the collectability requirement for revenue recognition is not met,
and therefore does not account for the license fee revenues in the condensed consolidated financial
statements.
Revenue Recognition
The Companys revenue is derived principally from advertising services, subscription services
and transaction services. Advertising services revenue is generated by advertisements placed in
the Companys printed publications and from banner and sponsorship advertisements on the Companys
websites. Subscription services revenue is generated by fees paid by subscribers for the Companys
subscription video-on-demand (SVOD) and linear television channel services, subscription services
across the Companys print media properties and paid membership subscriptions to the Companys
online media properties. Transaction services revenue includes publicity and marketing services
relating to theatrical motion picture releases, transactional fees paid by viewers for the
Companys video-on-demand (VOD) services, revenues from distribution of feature films, newsstand
sales of the Companys various print properties and revenue generated from co-marketing
opportunities with other affiliates that are marketing to the LGBT community.
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Magazine advertising revenues are recognized, net of related agency commissions, on the date
the magazines are placed on sale at the newsstands. Revenues received for advertisements in
magazines to go on sale in future months are classified as deferred advertising revenue.
The duration of the Companys banner advertising commitments has ranged from one week to one
year. Sponsorship advertising contracts have terms ranging from three months to two years and also
involve more integration with the Companys services, such as the placement of units that provide
users with direct links to the advertisers website. Advertising revenue on both banner and
sponsorship contracts is recognized ratably over the term of the contract, provided that no
significant Company obligations remain at the end of a period and collection of the resulting
receivables is reasonably assured, at the lesser of the ratio of impressions delivered over the
total number of undertaken impressions or the straight-line basis. The Companys obligations
typically include undertakings to deliver a minimum number of impressions, or times that an
advertisement appears in pages viewed by users of the Companys online properties. To the extent
that these minimums are not met, the Company defers recognition of the corresponding revenue until
the minimums are achieved.
Subscription services revenue from television services is recognized for the month in which
programming is broadcast to viewers. The relevant cable or satellite television operator collects
the fees from subscribers and pays to the Company its corresponding portion, typically within 90
days of receipt from the customer. Viewership counts are reported monthly by system operators.
Generally, under the terms of the Companys agreements with the cable, satellite and fiber-optic
television operators, the Company is paid based on a percentage of the amount charged to
subscribers, video-on-demand or pay-per-view viewers of the relevant cable, satellite or
fiber-optic television operator, typically ranging from 40% to 50% of those charges, subject to a
negotiated minimum dollar amount per subscriber and to any additional incentives that the Company
may offer an operator for carrying its service for a specified period of time. These additional
incentives may include the operator effectively retaining the full amount of monthly subscriber
fees for a specified period, such as the first three months of a twelve-month period, before fees
are paid to the Company. The incentives are recognized as a reduction of revenues. The Company
recognizes revenue earned from viewers net of the portion retained by the relevant system operator.
The determination of whether the Company acts as a principal or an agent in a transaction involves
judgment and is based on an evaluation of whether the Company has the substantial risks and rewards
of ownership under the terms of the transaction.
Deferred magazine subscription revenue results from advance payments for magazine
subscriptions received from subscribers and it is amortized on a straight-line basis over the life
of the subscription as issues are delivered. The Company provides an estimated reserve for
magazine subscription cancellations at the time such subscription revenues are recorded.
Premium online subscription services are generally for a period of one to twelve months.
Premium online subscription services are generally paid for upfront by credit card, subject to
cancellations by subscribers or charge backs from transaction processors. Revenue, net of
estimated cancellations and charge backs, is recognized ratably over the service term. To date,
cancellations and charge backs have not been significant and have been within managements
expectations.
Transaction services revenue derived from publicity and marketing services related to
theatrical motion picture releases provided to Regent Releasing is recognized as the services are
performed. The Company provides the expertise to strategically release these movies, especially to
the LGBT community. The Company also provides consultative services for content creation such as
the production of movie trailers, behind-the-scenes featurettes and electronic press kits. The
Companys marketing employees also provide leadership in the design and planning strategy for these
releases, including assisting with marketing plans, press releases and advertising campaigns. The
Company supervises the creation and placement of editorial content in its magazines and coordinated
the campaign with editorial content of its related websites. The Company also advises on grass
roots promotional activities in local media outlets of target markets.
Revenues from the theatrical distribution of feature films are recognized as they are
exhibited.
Transaction services revenue from newsstand sales of the Companys various print properties is
recognized based on the on-sale dates of magazines and is recorded based upon estimates of sales,
net of product placement costs paid to resellers. Estimated returns from newsstand revenues are
recorded based upon historical experience.
Transaction revenue generated from the sale of magazines and books held in inventory is
recognized when the books are shipped, net of estimated returns. The Company also earns
transaction services revenue from licensing of its subscriber lists, which is recognized at the
time the cash is received.
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Advertising
Costs related to advertising and promotion are charged to sales and marketing expense as
incurred except for direct-response advertising costs which are amortized over the expected life of
the subscription, typically a twelve month period. Direct-response advertising costs consist
primarily of production costs associated with direct-mail promotion of magazine subscriptions. As
of December 31, 2008 and September 30, 2009, the balance of unamortized direct-response advertising
costs was approximately $930,000 and $628,000, respectively, and is included in prepaid expenses
and other current assets. Total advertising costs in the three months ended September 30, 2008 and
2009 were approximately $318,000 and $906,000, respectively. Total advertising costs in the nine
months ended September 30, 2008 and 2009 were approximately $504,000 and $1,893,000, respectively.
Sales Returns and Allowances
The Company accrues an estimated amount for sales returns and allowances in the same period
that the related revenue is recorded based on historical information, adjusted for current economic
trends. To the extent actual returns and allowances vary from the estimated experience, revisions
to the allowance may be required. Significant management judgments and estimates are made and used
in connection with establishing the sales and allowances reserve. As of December 31, 2008 and
September 30, 2009, the provision for sales returns and allowances included in accounts receivable,
net was approximately $519,000 and $504,000, respectively.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The Company determines the adequacy of
this allowance by regularly reviewing the composition of its aged accounts receivable and
evaluating individual customer receivables, considering (i) the customers financial condition,
(ii) the customers credit history, (iii) current economic conditions and (iv) other known factors.
As of December 31, 2008 and September 30, 2009, the allowance for doubtful accounts included in
accounts receivable, net was approximately $191,000 and $249,000, respectively.
Stock-Based Compensation
The Company does not have stock-based compensation expense.
Segment Reporting
The Company operates in one segment. Although the chief operating decision maker does review
revenue results across the three revenue streams of advertising, subscription and transaction
services, financial reporting is consistent with the Companys method of internal reporting where
the chief operating decision maker evaluates, assesses performance and makes decisions on the
allocation of resources at a consolidated results of operations level. The Company has no
operating managers reporting to the chief operating decision maker over components of the
enterprise for which separate financial information of revenue, results of operations and assets is
available.
Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires
the recognition of taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized in the Companys
financial statements or tax returns. The measurement of current and deferred tax assets and
liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws
or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by
the amount of any tax benefits that are not expected to be realized based on available evidence.
The Company reports a liability for unrecognized tax benefits, if any, resulting from
uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes
interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
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Net Loss Per Share
Basic net loss per share (Basic EPS) is computed by dividing net loss by the sum of the
weighted-average number of common shares outstanding during the period. Diluted net loss per share
(Diluted EPS) gives effect to all dilutive potential common shares outstanding during the period.
The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on earnings. The dilutive effect of outstanding
stock options and warrants is computed using the treasury stock method.
The following table sets forth the computation of basic and diluted net loss per share (in
thousands, except per share amounts):
Three months ended | Nine months ended | |||||||
September 30, 2009 | September 30, 2009 | |||||||
Numerator: |
||||||||
Net loss |
$ | (5,803 | ) | $ | (12,240 | ) | ||
Denominator for basic and diluted net loss
per share: |
||||||||
Weighted-average shares |
20,701 | 18,285 | ||||||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.28 | ) | $ | (0.67 | ) | ||
Potential shares which are excluded from the determination of basic and diluted net loss per
share as their effect is anti-dilutive are as follows (in thousands):
Nine months ended | ||||
September 30, 2009 | ||||
Warrants |
87 |
Recent Accounting Pronouncements
On January 1, 2009, the Company adopted new accounting guidance for business combinations as
issued by the Financial Accounting Standards Board (the FASB). The new accounting guidance
establishes principles and requirements for how an acquirer in a business combination recognizes
and measures in its financial statements the identifiable assets acquired, liabilities assumed, and
any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant
changes from previous guidance resulting from this new guidance include the expansion of the
definitions of a business and a business combination. For all business combinations (whether
partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of
the acquired business, including goodwill, generally at their fair values; contingent consideration
will be recognized at its fair value on the acquisition date and; for certain arrangements, changes
in fair value will be recognized in earnings until settlement; and acquisition-related transaction
and restructuring costs will be expensed rather than treated as part of the cost of the
acquisition. The new accounting guidance also establishes disclosure requirements to enable users
to evaluate the nature and financial effects of the business combination. This guidance was
effective for the Company in the first quarter of fiscal 2009 and was followed by the Company in
its accounting for the business combination described in Note 2, Business Combinations and
Intangible Assets Merger with PlanetOut Inc. The Company recognized approximately $3,008,000 of
transaction costs in connection with the merger with PlanetOut during the nine months ended
September 30, 2009.
On January 1, 2009, the Company adopted new accounting guidance by the FASB which delayed the
effective date of fair value accounting for all nonfinancial assets and nonfinancial liabilities by
one year, except those recognized or disclosed at fair value in the financial statements on a
recurring basis. The adoption of this accounting guidance did not have a material impact on the
Companys consolidated financial statements.
On January 1, 2009, the Company adopted new accounting guidance for assets acquired and
liabilities assumed in a business combination as issued by the FASB. The new guidance amends the
provisions previously issued by the FASB related to the initial recognition and measurement,
subsequent measurement and accounting, and disclosures for assets and liabilities arising from
contingencies in business combinations. The new guidance eliminates the distinction between
contractual and non-contractual contingencies, including the initial recognition and measurement.
The adoption of this accounting guidance did not have a material impact on the Companys
consolidated financial statements.
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During the second quarter of fiscal 2009, the Company adopted three related sets of accounting
guidance as issued by the FASB. The accounting guidance sets forth rules related to determining
the fair value of financial assets and financial liabilities when the activity levels have
significantly decreased in relation to the normal market, guidance related to the determination of
other-than-temporary impairments to include the intent and ability of the holder as an indicator in
the determination of whether an other-than-temporary impairment exists and interim disclosure
requirements for the fair value of financial instruments. The adoption of the three sets of
accounting guidance did not have a material impact on the Companys consolidated financial
statements.
During the second quarter of fiscal 2009, the Company adopted new accounting guidance for the
determination of the useful life of intangible assets as issued by the FASB. The new guidance
amends the factors that should be considered in developing the renewal or extension assumptions
used to determine the useful life of a recognized intangible asset. The new guidance also requires
expanded disclosure regarding the determination of intangible asset useful lives. The adoption of
this accounting guidance did not have a material impact on the Companys consolidated financial
statements.
During the second quarter of fiscal 2009, the Company adopted new accounting guidance related
to subsequent events as issued by the FASB. This new requirement establishes the accounting for
and disclosure of events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be issued. See
Principles of Consolidation and Basis of Presentation for the related disclosure. The adoption
of this accounting guidance did not have a material impact on the Companys consolidated financial
statements.
During the third quarter of fiscal 2009, the Company adopted the new Accounting Standards
Codification (the ASC) as issued by the FASB. The ASC has become the source of authoritative
U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is not
intended to change or alter existing U.S. GAAP. The adoption of the ASC did not have a material impact
on the Companys consolidated financial statements.
In June 2009, the FASB issued new accounting guidance which amends the criteria for a transfer
of a financial asset to be accounted for as a sale, redefines a participating interest for
transfers of portions of financial assets, eliminates the qualifying special-purpose entity concept
and provides for new disclosures. The provisions of this new accounting guidance are effective for
financial statements issued for interim and annual periods ending after November 15, 2009. The
Company does not believe the adoption of this guidance will have a material impact on its
consolidated financial statements.
In June 2009, the FASB issued new accounting guidance which amends the evaluation criteria to
identify the primary beneficiary of a variable interest entity (VIE) and requires ongoing
reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance
significantly changes the consolidation rules for VIEs including the consolidation of common
structures, such as joint ventures, equity method investments and collaboration arrangements. The
provisions of this new accounting guidance are effective for interim and annual reporting periods
ending after November 15, 2009. The Company does not believe the adoption of this guidance will
have a material impact on its consolidated financial statements.
In October 2009, the FASB issued new accounting guidance related to the revenue recognition of
multiple element arrangements. The new guidance states that if vendor specific objective evidence
or third party evidence for deliverables in an arrangement cannot be determined, companies will be
required to develop a best estimate of the selling price to separate deliverables and allocate
arrangement consideration using the relative selling price method. The accounting guidance will be
applied prospectively and will become effective for the Company during the first quarter of fiscal
2011. Early adoption is allowed. The Company is currently evaluating the impact of this
accounting guidance on its consolidated financial statements.
Note 2 Business Combinations and Intangible Assets
Business Combinations
Merger with PlanetOut Inc.
On June 11, 2009, the HMI Entities and PlanetOut combined their businesses and became
wholly-owned subsidiaries of the Company. As a result of the merger, the Company operates the
businesses currently conducted by the HMI Entities and PlanetOut and plans to expand into other
areas of content production and distribution.
On June 11, 2009, the owners of the HMI Entities contributed to the Company all of their
interests in the HMI Entities, which consisted of stock and limited liability company interests
that constituted 100% of the ownership interest in each of those companies, in exchange for the
common stock of the Company, $0.001 par value per share (the Common Stock). The aggregate number
of shares of Common Stock received by the former owners of the HMI Entities equaled approximately
80% of the issued and outstanding shares of the Common Stock, or 16,630,140 shares.
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On June 11, 2009, PlanetOut merged with a subsidiary of the Company. In connection with the
merger, each share of the issued and outstanding shares of PlanetOuts common stock was exchanged
for one share of the Common Stock and one share of the special stock of the Company, $0.001 par
value per share (the Special Stock). The aggregate number of shares of Common Stock received by
PlanetOut stockholders equaled approximately 20% of the issued and outstanding shares of the Common
Stock, or 4,070,535 shares of such stock, and 100% of the issued and outstanding shares of the
Special Stock, or 4,070,535 shares of such stock. In addition, the Company assumed warrants to
purchase up to 87,000 shares of PlanetOuts common stock in connection with the transaction and has
reserved 87,000 shares of both Common Stock and Special Stock of the Company for their issuance
upon exercise of the warrants.
The merger was accounted for under the acquisition method of accounting. The Company acquired
PlanetOut for approximately $900,000 based on the estimated fair value of the tangible assets and
intangible assets acquired and liabilities assumed on the acquisition date. The following is a
statement of the net assets acquired (in thousands):
Cash and cash equivalents |
$ | 915 | ||
Restricted cash |
1,100 | |||
Accounts receivable, net |
753 | |||
Prepaid expenses and other current assets |
552 | |||
Property and equipment, net |
2,145 | |||
Intangible assets |
1,973 | |||
Other assets |
279 | |||
Liabilities assumed |
(6,817 | ) | ||
Net assets acquired |
$ | 900 | ||
The purchased assets and assumed liabilities were recorded at their respective acquisition
date fair values, and identifiable intangible assets were recorded at fair value. The intangible
assets consist of tradenames, customer lists and content databases.
There is no active market or established fair value for either of the Common Stock or the
Special Stock of Here Media which was exchanged in the PlanetOut acquisition, therefore, the value
of the Common Stock and Special Stock was recorded at a value equal to the net assets acquired in
the PlanetOut acquisition. Each of the Common Stock and Special Stock were recorded at their
extended par value based on the number of shares exchanged and the remainder of the value exchanged
was recorded as additional paid-in-capital. No recording of goodwill resulted from the PlanetOut
acquisition.
The
results of operations for PlanetOut provided revenue of approximately
$2,951,000 and net
loss of approximately $2,013,000 for the period of June 11, 2009 to September 30, 2009 and have
been included in the Companys condensed consolidated statements of operations.
Acquisition of LPI Media, Inc. and SpecPub, Inc. Assets
In August 2008, Here Publishing completed the acquisition of substantially all of the assets
and assumption of certain liabilities of LPI Media Inc. (LPI) and SpecPub, Inc. (SPI) the
former magazine publishing operations of PlanetOut, for an aggregate purchase price of
approximately $500,000. The assets of SPI were transferred out of the Company in December 2008 to
Hyperion, a related party. See Note 10, Discontinued Operations.
Accounting guidance requires that the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed be recognized as goodwill. If the
sum of the amounts assigned to assets acquired and liabilities assumed exceeds the cost of the
acquired entity (so-called negative goodwill), the excess is required to be allocated as a pro
rata reduction of the amounts that otherwise would have been assigned to the acquired noncurrent
assets. As a result of such allocation of negative goodwill recognized in the Companys
acquisition of the LPI assets, the value assigned to the intangible assets was reduced by
approximately $900,000.
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A condensed, unaudited balance sheet reflecting the adjusted value of acquired assets and
liabilities assumed as of the date of acquisition is as follows (in thousands):
Accounts receivable, net |
$ | 3,385 | ||
Inventory |
900 | |||
Prepaid expenses and other current assets |
1,095 | |||
Property and equipment, net |
820 | |||
Intangible assets, net |
430 | |||
Liabilities assumed |
(6,130 | ) | ||
Total purchase price |
$ | 500 | ||
The Company evaluated the intangible assets, which consist of tradenames, during the three
months ended September 30, 2009 and determined that there was no indication of impairment. The
results of operations for LPI have been included in the Companys condensed consolidated statements
of operations for the period subsequent to the acquisition date of August 13, 2008.
Pro Forma Information
Supplemental consolidated information on an unaudited pro forma consolidated basis, as if the
PlanetOut merger and the acquisition of the LPI assets were completed at the beginning of each
period presented, is as follows (in thousands, except per share amounts):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Revenue |
$ | 16,116 | $ | 7,363 | $ | 38,977 | $ | 25,382 | ||||||||
Loss from continuing operations |
$ | (480 | ) | $ | (5,580 | ) | $ | (16,123 | ) | $ | (13,113 | ) | ||||
Basic loss from continuing
operations per share |
$ | (0.02 | ) | $ | (0.27 | ) | $ | (0.78 | ) | $ | (0.63 | ) |
The unaudited pro forma supplemental information is based on estimates and assumptions which
the Company believes are reasonable. The unaudited pro forma supplemental information prepared by
management is not necessarily indicative of the consolidated financial position or results of
income in future periods or the results that actually would have been realized had the Company, LPI
and PlanetOut been a combined company during the specified periods.
Intangible Assets
The components of acquired intangible assets are as follows (in thousands):
December 31, 2008 | September 30, 2009 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Tradenames |
$ | 430 | $ | | $ | 430 | $ | 1,292 | $ | | $ | 1,292 | ||||||||||||
Customer lists |
| | | 605 | 40 | 565 | ||||||||||||||||||
Content database |
| | | 506 | 56 | 450 | ||||||||||||||||||
$ | 430 | $ | | $ | 430 | $ | 2,403 | $ | 96 | $ | 2,307 | |||||||||||||
Intangible assets subject to amortization consist of customer lists and content databases with
amortization periods of three to five years. As of September 30, 2009, the weighted-average useful
economic life of customer lists and content databases being amortized was 4.1 years. During the
three and nine months ended September 30, 2008 and 2009, the Company did not record amortization
expense on its tradenames which it considers to be indefinitely lived assets. During the three
months ended September 30, 2008 and 2009, amortization expense of intangible assets was zero and
approximately $72,000, respectively. During the nine months ended September 30, 2008 and 2009,
amortization expense of intangible assets was zero and approximately $96,000, respectively.
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As of September 30, 2009, expected future intangible asset amortization is as follows (in
thousands):
Fiscal Years: | ||||
2009 (remaining three months) |
$ | 73 | ||
2010 |
290 | |||
2011 |
290 | |||
2012 |
191 | |||
2013 |
121 | |||
2014 |
50 | |||
$ | 1,015 | |||
Note 3 Other Balance Sheet Components
December 31, | September 30, | |||||||
2008 | 2009 | |||||||
(In thousands) | ||||||||
Accounts receivable: |
||||||||
Trade accounts receivable |
$ | 4,559 | $ | 4,016 | ||||
Less: Allowance for doubtful accounts |
(191 | ) | (249 | ) | ||||
Less: Provision for returns |
(519 | ) | (504 | ) | ||||
$ | 3,849 | $ | 3,263 | |||||
In the three months ended September 30, 2008 and 2009, the Company provided for an increase in
the allowance for doubtful accounts of $54,000 and approximately $99,000, respectively, and
wrote-off $74,000 and approximately $96,000, respectively, against the allowance for doubtful
accounts. In the nine months ended September 30, 2008 and 2009, the Company provided for an
increase in the allowance for doubtful accounts of $54,000 and approximately $322,000,
respectively, and wrote-off $74,000 and approximately $327,000, respectively, against the allowance
for doubtful accounts.
Prior to the acquisition of the LPI assets in August 2008, the Company had no history of
returns. See Note 2, Business Combinations and Intangible Assets Acquisition of LPI Media,
Inc. and SpecPub, Inc. Assets. In the three months ended September 30, 2008 and 2009, the Company
provided for an increase in the provision for returns of approximately $408,000 and $514,000,
respectively, and wrote-off accounts receivable against the provision for returns totaling
approximately $182,000 and $431,000, respectively. In the nine months ended September 30, 2008 and
2009, the Company provided for an increase in the provision for returns of approximately $408,000
and $1,346,000, respectively, and wrote-off accounts receivable against the provision for returns
totaling approximately $182,000 and $1,361,000, respectively.
December 31, | September 30, | |||||||
2008 | 2009 | |||||||
(In thousands) | ||||||||
Inventory: |
||||||||
Materials for future publications |
$ | 293 | $ | 195 | ||||
Finished goods available for sale |
573 | 440 | ||||||
866 | 635 | |||||||
Less: reserve for obsolete inventory |
(153 | ) | (19 | ) | ||||
$ | 713 | $ | 616 | |||||
Prior to the acquisition of the LPI assets in August 2008, the Company had no inventory and
therefore no provision for obsolete inventory. See Note 2, Business Combinations and Intangible
Assets Acquisition of LPI Media, Inc. and SpecPub, Inc. Assets. In the three months ended
September 30, 2008 and 2009, the Company provided for an increase in the provision for obsolete
inventory of approximately $174,000 and $17,000, respectively, and wrote-off inventory against the
reserve for obsolete inventory totaling approximately $37,000 and $5,000, respectively. In the
nine months ended September 30, 2008 and 2009, the Company provided for an increase in the reserve
for obsolete inventory of approximately $174,000 and $63,000, respectively, and wrote-off inventory
against the reserve for obsolete inventory totaling approximately $37,000 and $197,000,
respectively.
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December 31, | September 30, | |||||||
2008 | 2009 | |||||||
(In thousands) | ||||||||
Prepaid expenses and other current assets: |
||||||||
Unamortized direct-response advertising costs |
$ | 930 | $ | 628 | ||||
Other prepaid expenses and other current assets |
383 | 879 | ||||||
$ | 1,313 | $ | 1,507 | |||||
December 31, | September 30, | |||||||
2008 | 2009 | |||||||
(In thousands) | ||||||||
Property and equipment: |
||||||||
Computer equipment and software |
$ | 590 | $ | 1,922 | ||||
Furniture and fixtures |
817 | 861 | ||||||
Leasehold improvements |
467 | 489 | ||||||
Website development costs |
| 188 | ||||||
1,874 | 3,460 | |||||||
Less: Accumulated depreciation and amortization |
(855 | ) | (1,680 | ) | ||||
$ | 1,019 | $ | 1,780 | |||||
In the three months ended September 30, 2008 and 2009, the Company recorded depreciation and
amortization expense of property and equipment of approximately $83,000 and $495,000, respectively.
In the nine months ended September 30, 2008 and 2009, the Company recorded depreciation and
amortization expense of property and equipment of approximately $170,000 and $872,000,
respectively.
December 31, | September 30, | |||||||
2008 | 2009 | |||||||
(In thousands) | ||||||||
Accrued expenses and other liabilities: |
||||||||
Accrued payroll and related liabilities |
$ | 497 | $ | 1,413 | ||||
Other accrued liabilities |
794 | 2,095 | ||||||
$ | 1,291 | $ | 3,508 | |||||
Note 4 Program Broadcasting Rights
Program broadcasting rights are subject to amortization, and the balances are as follows:
December 31, | September 30, | |||||||
2008 | 2009 | |||||||
(In thousands) | ||||||||
Program broadcasting rights: |
||||||||
Related parties |
$ | 29,828 | $ | 33,975 | ||||
Non-related parties |
1,584 | 2,931 | ||||||
Less accumulated amortization: |
||||||||
Related parties |
(18,044 | ) | (20,840 | ) | ||||
Non-related parties |
(645 | ) | (1,264 | ) | ||||
Program broadcasting rights |
12,723 | 14,802 | ||||||
Less: current portion |
3,864 | 3,242 | ||||||
Program broadcasting rights, less current portion |
$ | 8,859 | $ | 11,560 | ||||
Amortization expense for the three months ended September 30, 2008 and 2009 was approximately
$997,000 and $1,052,000, respectively. Amortization expense for the nine months ended September
30, 2008 and 2009 was approximately $3,065,000 and $3,415,000, respectively. During the three and
nine months ended September 30, 2008 and 2009, the Company had no impairment of program
broadcasting rights included in amortization expense.
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As of September 30, 2009, expected future program broadcasting rights amortization is as
follows (in thousands):
Fiscal Years: | ||||
2009 (remaining three months) |
$ | 646 | ||
2010 |
3,571 | |||
2011 |
2,011 | |||
2012 |
1,243 | |||
2013 |
1,053 | |||
2014 |
950 | |||
Thereafter |
5,328 | |||
$ | 14,802 | |||
Note 5 Related Party Transactions
Related party revenue
The Company has several one-year term publicity and marketing agreements with Regent
Releasing. Under these agreements, Regent Releasing agreed to pay a total of approximately
$16,696,000 in consulting fees over the terms of the agreements for use of the Companys marketing
staff expertise in creating content and strategically releasing films and for providing assistance
with marketing plans, press releases and advertising campaigns. The Company also has several
ongoing service agreements with Hyperion. Under these agreements, the Company provides
circulation, production and information technology services for a monthly fee of approximately
$28,000. During the three months ended September 30, 2008 and 2009, the Company generated
approximately $3,976,000 and $83,000, respectively, in revenue from services provided under these
agreements. During the nine months ended September 30, 2008 and 2009, the Company generated
approximately $6,659,000 and $2,781,000, respectively, in revenue from services provided under
these agreements.
Related party deferred revenue
As of December 31, 2008 and September 30, 2009, the Company had outstanding deferred license
fee revenue of zero and $1,200,000, respectively, included in deferred revenue on the Condensed
Consolidated Balance Sheets from Oxford Media, related to licensing rights sub-licensed by the
Company to Oxford Media to distribute certain motion picture and television programs.
Related party receivables/payables
At December 31, 2008 and September 30, 2009, the Company had outstanding approximately
$818,000 of funds due to and $156,000 of funds due from, respectively, various companies affiliated
through common ownership. The amounts are unsecured, non-interest bearing and due on demand.
At December 31, 2008, the Company also had outstanding commitments of approximately
$10,352,000 and $415,000 in programming license fees payable to Studios Funding and Convergent
Funding, respectively. At September 30, 2009 the Company had outstanding commitments of
approximately $10,912,000, $1,883,000 and $419,000 in programming license fees payable to Studios
Funding, Convergent Funding and Regent Studios, respectively. The license fees payable pertain to
license rights for films and TV programs.
Program broadcasting rights
Approximately $3,280,000 and $870,000 of programming was purchased from related parties for
the three months ended September 30, 2008 and 2009, respectively. The total amount of programming
purchased from related parties amounted to approximately $4,045,000 and $4,147,000 for the nine
months ended September 30, 2008 and 2009, respectively. The total amount of programming payments
to related parties was zero for the three and nine months ended September 30, 2008 and 2009.
At December 31, 2008 and September 30, 2009, the Companys carrying value for
program broadcasting rights purchased from related parties amounted to approximately $7,399,000 and
$6,368,000, respectively, from Regent Studios; $3,862,000 and $3,685,000, respectively from RWS;
$372,000 and $2,971,000, respectively from Convergent Funding; and $151,000 and $111,000,
respectively, from Regent Releasing.
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Sale of accounts receivable
During the nine months ended September 30, 2009, the Company sold accounts receivable of
approximately $3,200,000 without recourse to Mr. Colichman and Mr. Jarchow and received $3,200,000
in cash.
Note 6
Lines of Credit from Related Parties
On August 17, 2009, the Company entered into a line of credit agreement with Paul A. Colichman
and a separate line of credit agreement with Stephen P. Jarchow (collectively, the Agreements),
which set forth the terms upon which Mr. Colichman and Mr. Jarchow (collectively, the Lenders)
may lend up to $2,000,000 and $3,000,000, respectively, to the Company in their respective
discretion as and when requested by the Company from time to time until August 17, 2011.
The outstanding principal balance of advances made under the Agreements accrue interest at a
rate equal to the U.S. prime rate, as set forth in the Wall Street Journal, plus 1.00% per annum
(4.25% at September 30, 2009). Advances made under the Agreements are secured by the collateral
specified in the Agreements, including certain domain names owned or under the control of the
Company, trademarks and tradenames and cash reserves (not to exceed $1,000,000) held by the
Companys former credit card processor. The Agreements provide for customary events of default.
Upon an event of default, the Lenders may declare all or any part of the outstanding principal
balance of the advances to be immediately due and payable. During the three months ended September
30, 2009, the Company borrowed approximately $3,668,000 and made repayments of approximately
$148,000 under the Agreements, and recognized approximately $18,000 of interest expense related to
those borrowings.
Note 7 Commitments and Contingencies
January 2008 Severance Plan
Certain employees acquired through the PlanetOut business combination were provided in January
2008 with an incentive to remain committed to the Companys business (the Severance Plan). The
Severance Plan provides for certain cash payments in the event of termination without cause. The
Company has made payments of approximately $46,000 and $198,000 under the Severance Plan in the
three and nine months ended September 30, 2009, respectively. As of September 30, 2009, the
Company estimates that the total outstanding potential payments that have not been paid or accrued
to date remaining under the Severance Plan is approximately $153,000. The actual amounts may vary
as they depend on numerous factors outside of the Companys control, such as whether the eligible
participants choose to remain with the Company.
Employment Agreements
The Company has entered into employment agreements with certain senior executives for various
terms up to three years. Aggregate future commitments under these agreements are as follows (in
thousands):
Fiscal Years: | ||||
2009 (remaining three months) |
$ | 653 | ||
2010 |
1,502 | |||
2011 |
628 | |||
2012 |
134 | |||
$ | 2,917 | |||
Contingencies
The Company is not currently subject to any material legal proceedings. The Company may from
time to time, however, become a party to various legal proceedings, arising in the ordinary course
of business. The Company may also be indirectly affected by administrative or court proceedings or
actions in which the Company is not involved but which have general applicability to the Internet
industry.
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Note 8 Stockholders Equity
Common Stock
The Company has 40,000,000 shares of Common Stock authorized with a par value of $0.001 per
share. The Company had 16,630,140 and 20,700,675 common shares issued and outstanding at December
31, 2008 and September 30, 2009. The Company issued 16,630,140 shares of Common Stock to the
former owners of the HMI Entities and 4,070,535 shares of Common Stock to the former owners of
PlanetOut common stock in the business combination on June 11, 2009. Since the HMI Entities have
been determined to be the acquiring entity in the business combination, and the historical
information for the HMI Entities is presented as combined with Here Media, the Common Stock issued
to the former owners of the HMI Entities is presented as issued and outstanding as of December 31,
2008. See Note 1, The Company and Summary of Significant Accounting Policies The Company and
Note 2, Business Combinations and Intangible Assets Merger with PlanetOut Inc., for more
detail.
Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001 per
share. The Company had no preferred shares issued and outstanding at December 31, 2008 and
September 30, 2009.
Special Stock
The Company has 4,200,000 shares of Special Stock authorized with a par value of $0.001 per
share. In conjunction with the merger with PlanetOut on June 11, 2009, the Company issued
4,070,535 shares of Special Stock to the former stockholders of PlanetOut common stock. The
Special Stock was issued to provide a limited form of downside protection in the event of a
liquidation, dissolution or winding up of the Company or a sale of the Company for cash or publicly
tradable within four years after the merger and in which the holders of the Companys Common Stock
would, but for the effect of the Special Stock, receive less than $4.00 per share. The former
stockholders of PlanetOut would have a priority claim to any liquidation proceeds distributable to
holders of the Common Stock of Here Media to the extent necessary (and to the extent liquidation
proceeds are available) to provide the former PlanetOut stockholders with total liquidation
proceeds of at least $4.00 per share.
Warrants
In connection with the merger with PlanetOut, the Company assumed warrants to purchase up to
87,000 shares of PlanetOut common stock, which warrants became exercisable for Common Stock and
Special Stock of the Company upon completion of the merger. Warrants to purchase 12,000 shares at
an exercise price of $37.40 per share will expire in September 2013. Warrants to purchase 75,000
shares at an exercise price of $0.69 per share will expire in January 2018.
Note 9 Restructuring
In July 2009, the Companys management committed to a restructuring plan to align the
Companys resources with its strategic business objectives. The restructuring included a reduction
of the Companys total workforce by approximately 24%, or a total of 39 employees, and the
consolidation of certain facilities. Restructuring costs of
approximately $786,000, related to
employee severance benefits of approximately $243,000 and net facilities consolidation expenses of
approximately $543,000 were recorded during the three months ended September 30, 2009. The Company
expects to be able to complete this restructuring in the fourth quarter of fiscal 2009, with
certain payments continuing beyond the fourth quarter of fiscal 2009 in accordance with the terms
of existing severance and other agreements.
The following is a summary of the restructuring activities:
Accrued | ||||||||||||||||
Non-cash | Restructuring | |||||||||||||||
Restructuring | Cash | (Charges) | As of | |||||||||||||
Charges | Payments | Benefit | September 30, 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Termination benefits |
$ | 243 | $ | (165 | ) | $ | | $ | 78 | |||||||
Facilities consolidation expenses |
543 | 95 | 638 | |||||||||||||
Total |
$ | 786 | $ | (165 | ) | $ | 95 | $ | 716 | |||||||
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Note 10 Discontinued Operations
In August 2008, the Company completed the purchase of assets and assumption of certain
liabilities of LPI and SPI. See Note 2, Business Combinations and Intangible Assets. The
assets, liabilities and business operations of SPI were transferred from the Company in December
2008 and are reflected as discontinued operations in the condensed consolidated financial
statements.
The results of discontinued operations for the business previously conducted under SPI for the
period from August 13, 2008 to September 30, 2008 were as follows (in thousands):
Total revenue |
$ | 434 | ||
Operating costs and expenses: |
||||
Cost of revenue |
287 | |||
Sales and marketing |
62 | |||
General and administrative |
74 | |||
Total operating costs and expenses |
423 | |||
Income from discontinued operations |
$ | 11 | ||
Note 11 Subsequent Events
On October 14, 2009, Phillip S. Kleweno resigned from the board of directors of the Company.
On November 2, 2009, the Company entered into a Lease Termination, Surrender and Settlement
Agreement (the Agreement) with its former landlord terminating an operating lease for office
space. The Agreement is effective as of September 30, 2009 and provides for a settlement amount of
$500,000 to be paid in increments through March 2, 2010. The settlement amount has been included
in facilities consolidation expenses in restructuring expense in the condensed consolidated
financial statements. See Note 9, Restructuring.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
As used in this Managements Discussion and Analysis of Financial Condition and Results of
Operations, except where the context requires, the term we, us, our, or Here Media refers
to the consolidated businesses of Here Media Inc. and its wholly-owned subsidiaries Here Networks,
LLC, or Here Networks, Here Publishing Inc. (formerly Regent Entertainment Media Inc.), or Here
Publishing, and PlanetOut Inc., or PlanetOut.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of
Financial Condition and Results of Operations and other sections, contains forward-looking
statements as that term is defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements reflect managements current beliefs and estimates of future economic
circumstances, industry conditions, company performance and financial results. Forward-looking
statements include statements concerning the possible or assumed future results of operations of
the Company. Such statements typically are preceded by, followed by or include words such as
future, position, anticipate(s), expect, believe(s), intend, estimate, predict,
may, see, plan, further improve, outlook, should, or similar words or phrases.
Forward-looking statements are not guarantees of future performance or results. They involve
risks, uncertainties and assumptions, many of which are outside of our control or our ability to
accurately predict. You should understand that many factors, in addition to those discussed
elsewhere in this document, could affect the future results of the Company and could cause those
results to differ materially and adversely from those expressed in our forward-looking statements.
These factors include the following:
| We have a history of losses. If we do not attain and sustain profitability, our financial condition and investment value could suffer. |
| If we are not successful in our efforts to reduce costs substantially and to increase revenues to achieve the planned benefits of our recent business combination with PlanetOut, we may have difficulty funding our operations, may not be able to expand our business as planned and may instead find it necessary to curtail operations. |
| We may require additional capital, which may not be available, particularly under current capital and credit market conditions. |
| Our success is dependent upon audience acceptance of our programming and other entertainment content, which is difficult to predict. |
| The entertainment and media programming industries are highly competitive industries, and many of our competitors have much greater resources, longer operating histories and more well known brand names than we have. |
| If we are unable to generate increased revenue from advertising or if we were to lose existing advertisers, our business will suffer. |
| Our success depends, in part, upon the growth of Internet advertising and upon our ability to predict the cost of customized campaigns. |
| If our efforts to attract and retain subscribers are not successful, our revenue will decrease. We could lose subscribers if we are unable to provide satisfactory customer service. |
| Increased programming production and content costs may adversely affect our results of operations and financial condition. |
| Disruption or failure of satellites and facilities that transmit our media network to cable television operators and other distributors, and disputes over supplier contracts on which we depend to distribute our programming could adversely affect our business. |
| We must respond to and capitalize on rapid changes in new technologies and distribution platforms, including their effect on consumer behavior, in order to remain competitive and exploit new opportunities. |
| Our operations could be harmed if we lost the services of our senior executives including Paul A. Colichman, our Chief Executive Officer, and Stephen P. Jarchow, the Chairman of our Board of Directors. |
| Any significant disruption in service on our websites or in our computer and communications hardware and software systems could harm our business. |
| If we are unable to compete effectively, we may lose market share and our revenue may decline. |
| Our efforts to develop new products and services for evolving markets are subject to a number of factors beyond our control. |
| Our reputation and brand could be harmed if we are unable to protect our domain names and third parties gain rights to, or use, these domain names in a manner that confuses or impairs our ability to attract and retain customers. |
| If we fail to protect our trademarks and other proprietary rights, or if we become involved in intellectual property litigation, our revenue may decline and our expenses may increase. |
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| The risks of transmitting confidential information online, including credit card information, may discourage customers from subscribing to our services. |
| Existing or future government regulation in the United States and other countries could limit our growth and result in loss of revenue. |
| We may be the target of negative publicity campaigns or other actions by advocacy groups that could disrupt our operations because we serve the lesbian, gay, bisexual and transgender, or LGBT, community. |
| If one or more states or countries successfully assert that we should collect sales or other taxes on the use of the Internet or the online sales of goods and services, our expenses will increase, resulting in lower margins. |
| We are exposed to pricing and production capacity risks associated with our magazine publishing business, which could result in lower revenues and profit margins. |
| Our common stock is not listed on any securities exchange, which results in very limited liquidity for our stockholders. |
| The ownership of 80% of Here Medias common stock by the pre-transaction owners of the HMI Entities, and provisions in Here Medias certificate of incorporation and Here Medias bylaws, may prevent takeover attempts that could be beneficial to Here Medias other stockholders. |
| The interests of our principal stockholders may differ from the interests of our other stockholders. |
| The special stock will provide only limited downside protection to its holders. |
| Recent and potential future acquisitions could result in operating difficulties and unanticipated liabilities. |
| Adult content in our online service may be the target of negative publicity campaigns or subject us to restrictive or costly regulatory compliance. |
| In the event we are unable to satisfy regulatory requirements relating to internal control over financial reporting, or if these internal controls are not effective, our business could suffer. |
| In the event of an earthquake, other natural or man-made disaster, or power loss, our operations could be interrupted or adversely affected, resulting in lower revenue. |
Additional information concerning these important factors can be found in our filings with the
SEC. Forward-looking statements in this Quarterly Report on Form 10-Q should be evaluated in light
of these important factors.
You should not place undue reliance on the forward-looking statements included in this
Quarterly Report on Form 10-Q, which apply only as of the date of this Quarterly Report on Form
10-Q. We expressly disclaim any duty to update the forward-looking statements, and the estimates
and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q to
reflect changes in circumstances or expectations or the occurrence of unanticipated events, except
to the extent required by applicable securities laws.
Overview
We are the parent company of Here Networks, Here Publishing and PlanetOut. We were formed in
connection with the business combination of Here Networks, Here Publishing and PlanetOut, which was
completed on June 11, 2009. As a result of such business combination, Here Networks, Here
Publishing and PlanetOut became our wholly-owned subsidiaries. We operate the businesses currently
conducted by Here Networks, Here Publishing and PlanetOut and plan to expand into other areas of
content production and distribution. The results of operations for PlanetOut have been included in
our condensed consolidated statements of operations for the period subsequent to the acquisition
date.
Here Networks offers original movies, series, documentaries and music specials tailored for
the LGBT community on a subscription and transactional basis via cable television, direct-to-home
(also referred to as DTH) satellite television, fiber-optic television and the Internet under the
brand name here!. Here Networks has agreements with major cable, satellite and fiber-optic
television operators in the United States for its VOD and SVOD and/or regularly scheduled (also
referred to as linear) television channel services. Here Networks generates revenue from the
receipt of fees paid by its subscribers for its SVOD and linear television channel services and
transactional fees paid by viewers of its VOD services.
Here Publishing publishes magazines and books targeting the LGBT community, which are
distributed through the newsstand distribution network as well as by subscriptions of print and
digital editions of the magazines. Products include The Advocate, Out, HIVPlus and Alyson Books,
and companion websites. Here Publishing offers Out and The Advocate on a subscription and
newsstand basis, while it offers HIVPlus free to health care professionals and organizations. Here
Publishings revenues are derived principally from subscriptions and newsstand sales for its
magazines and fees charged for advertising in its magazines and on its websites. Here Publishings
business consists of the former magazine publishing operations of PlanetOut that were conducted
through LPI Media Inc., or LPI. Here Publishing acquired substantially all of the assets and
liabilities of LPI in August 2008. The results of operations for LPI have been included in our
condensed consolidated statements of operations for the period subsequent to the acquisition date.
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PlanetOut is a leading online media and entertainment company serving the LGBT community
through its flagship websites, Gay.com and PlanetOut.com. These websites provide revenues from advertising services and
subscription services.
The combined companies of Here Networks, Here Publishing and PlanetOut function as a
multi-platform content company serving and marketing to the LGBT community.
Executive Operating and Financial Summary
Our total revenue was $7.4 million in the three months ended September 30, 2009, increasing 2%
from total revenue of $7.2 million in the three months ended September 30, 2008. Our total revenue
was $19.2 million in the nine months ended September 30, 2009, increasing 75% from total revenue of
$11.0 million in the nine months ended September 30, 2008. These increases were primarily due to
the incremental effect of the acquisition of the LPI assets and the merger with PlanetOut, as well
as increases in SVOD subscription services revenue and theatrical box office revenues due to the
initiation of our distribution of theatrical motion picture releases, partially offset by decreases
in publicity and marketing services revenues caused by the timing of motion picture title releases
by Regent Releasing.
Total operating costs and expenses were $13.1 million in the three months ended September 30,
2009, increasing 140% from total operating costs and expenses of $5.5 million in the three months
ended September 30, 2008. Total operating costs and expenses were $31.4 million in the nine months
ended September 30, 2009, increasing 149% from total operating costs and expenses of $12.6 million
in the nine months ended September 30, 2008. These increases were primarily due to the incremental
effect of the acquisition of the LPI assets and the merger with PlanetOut.
Loss from operations was $5.8 million in the three months ended September 30, 2009, compared
to income from operations of $1.7 million in the three months ended September 30, 2008. Loss from
operations was $12.2 million in the nine months ended September 30, 2009, compared to loss from
operations of $1.6 million in the nine months ended September 30, 2008.
Outlook
We expect that revenue will increase for the remainder of fiscal 2009 in comparison to fiscal
2008, primarily as a result of the incremental effect of the merger with PlanetOut in June 2009 and
the acquisition of the LPI assets in August 2008, increases in SVOD subscription services revenue
and increases in transaction services revenue from theatrical box office revenues. We expect
operating costs and expenses to increase for the remainder of fiscal 2009 in comparison to fiscal
2008 due to the incremental effect of our acquisition of the LPI assets and the merger with
PlanetOut, increases in program broadcasting rights amortization expenses, costs related to the
development of our planned motion picture production operations and increased depreciation and
amortization expense due to an increase in depreciable assets in service and an increase in
intangible assets as a result of the merger with PlanetOut. Our results of operations for the
remainder of fiscal 2009 will be dependent on how successful we are in implementing our operating
plan discussed in Liquidity and Capital Resources.
Results of Operations
Revenue
Advertising Services. We derive advertising revenue from advertisements placed in our printed
publications and from advertising contracts in which we typically undertake to deliver a minimum
number of impressions to users over a specified time period for a fixed fee on our websites. Our
advertising services revenue was $3.7 million in the three months ended September 30, 2009, an
increase of 50% from the three months ended September 30, 2008. Our advertising services revenue
was $11.4 million in the nine months ended September 30, 2009, an increase of 359% from the nine
months ended September 30, 2008. These increases in advertising services revenue were primarily
due to the acquisition of the LPI assets in August 2008 and, to a lesser extent, the merger with
PlanetOut in June 2009. Advertising services revenue included $0.1 million and $0.4 million in
publicity and marketing services provided to Regent Releasing in the three months ended September
30, 2009 and 2008, respectively. Advertising services revenue included $2.3 million and $0.4
million in publicity and marketing services provided to Regent Releasing in the nine months ended
September 30, 2009 and 2008, respectively.
Subscription Services. We derive subscription services revenue from the receipt of fees paid
by subscribers for our subscription video-on-demand, or SVOD, and linear television channel
services, subscription services across our print media properties and paid membership subscriptions
to our online media properties. Our subscription services revenue was $3.0 million in the three
months ended September 30, 2009, an increase of 232% from the three months ended September 30,
2008. Our subscription services revenue was $5.8 million in the nine months ended September 30,
2009, an increase of 192% from the nine months ended September 30, 2008. These increases in
subscription services revenue were primarily due to the incremental effect of the acquisition of
the LPI assets and the merger with PlanetOut and, to a lesser extent, increases in SVOD
subscription services revenue.
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Table of Contents
Transaction Services. Transaction services revenue includes publicity and marketing services
provided to Regent Releasing, transactional fees paid by viewers for our video-on-demand, or VOD,
services, theatrical box office revenues, newsstand sales of our various print properties and
revenue generated from co-marketing opportunities with other affiliates that are marketing to the
LGBT community. Our transaction services revenue was $0.6 million in the three months ended
September 30, 2009, a decrease of 83% from the three months ended September 30, 2008. Our
transaction services revenue was $2.1 million in the nine months ended September 30, 2009, a
decrease of 68% from the nine months ended September 30, 2008. These decreases in transaction
services revenue were primarily due to decreases in publicity and marketing services revenues
caused by the timing of title releases by Regent Releasing, partially offset by increases due to
the incremental effect of the acquisition of the LPI assets and theatrical box office revenues due
to the initiation of our distribution of theatrical motion picture releases. Transaction services
revenue included zero and $3.6 million in publicity and marketing services provided to Regent
Releasing in the three months ended September 30, 2009 and 2008, respectively. Transaction
services revenue included $0.5 million and $6.2 million in publicity and marketing services
provided to Regent Releasing in the nine months ended September 30, 2009 and 2008, respectively.
Operating Costs and Expenses
Cost of Revenue. Cost of revenue primarily consists of amortization of program broadcasting
rights and expenses related to the delivery of programming to cable satellite and fiber-optic
television providers and on-air promotional segments or interstitials that are broadcast between
programs on here!, payroll and related benefits associated with supporting our subscription-based
services, the development and expansion of site operations and support infrastructure and producing
and maintaining content for our various websites. Other expenses directly related to generating
revenue included in cost of revenue include transaction processing fees, computer equipment
maintenance, occupancy costs, co-location and Internet connectivity fees, purchased content and
cost of goods sold. Cost of revenue was $6.9 million in the three months ended September 30, 2009,
increasing 121% from cost of revenue of $3.1 million in the three months ended September 30, 2008.
Cost of revenue was $15.5 million in the nine months ended September 30, 2009, increasing 153% from
cost of revenue of $6.1 million in the nine months ended September 30, 2008. These increases were
primarily due to the incremental effect of the acquisition of the LPI assets and the merger with
PlanetOut.
Sales and Marketing. Sales and marketing expense primarily consists of publicity and
marketing activities, payroll and related benefits for employees involved in publicity, sales,
advertising client service, customer service, marketing and other support functions; product,
service and general corporate marketing and promotions; and occupancy costs. Sales and marketing
expenses were $2.1 million in the three months ended
September 30, 2009, increasing 111% from sales
and marketing expenses of $1.0 million in the three months ended September 30, 2008. Sales and
marketing expenses were $4.8 million in the nine months ended
September 30, 2009, increasing 203%
from sales and marketing expenses of $1.6 million in the nine months ended September 30, 2008.
Sales and marketing expenses as a percentage of revenue were 28% for the three months ended
September 30, 2009, up from 14% in the three months ended September 30, 2008. Sales and marketing
expenses as a percentage of revenue were 25% for the nine months ended September 30, 2009, up from
14% in the nine months ended September 30, 2008. These increases in sales and marketing expenses
in both absolute dollars and as a percentage of revenue were primarily due to the incremental
effect of the acquisition of the LPI assets and the merger with PlanetOut and costs associated with
the generation of theatrical box office revenues, partially offset by reductions in print
advertising costs, cross channel promotion expenses, website expenses, research expenses, talent
appearance fees and travel costs.
General and Administrative. General and administrative expense consists primarily of payroll
and related benefits for executive, finance, administrative and other corporate personnel,
occupancy costs, professional fees, insurance and other general corporate expenses. General and
administrative expenses were $2.6 million for the three months ended September 30, 2009, increasing
101% from general and administrative expenses of $1.3 million in the three months ended September
30, 2008. General and administrative expenses were $6.4 million for the nine months ended
September 30, 2009, increasing 34% from general and administrative expenses of $4.8 million in the
nine months ended September 30, 2008. These increases were due primarily to the incremental effect
of the acquisition of the LPI assets and the merger with PlanetOut including increased legal and
accounting fees, partially offset by reduced payroll costs and insurance expenses. General and
administrative expenses as a percentage of revenue were 36% for the three months ended September
30, 2009, up from 18% in the three months ended September 30, 2008. This increase was due to the
incremental effect of the acquisition of the LPI assets and the merger with PlanetOut, integration
and other expenses associated with the merger with PlanetOut and costs associated with the
generation of theatrical box office revenues. General and administrative expenses as a percentage
of revenue were 33% for the nine months ended September 30, 2009, down from 43% in the nine months
ended September 30, 2008. This decrease was primarily due to the incremental effect of the
acquisition of the LPI assets and the merger with PlanetOut.
Restructuring. In July 2009, management committed to a restructuring plan to align our
resources with our strategic business objectives. The restructuring included a reduction of our
total workforce by approximately 24%, or a total of 39 employees, and the consolidation of certain
facilities. Restructuring costs of approximately $0.8 million, related to employee severance
benefits of approximately $0.2 million and net facilities consolidation expenses of approximately
$0.6 million were recorded during the three months ended September 30, 2009. We expect to be able
to complete this restructuring in the fourth quarter of fiscal 2009, with
certain payments continuing beyond the fourth quarter of fiscal 2009 in accordance with the
terms of existing severance and other agreements.
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Acquisition Transaction Costs. During the three and nine months ended September 30, 2009, we
recognized $0.2 million and $3.0 million, respectively, of acquisition transaction costs related to
the merger with PlanetOut. These expenses include legal costs, transaction fees to our investment
bankers, printing costs and accounting fees related to the transaction.
Depreciation and Amortization. Depreciation and amortization expense was $0.6 million for the
three months ended September 30, 2009, increasing 584% from depreciation and amortization expense
of $0.1 million in the three months ended September 30, 2008. Depreciation and amortization
expense was $1.0 million for the nine months ended September 30, 2009, increasing 471% from
depreciation and amortization expense of $0.2 million in the nine months ended September 30, 2008.
These increases were primarily due to an increase in depreciable assets in service as a result of
the acquisition of the LPI assets and the merger with PlanetOut.
Other Income and Expenses
Interest expense. Interest expense was $31,000 and $40,000 in the three and nine months ended
September 30, 2009. Interest expense was zero in the three and nine months ended September 30,
2008. During the three months ended September 30, 2009, we entered into line of credit agreements
with Mr. Colichman and Mr. Jarchow. Advances made under the lines of credit accrue interest at a
rate equal to the U.S. prime rate, as set forth in the Wall Street Journal, plus 1.00% per annum
from the date of issuance of such advances to and including the date of repayment.
Discontinued Operations
In August 2008, we completed the purchase of assets and assumption of certain liabilities of
LPI and SPI. The assets, liabilities and business operations of SPI were transferred by us in
December 2008 and are reflected as discontinued operations in the condensed consolidated financial
statements.
The results of discontinued operations for the business previously conducted under SPI for the
period from August 13, 2008 to September 30, 2008 were as follows (in thousands):
Total revenue |
$ | 434 | ||
Operating costs and expenses: |
||||
Cost of revenue |
287 | |||
Sales and marketing |
62 | |||
General and administrative |
74 | |||
Total operating costs and expenses |
423 | |||
Income from discontinued operations |
$ | 11 | ||
Liquidity and Capital Resources
Cash used in operating activities for the nine months ended September 30, 2009 was $4.2
million, due primarily to our net loss of $12.2 million which included acquisition transaction
costs of $3.0 million related to our business combination of the HMI Entities and PlanetOut, an
increase in program broadcasting rights and an increase in accounts receivable, partially offset by
$3.2 million of cash received from the sale of accounts receivable to our Chief Executive Officer,
Paul A. Colichman, and our Chairman of the Board, Stephen P. Jarchow, increases in accounts
payable, deferred revenue and due to related parties and non-cash charges related to amortization
of program broadcasting rights, restructuring charges and deprecation and amortization expenses.
Cash used in operating activities for the nine months ended September 30, 2008 was $2.1 million,
and was primarily attributable to our net loss of $1.6 million and an increase in program
broadcasting rights, partially offset by an increase in due to related parties and non-cash charges
related to amortization of program broadcasting rights.
Cash provided by investing activities in the nine months ended September 30, 2009 was $1.2
million and was attributable to cash acquired in the merger with PlanetOut of $0.9
million and a decrease in restricted cash of $0.6 million, partially offset by purchases of
property and equipment of $0.3 million. Cash used in investing activities in the nine months ended
September 30, 2008 was $0.2 million and was attributable to purchases of property and equipment.
Net cash provided by financing activities in the nine months ended September 30, 2009 was $1.0
million, due to net borrowings under lines of credit from related
parties of $3.5 million, partially offset by
repayments of loans from related parties of $2.3 million and principal payments under capital lease
obligations of $0.2 million. Net cash provided by financing activities in the nine months ended
September 30, 2008 was $2.5 million, primarily due to borrowings from related parties to cover
net cash used in operating activities.
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We expect that cash used in operating activities may fluctuate in future periods as a result
of a number of factors, including fluctuations in our operating results, acquisitions of program
broadcasting rights, theatrical box office revenues, advertising sales, subscription trends and
accounts receivable collections.
Our capital requirements depend on many factors, including the level of our revenues, the
resources we devote to developing, marketing and selling our products and services, the timing and
extent of our introduction of new features and services, the extent and timing of potential
investments and other factors. In particular, our subscription services consist of prepaid
subscriptions that provide cash flows in advance of the actual provision of services. We expect to
invest capital resources to continue our product development and marketing efforts and for other
general corporate activities. In addition, we expect to incur costs in developing our planned
motion picture production operations, which will consist principally of compensation expenses and
other costs incurred on a production-by-production basis in connection with the production of
individual motion pictures.
As a result of experiencing recurring losses and negative cash flow from operations in each of
the last two years to date and our accumulated deficit, we have assessed our anticipated cash needs
for the next twelve months and adopted an operating plan to manage our capital expenditures and
costs of operating activities consistent with our revenue in order to meet our working capital
needs for the next twelve months. To this end, we have negotiated cost reductions with existing
vendors and adopted a restructuring plan in the third quarter of fiscal 2009 under which we have
reduced our headcount and terminated some of our existing lease obligations in order to consolidate
facilities. We may make further reductions as necessary to meet our working capital needs.
On August 17, 2009, we entered into line of credit agreements with Paul A. Colichman and
Stephen P. Jarchow, under which we may borrow an aggregate of up to $5.0 million. Advances under
the lines of credit bear interest at a rate equal to the U.S. prime rate, as set forth in the Wall
Street Journal, plus 1.00% per annum. During the three months ended September 30, 2009, we
borrowed approximately $3.7 million under the lines of credit,
made repayments of approximately $0.2 million and recognized approximately $18,000
of interest expense related to those borrowings.
Prior to the business combination on June 11, 2009, we met our liquidity requirements
primarily through capital contributions from equity holders and borrowings from related parties.
If we do not have sufficient cash available to finance our operations, we may be required to obtain
additional public or private debt or equity financing. We cannot be certain that additional
financing will be available to us on favorable terms when required or at all. If we are unable to
raise sufficient funds, we may need to reduce our planned operations. In that event, we cannot
provide any assurance that our assets will be sufficient to meet our liabilities.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet liabilities or transactions as of September 30, 2009.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amount of assets, liabilities,
revenue and expenses and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis on which we
make judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Because this can vary in each situation, actual results may differ from the
estimates under different assumptions and conditions.
We believe the following critical accounting policies require more significant judgments and
estimates in the preparation of our consolidated financial statements:
Revenue Recognition. Our revenue is derived principally from advertising services,
subscription services and transaction services. Advertising services revenue is generated by
advertisements placed in our printed publications and from banner and sponsorship advertisements on
our websites. Subscription services revenue is generated by fees paid by subscribers for our SVOD
and linear television channel services, subscription services across our print media properties and
paid membership subscriptions to our online media properties. Transaction services revenue
includes publicity and marketing services relating to theatrical motion picture releases,
transactional fees paid by viewers for our VOD services, revenues from distribution of feature
films, newsstand sales of our various print properties and revenue generated from co-marketing
opportunities with other affiliates that are marketing to the LGBT community.
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Magazine advertising revenues are recognized, net of related agency commissions, on the date
the magazines are placed on sale at the newsstands. Revenues received for advertisements in
magazines to go on sale in future months are classified as deferred advertising revenue.
The duration of our banner advertising commitments has ranged from one week to one year.
Sponsorship advertising contracts have terms ranging from three months to two years and also
involve more integration with our services, such as the placement of units that provide users with
direct links to the advertisers website. Advertising revenue on both banner and sponsorship
contracts is recognized ratably over the term of the contract, provided that we have no significant
obligations remaining at the end of a period and collection of the resulting receivables is
reasonably assured, at the lesser of the ratio of impressions delivered over the total number of
undertaken impressions or the straight-line basis. Our obligations typically include undertakings
to deliver a minimum number of impressions, or times that an advertisement appears in pages
viewed by users of our online properties. To the extent that these minimums are not met, we defer
recognition of the corresponding revenue until the minimums are achieved.
Subscription services revenue from television services is recognized for the month in which
programming is broadcast to viewers. The relevant cable or satellite television operator collects
the fees from subscribers and pays us our corresponding portion, typically within 90 days of
receipt from the customer. Viewership counts are reported monthly by system operators. Generally,
under the terms of our agreements with the cable, satellite and fiber-optic television operators,
we are paid based on a percentage of the amount charged to subscribers, video-on-demand or
pay-per-view viewers of the relevant cable, satellite or fiber-optic television operator, typically
ranging from 40% to 50% of those charges, subject to a negotiated minimum dollar amount per
subscriber and to any additional incentives that we may offer an operator for carrying our service
for a specified period of time. These additional incentives may include the operator effectively
retaining the full amount of monthly subscriber fees for a specified period, such as the first
three months of a twelve-month period, before fees are paid to us. The incentives are recognized
as a reduction of revenues. We recognize revenue earned from viewers net of the portion retained
by the relevant system operator. The determination of whether we act as a principal or an agent in
a transaction involves judgment and is based on an evaluation of whether we have the substantial
risks and rewards of ownership under the terms of the transaction.
Deferred magazine subscription revenue results from advance payments for magazine
subscriptions received from subscribers and it is amortized on a straight-line basis over the life
of the subscription as issues are delivered. We provide an estimated reserve for magazine
subscription cancellations at the time such subscription revenues are recorded.
Premium online subscription services are generally for a period of one to twelve months.
Premium online subscription services are generally paid for upfront by credit card, subject to
cancellations by subscribers or charge backs from transaction processors. Revenue, net of
estimated cancellations and charge backs, is recognized ratably over the service term. To date,
cancellations and charge backs have not been significant and have been within managements
expectations.
Transaction services revenue derived from publicity and marketing services related to
theatrical motion picture releases provided to Regent Releasing is recognized as the services are
performed. We provide the expertise to strategically release these movies, especially to the LGBT
community. We also provide consultative services for content creation such as the production of
movie trailers, behind-the-scenes featurettes and electronic press kits. Our marketing employees
also provide leadership in the design and planning strategy for these releases, including assisting
with marketing plans, press releases and advertising campaigns. We supervise the creation and
placement of editorial content in our magazines and coordinated the campaign with editorial content
of our related websites. We also advise on grass roots promotional activities in local media
outlets of target markets.
Revenues from the theatrical distribution of feature films are recognized as they are
exhibited.
Transaction services revenue from newsstand sales of our various print properties is
recognized based on the on-sale dates of magazines and is recorded based upon estimates of sales,
net of product placement costs paid to resellers. Estimated returns from newsstand revenues are
recorded based upon historical experience.
Transaction revenue generated from the sale of magazines and books held in inventory is
recognized when the books are shipped, net of estimated returns. We also earn transaction services
revenue from licensing of our subscriber lists, which is recognized at the time the cash is
received.
Advertising Costs. Costs related to advertising and promotion are charged to sales and
marketing expense as incurred except for direct-response advertising costs which are amortized over
the expected life of the subscription, typically a twelve month period. Direct-response
advertising costs consist primarily of production costs associated with direct-mail promotion of
magazine subscriptions.
Valuation Allowances. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our
customers to make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
might be required.
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We accrue an estimated amount for sales returns and allowances in the same period that the
related revenue is recorded based on historical information, adjusted for current economic trends.
To the extent actual returns and allowances vary from the estimated experience, revisions to the
allowance may be required. Significant management judgments and estimates are made in connection
with establishing the sales and allowances reserve.
We regularly review inventory quantities on hand and write down obsolete inventories to their
estimated net realizable value. We make significant estimates and assumptions based on our
judgment of inventory age, shipment history and our forecast of future demand. Recoveries of
previously written down inventory are recognized only when the related inventory has been sold and
revenue has been recognized.
Intangible Assets and Other Long-lived Assets. Our long-lived assets include intangible
assets, property and equipment and other assets. We record an impairment charge on intangible or
other long-lived assets to be held and used when we determine that the carrying value of these
assets may not be recoverable and/or exceed their carrying value. Based on the existence of one or
more indicators of impairment, we measure any impairment based on a projected discounted cash flow
method using a discount rate that we determine to be commensurate with the risk inherent in our
business model. Our estimates of cash flow require significant judgment based on our historical
results and anticipated results and are subject to many factors including assumptions about the
timing and amount of future cash flows, growth rates and discount rates.
Capitalized Website Development Costs. We capitalize the costs of enhancing and developing
features for our websites when we believe that the capitalization criteria for these activities
have been met and amortize these costs on a straight-line basis over the estimated useful life,
generally three years. We expense the cost of enhancing and developing features for our websites
in cost of revenue only when we believe that capitalization criteria have not been met. We
exercise judgment in determining when to begin capitalizing costs and the period over which we
amortize the capitalized costs. If different judgments were made, it would have an impact on our
results of operations.
Program Broadcasting Rights. Program broadcasting rights consist of the non-reimbursable
amounts paid by us for rights to distribute particular films or film libraries. Rights to programs
available for broadcast under program license agreements are initially recorded at the beginning of
the license period on the basis of the amounts of total license fees payable under the license
agreements and are charged to operating expense over the license period. Program broadcasting
rights are recorded at the lower of cost, less accumulated amortization, or net realizable value.
Our distribution agreements with the producers of films or programs typically include rights to
exploit the films and television programming via most forms of media in the United States and its
territories for the duration of the distribution agreement.
We offer multiple hours of programming to subscribers each month, refreshing the content
by 50% or more on a monthly basis. Accordingly, we cannot attribute the monthly fees earned per
subscriber to individual programs or films. As a result, we are unable to recognize expenses
utilizing the individual film forecast method. Therefore we amortize program broadcasting rights
utilizing the straight-line method, generally over the license term. We believe that this method
provides a reasonable matching of expenses with total estimated revenues over the periods that
revenues associated with the films and programs are expected to be realized.
We evaluate identifiable intangible assets and other long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of a long-lived asset may not
be recoverable. The carrying value of a long-lived asset held for use is considered impaired when
the anticipated discounted cash flow from such asset is separately identifiable and is less than
its carrying value. In that event, a loss is recognized based on the amount by which the carrying
value exceeds the fair market value of the long-lived asset held for use. Fair market value is
determined primarily using the anticipated cash flows discounted at a rate commensurate with the
risk involved to estimate the fair value of the film assets. In determining the film assets fair
value, we consider key indicators such as the anticipated growth in subscriber level, and the plan
for expansion into international territories. We also consider cash outflows necessary to generate
the film assets cash inflows. We use a discount rate that we believe is appropriate to the risk
level for film production.
Related Party Transactions. We and several of the Affiliates share certain general and
administrative expenses. Expenses shared by us and the Affiliates require the use of judgments and
estimates in determining the allocation of expenses. Prior to the business combination on June 11,
2009, these shared expenses included salary and other non-payroll related costs. Allocation of
salary costs between us and the Affiliates was performed on an individual employee basis and was
based upon the proportionate share of each employees time spent per affiliate company.
Non-payroll costs, such as insurance, office rent, utilities, information technology and other
office expenses were allocated in proportion to allocated payroll costs. Subsequent to the
business combination on June 11, 2009, the sharing of employees with the Affiliates has been
eliminated and non-payroll costs have been allocated between us and the
Affiliates based primarily on usage. Our management believes the allocation methodology is
reasonable and represents managements best available estimate of actual costs incurred by each
company.
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We share our merchant services provided by US Bank with Hyperion through its magazine
fulfillment center. The funds and transactions are clearly identified, and we believe that there
are no risks associated with the comingling of funds.
We are also a party to agreements with several of our affiliates relating to the acquisition,
licensing or distribution of programming and motion pictures and the provision of publicity and
marketing services.
During the nine months ended September 30, 2009, we sold accounts receivable without recourse
to our Chief Executive Officer, Paul A. Colichman, and our Chairman of the Board, Stephen P.
Jarchow. See Note 5, Related Party Transactions of Notes to Unaudited Condensed Consolidated
Financial Statements. During the three months ended September 30, 2009, we entered into line of
credit agreements with Mr. Colichman and Mr. Jarchow. See
Note 6, Lines of Credit from Related Parties of Notes to
Unaudited Condensed Consolidated Financial Statements.
Income Taxes. We account for income taxes using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been recognized in our
financial statements or tax returns. The measurement of current and deferred tax assets and
liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws
or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by
the amount of any tax benefits that are not expected to be realized based on available evidence.
We report a liability for unrecognized tax benefits, if any, resulting from uncertain tax
positions taken or expected to be taken in a tax return. We recognize interest and penalties, if
any, related to unrecognized tax benefits in income tax expense.
Seasonality
We anticipate that our business may be affected by the seasonality of certain revenue lines.
For example, advertising buys are usually higher approaching year-end and lower at the beginning of
a new year than at other points during the year.
Recent Accounting Pronouncements
On January 1, 2009, we adopted new accounting guidance for business combinations as issued by
the Financial Accounting Standards Board (the FASB). The new accounting guidance establishes
principles and requirements for how an acquirer in a business combination recognizes and measures
in its financial statements the identifiable assets acquired, liabilities assumed, and any
noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes
from previous guidance resulting from this new guidance include the expansion of the definitions of
a business and a business combination. For all business combinations (whether partial, full or
step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired
business, including goodwill, generally at their fair values; contingent consideration will be
recognized at its fair value on the acquisition date and; for certain arrangements, changes in fair
value will be recognized in earnings until settlement; and acquisition-related transaction and
restructuring costs will be expensed rather than treated as part of the cost of the acquisition.
The new accounting guidance also establishes disclosure requirements to enable users to evaluate
the nature and financial effects of the business combination. This guidance was effective for us
in the first quarter of fiscal 2009 and was followed by us in our accounting for the business
combination described in Note 2, Business Combinations and
Intangible Assets Merger with PlanetOut
Inc. of Notes to Unaudited Condensed Consolidated Financial Statements. We recognized
approximately $3,008,000 of transaction costs in connection with the merger with PlanetOut during
the nine months ended September 30, 2009.
On January 1, 2009, we adopted new accounting guidance by the FASB which delayed the effective
date of fair value accounting for all nonfinancial assets and nonfinancial liabilities by one year,
except those recognized or disclosed at fair value in the financial statements on a recurring
basis. The adoption of this accounting guidance did not have a material impact on our consolidated
financial statements.
On January 1, 2009, we adopted new accounting guidance for assets acquired and liabilities
assumed in a business combination as issued by the FASB. The new guidance amends the provisions
previously issued by the FASB related to the initial recognition and measurement, subsequent
measurement and accounting, and disclosures for assets and liabilities arising from contingencies
in business combinations. The new guidance eliminates the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement. The adoption of
this accounting guidance did not have a material impact on our consolidated financial statements.
During the second quarter of fiscal 2009, we adopted three related sets of accounting guidance
as issued by the FASB. The accounting guidance sets forth rules related to determining the fair
value of financial assets and financial liabilities when the activity
levels have significantly decreased in relation to the normal market, guidance related to the
determination of other-than-temporary impairments to include the intent and ability of the holder
as an indicator in the determination of whether an other-than-temporary impairment exists and
interim disclosure requirements for the fair value of financial instruments. The adoption of the
three sets of accounting guidance did not have a material impact on our consolidated financial
statements.
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During the second quarter of fiscal 2009, we adopted new accounting guidance for the
determination of the useful life of intangible assets as issued by the FASB. The new guidance
amends the factors that should be considered in developing the renewal or extension assumptions
used to determine the useful life of a recognized intangible asset. The new guidance also requires
expanded disclosure regarding the determination of intangible asset useful lives. The adoption of
this accounting guidance did not have a material impact on our consolidated financial statements.
During the second quarter of fiscal 2009, we adopted new accounting guidance related to
subsequent events as issued by the FASB. This new requirement establishes the accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be issued. See Note
1, The Company and Summary of Significant Accounting Policies Principles of Consolidation and
Basis of Presentation, of Notes to Unaudited Condensed Consolidated Financial Statements for the
related disclosure. The adoption of this accounting guidance did not have a material impact on our
consolidated financial statements.
During the third quarter of fiscal 2009, we adopted the new Accounting Standards Codification
(the ASC) as issued by the FASB. The ASC has become the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to
change or alter existing U.S. GAAP. The adoption of the ASC did not have a material impact on our
consolidated financial statements.
In June 2009, the FASB issued new accounting guidance which amends the criteria for a transfer
of a financial asset to be accounted for as a sale, redefines a participating interest for
transfers of portions of financial assets, eliminates the qualifying special-purpose entity concept
and provides for new disclosures. The provisions of this new accounting guidance are effective for
financial statements issued for interim and annual periods ending after November 15, 2009. We do
not believe the adoption of this guidance will have a material impact on our consolidated financial
statements.
In June 2009, the FASB issued new accounting guidance which amends the evaluation criteria to
identify the primary beneficiary of a variable interest entity (VIE) and requires ongoing
reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance
significantly changes the consolidation rules for VIEs including the consolidation of common
structures, such as joint ventures, equity method investments and collaboration arrangements. The
provisions of this new accounting guidance are effective for interim and annual reporting periods
ending after November 15, 2009. We do not believe the adoption of this guidance will have a
material impact on our consolidated financial statements.
In October 2009, the FASB issued new accounting guidance related to the revenue recognition of
multiple element arrangements. The new guidance states that if vendor specific objective evidence
or third party evidence for deliverables in an arrangement cannot be determined, companies will be
required to develop a best estimate of the selling price to separate deliverables and allocate
arrangement consideration using the relative selling price method. The accounting guidance will be
applied prospectively and will become effective for us during the first quarter of fiscal 2011.
Early adoption is allowed. We are currently evaluating the impact of this accounting guidance on
our consolidated financial statements.
Item 4T. | Controls and Procedures |
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30,
2009. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by the company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized, and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that such
information is accumulated and communicated to the companys management, including its chief
executive officer and chief financial officer, as appropriate, to allow timely decisions to be made
regarding required disclosure. It should be noted that any system of controls and procedures,
however well designed and operated, can provide only reasonable, and not absolute, assurance that
the objectives of the system are met and that, due to resource constraints, management was
necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our disclosure controls and procedures as of
September 30, 2009, our Chief Executive Officer and Chief Financial Officer concluded that, as of
such date, our disclosure controls
and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter
ended September 30, 2009, that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
We are involved from time to time in various legal proceedings, investigations and claims
incident to the normal conduct of our business, which may include proceedings that are specific to
us and others generally applicable to business practices within the industries in which we operate.
We believe that the outcome of these proceedings, investigations and claims, even if determined
adversely, would not have a material adverse effect on our business, financial condition and
results of operations.
Item 1A. | Risk Factors |
Not Applicable.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
Not Applicable.
Item 4. | Submission of Matters to a Vote of Security Holders |
Not Applicable.
Item 5. | Other Information |
Not applicable.
Item 6. | Exhibits |
(a) Exhibits
Exhibit | ||||
Number | Description of Documents | |||
2.1 | Agreement and Plan of Merger, dated as of January 8, 2009, by and among Here Media Inc., PlanetOut
Inc., HMI Merger Sub, Inc. and other parties signatory thereto (incorporated by reference to Annex C
to the Form 242(b) filing with the SEC on May 20, 2009, supplementing the Prospectus filed on the
Registration Statement on Form S-4, effective May 14, 2009) |
|||
2.2 | First Amendment to Agreement and Plan of Merger, dated as of April 27, 2009, by and among PlanetOut
Inc., Here Media Inc., HMI Merger Sub, Inc. and the HMI Owners and HMI Entities signatory thereto
(incorporated by reference to Exhibit 2.2 to Amendment No. 3 to the Registration Statement on Form
S-4 filed with the SEC on April 30, 2009) |
|||
2.3 | Letter Agreement, dated as of May 13, 2009, by PlanetOut Inc. and Here Media Inc. (incorporated by
reference to Exhibit 2.3 to Amendment No. 4 to the Registration Statement on Form S-4 filed with the
SEC on May 14, 2009) |
|||
2.4 | Second Amendment to Agreement and Plan of Merger, dated as of June 1, 2009, by and among PlanetOut
Inc., Here Media Inc., HMI Merger Sub, Inc. and the HMI Owners and HMI Entities signatory thereto
(incorporated by reference to Exhibit 2.1 to PlanetOut Inc.s current report on Form 8-K filed on
June 4, 2009) |
|||
3.1 | Amended and Restated Certificate of Incorporation of Here Media Inc. (incorporated by reference to
Exhibit 3.2 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed with
the SEC on June 10, 2009) |
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Exhibit | ||||
Number | Description of Documents | |||
3.2 | Amended and Restated Bylaws of Here Media Inc. (incorporated by reference to Exhibit 3.4 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed with the SEC on June
10, 2009) |
|||
4.1 | Form of Certificate representing the Common Stock, par value $0.001 per share, of Here Media Inc.
(incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed with the
SEC on January 15, 2009) |
|||
4.2 | Form of Certificate representing the Special Stock, par value $0.001 per share, of Here Media Inc.
(incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form
S-4 filed with the SEC on March 5, 2009) |
|||
10.1 | Line of Credit Agreement, dated as of August 17, 2009, between Here Media Inc. and Stephen P. Jarchow |
|||
10.2 | Line of Credit Agreement, dated as of August 17, 2009, between Here Media Inc. and Paul A. Colichman |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HERE MEDIA INC. |
||||
Date: November 13, 2009 | By: | /s/ TONY SHYNGLE | ||
Tony Shyngle | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
33
Table of Contents
EXHIBIT INDEX
Exhibit | ||||
Number | Description of Documents | |||
2.1 | Agreement and Plan of Merger, dated as of January 8, 2009, by and among Here Media Inc., PlanetOut
Inc., HMI Merger Sub, Inc. and other parties signatory thereto (incorporated by reference to Annex C
to the Form 242(b) filing with the SEC on May 20, 2009, supplementing the Prospectus filed on the
Registration Statement on Form S-4, effective May 14, 2009) |
|||
2.2 | First Amendment to Agreement and Plan of Merger, dated as of April 27, 2009, by and among PlanetOut
Inc., Here Media Inc., HMI Merger Sub, Inc. and the HMI Owners and HMI Entities signatory thereto
(incorporated by reference to Exhibit 2.2 to Amendment No. 3 to the Registration Statement on Form
S-4 filed with the SEC on April 30, 2009) |
|||
2.3 | Letter Agreement, dated as of May 13, 2009, by PlanetOut Inc. and Here Media Inc. (incorporated by
reference to Exhibit 2.3 to Amendment No. 4 to the Registration Statement on Form S-4 filed with the
SEC on May 14, 2009) |
|||
2.4 | Second Amendment to Agreement and Plan of Merger, dated as of June 1, 2009, by and among PlanetOut
Inc., Here Media Inc., HMI Merger Sub, Inc. and the HMI Owners and HMI Entities signatory thereto
(incorporated by reference to Exhibit 2.1 to PlanetOut Inc.s current report on Form 8-K filed on
June 4, 2009) |
|||
3.1 | Amended and Restated Certificate of Incorporation of Here Media Inc. (incorporated by reference to
Exhibit 3.2 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed with
the SEC on June 10, 2009) |
|||
3.2 | Amended and Restated Bylaws of Here Media Inc. (incorporated by reference to Exhibit 3.4 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed with the SEC on June
10, 2009) |
|||
4.1 | Form of Certificate representing the Common Stock, par value $0.001 per share, of Here Media Inc.
(incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed with the
SEC on January 15, 2009) |
|||
4.2 | Form of Certificate representing the Special Stock, par value $0.001 per share, of Here Media Inc.
(incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form
S-4 filed with the SEC on March 5, 2009) |
|||
10.1 | Line of Credit Agreement, dated as of August 17, 2009, between Here Media Inc. and Stephen P. Jarchow |
|||
10.2 | Line of Credit Agreement, dated as of August 17, 2009, between Here Media Inc. and Paul A. Colichman |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
34